Editorial Spending for the future

Exploration may be the lifeblood of Canada’s mining industry, but capital investment is what turns discoveries into the mines and mills that produce a marketable commodity. That’s why it is gratifying to see the country’s largest mining outfits ploughing money back into both exploration and the improvement of milling and refining facilities.

Two examples are Inco and Noranda, two of the biggest mining concerns in the world and leading indicators of the industry’s direction. When the recession of the early 1980s set in, exploration and capital improvements were understandably the first things to be cut back. It may seem shortsighted, but when you’re struggling to make ends meet, you can’t always be setting something aside for a rainy day.

Inco, for example, spent $32.7 million on exploration in 1981, the last year before the effects of the recession were really felt. In 1984 it spent less than half that on exploration — $15.8 million. Noranda’s exploration expenditures have been more volatile, but still reflect the fate of the industry in the 1980s. In 1982 it spent $98.3 million on exploration, but that had fallen to $13.2 million by 1986.

Both companies, however, are back in the exploration business in earnest. In 1987 Inco’s expenditures on exploration were $21.9 million and Noranda’s were back up to $28.6 million. It looks as though 1988 will see similar improvements, although it’s still a far cry from “the good old days.”

When it comes to capital investment, these two leading companies are again in the forefront of preparing for tomorrow. Noranda, for example, recently announced plans to spend $120 million to modernize a zinc reduction plant near Montreal over a 30-month period. Although production capacity won’t be increased, the overall efficiency of the plant will be enhanced. In tomorrow’s competitive marketplace, that kind of forward thinking is what’s needed to ensure that Canada’s mining industry remains competitive.

Inco, similarly, says it plans to spend $89 million over 30 months to consolidate three milling and concentrating operations in Sudbury into one and to expand its mill tailings impoundment area. One of the side effects of the plan will be the ability to reduce sulphur dioxide emissions, emissions that eventually come back to earth as acid rain.

When the last recession hit, most base metal mining companies were deep in debt after financing expansions through borrowings. As interest rates soared and commodity prices fell, they were squeezed like never before. Inco went through 13 consecutive quarters using only red ink.

It was during that time that productivity improved drastically — it had to if mining companies were to stay in business. No one realized just how much fat had accumulated until they started to trim.

Improving operations’ efficiency and getting a business objective more clearly in focus had two benefits. First, it allowed the companies to survive. Second, and perhaps most important for the future, it has left them in a position to benefit the most from this upturn in the mining cycle.

Debt reduction is still a high priority, but if mining companies want to stay in business during the 1990s, hefty expenditures on exploration and on capital improvements have to be made now. There may not be immediate benefits, but there won’t be any benefits without them.