Editorial: Galore Creek blues

The week ended Nov. 30, the 48th week of 2007, saw British Columbia’s mining sector rattled by bombshell news that NovaGold Resources and Teck Cominco are mothballing development of their Galore Creek copper-gold mine, in northwestern B.C., due to soaring capital cost estimates and delays in construction timelines.

Word that capital spending estimates were approaching the astronomic $5-billion range left a lot of people scratching their heads on how costs could rise a whopping 150% from the roughly $2 billion forecast just a year ago. How could an engineering report be that far off?

Some of the overrun can be attributed to the accelerated development schedule factored into the latest engineering review by AMEC Americas. But the primary discrepancy between AMEC’s study and the previous engineering study, led by Hatch, stems from “in-valley” items — namely the scheduling and completion of several major water diversion projects and tailings dam construction.

It is blatantly apparent the 2006 feasibility study seriously underestimated manpower requirements necessary to complete such a large-scale development — a matter that should have been considered more closely, given ballooning budgets evidenced at mega-projects worldwide. Barely a day goes by without news of the continual crunch in construction and heavy industries, with a limited skilled labour pool spread thin between the building boom in Canada’s major Western cities and the black hole of employment known as northern Alberta’s oilsands development.

The fallout also shook up many juniors with projects in the vicinity that would have benefited from Galore Creek infrastructure. Sadly, the B.C. government’s planned $400-million power line initiative for Highway 37 is now likely a no-go without the anticipated $158-million contribution from the Galore Creek partners. Without the high-voltage transmission line, many potential mining projects along its proposed corridor are simply not going to see development.

Even more ominous are the implications for other large mineral development projects in remote regions and their susceptibility to cost overruns. Barrick Gold recently acknowledged that planned mine construction at its Donlin Creek gold deposit in western Alaska — a 50-50 partnership with NovaGold — could see costs double to about $4 billion from a projected $2 billion. Needless to say, analysts and investors will now scrutinize remote and challenging projects much more closely.

Engineering firms are also concerned with the cost-overrun crisis — likely reviewing recent feasibility reports with one eye on maintaining credibility and the other on dodging potential liability. Capital cost estimates are now apt to see a liberal portion of padding in an effort to offset similar escalations.

After being trotted out as a flagship example for the province, shelving Galore Creek will damage B.C.’s recent mining renaissance. The industry has endured other setbacks with some prospective mine development projects sent packing due to environmental, permitting and First Nations issues. It now looks like cost overruns stemming from challenging geography will become yet another hurdle to development.

The locals were also left rattled by the abrupt decision. The Tahltan First Nation was anticipating startup of the mine, which sits in its traditional territory, and would have seen lucrative royalties plus hundreds of direct jobs. This, at a time when other area mines (Eskay Creek and Kemess South) are approaching their end.

The cancellation of Galore Creek also deflates the economic balloon of the nearby towns of Smithers and Terrace, which have enjoyed growth fuelled by the mining and exploration boom. With a struggling forestry industry, this was not the news they wanted to hear.

Although pink slips are soon to be handed out to most of the 400 workers on the site, NovaGold and Teck Cominco have pledged to examine alternative development scenarios for the deposit. Hopefully, something can be salvaged.

Following the Galore Creek news, stunned NovaGold shareholders watched the company’s share price plummet more than 50%, or over $1 billion in market capitalization, to under $10 per share. Suddenly, Barrick Gold’s rebuffed US$16-per-share takeover offer for the company — which expired a year ago — looks pretty good.

Send your Letters-to-the-Editor and other op-ed submissions to the Editor at: tnm@northernminer.com, fax: (416) 510-5137, or 12 Concorde Pl., Suite 800, Toronto, ON M3C 4J2.