VANCOUVER – Don Lindsay, president and CEO of Teck Resources, is a very good storyteller. As he speaks, his divergent tales weave together seamlessly and listeners are left believing every word spoken.
Accordingly, those attending Lindsay’s keynote talk at Roundup in Vancouver were left believing that strong demand for commodities in China and India bodes very well for long-term metal prices, that political stability is one of the most important aspects of every major mining investment, and that as Teck celebrates its 100th anniversary the diversified major will continue to pour money into exploration and development to sustain a pipeline of projects, despite the need to dig deeper every year for every ounce and pound of production.
“The theme of this year’s Roundup is Digging Deeper: Resources for Life,” noted Lindsay. “It’s a theme that is incredibly relevant for the industry today. As we all know exploration is not getting any easier. Every year it is harder to find new deposits. We are literally being forced to dig deeper: deeper into the earth, deeper into remote areas, and deeper into challenging mining environments.”
The result, he continued, are deposits that are increasingly complex and difficult to develop. Technical challenges, lack of infrastructure, political instability, and a multitude of other hurdles mean projects take longer to permit and cost more to build with each passing year.
“The copper industry serves as a great example,” he said. “Despite strong copper prices over the last number of years the industry as a whole has struggled to significantly increase mine production. In fact, despite $4 copper for most of 2011, total global mined copper was up only 3% despite billions and billions of dollars of investment.”
The good news is that demand will stay strong, which means those investments will have to continue. For mining companies, though, the hardest part will be deciding where to spend those investment dollars, in a global mining climate that is rife with political risk.
Within that discussion, Lindsay stressed that political risk is not limited to ‘frontier’ type countries such as Mongolia, but is also very much a factor in seemingly stable jurisdictions like British Columbia. Of course, the majority of Teck’s operations are in BC, where a provincial election looms.
“We need a stable, competitive investment climate in order to have the confidence to explore for, develop, and commit the major investments needed to move these projects forward,” Lindsay said. “I’m just going to say that one more time, given that we have an election coming up: we need a stable, competitive investment climate in order to commit the major investments needed to move our projects forward.”
While a change of government in BC could be challenging for the province’s miners and explorers, it would pale in comparison to some of the political curveballs thrown at mining companies in more exotic locales. Lindsay suggested that miners are increasingly concluding those curveballs make such jurisdictions simply not worth their potential rewards.
He told an interesting story to support that statement, stemming from a meeting he attended the previous week between the CEOs of ten major mining companies and the leaders of Guinea, Peru, Mongolia, and Zimbabwe.
“Those leaders were there with the expectation that the ten mining companies were desperate to invest in their countries, because after all they are incredibly resource rich,” Lindsay said. “And so they were a bit surprised when one of the CEOs…got up and just went on a rant about ‘Why would we ever invest in these countries? They change the rules on us all the time, as soon as we put money in they just confiscate it, they don’t provide any infrastructure…’ He just went on and on.”
Lindsay said he started to think it was getting a bit awkward, since they were after all meeting with presidents and prime ministers, but then he noticed that several of the other CEOs were starting to encourage him, to cheer him on.
“Finally the leader from Guinea said, ‘Well, what are we supposed to do?'” said Lindsay. “And I kind of feel for them, because their people have an expectation that just can’t be met and these mining CEOs many of them have paid a heavy price for investments that didn’t work out. It’s a lesson that’s really important to learn, and not just in those countries but everywhere you operate.”
He pointed to the downturn in oil sands investment after Alberta increased taxes there, to the Australian prime minister who lost his job when he tried to increase resources taxes, and to recent happenings in Chile and Peru related to resource revenues to emphasize that political risk is hugely important for every mining investment, no matter where it’s situated.
The only answer is to stay up to date with the changing political landscape. Countries evolve and risks ebb and flow. No one would have dreamt of investing in Colombia 20 years ago, for example, and Lindsay suggested that 20 years from now Mongolia might have evolved into the next Chile of the mining world, creating extraordinary wealth for its citizens.
Once companies decide where they are comfortable investing they should dive in, Lindsay said, because he is convinced long-term metal demand is robust. For that, the industry should thank China and India.
“We at Teck keep a really close relationship with China and that’s for one reason,” said Lindsay. “It’s that no matter where we are investing, whether it’s here in BC or in Chile where we’re building two large copper projects, that money may be going into BC or Chile but really it’s an investment in China. Unless we had good confidence in China we wouldn’t be making the investment.”
But Lindsay does have confidence in China and he rattled off a raft of impressive numbers to show why.
China recently announced its 12th Five Year Plan, which includes some mind-boggling objectives. One of those: to build 200,000 km of transmission lines. To put that into perspective, that’s enough transmission line to more than replace every single existing power line in Canada.
China also plans to build 36 million low-income housing units. In all of Canada there are only about 12 million homes. And the numbers are equally staggering for roads, pipelines, and railways.
“If I’ve learned anything about China it is that if they set an objective in their Five Year Plan, they will achieve it,” said Lindsay.
He also noted that China’s economy is expected to grow 7 to 8% this year. While that may not sound as impressive as the double-digit growth rates of a few years ago, he said slightly slower growth from a larger economy generates just as much business as faster growth from a smaller economy.
“What is often forgotten is that today’s growth rate of 6 to 7% is actually larger, in absolute terms, than the 10 to 12% growth we had six years ago,” he said. “Sometimes I think Wall Street doesn’t know how to do math. At Teck we don’t care about the percent, we care about tonnes – and I can assure the demand for tonnes is still there.”
China is providing the biggest part of that demand today, but Lindsay said the mining industry also has to look ahead to the next market that will drive demand for mineral products: India.
“India is experiencing unprecedented urbanization, a rapidly-growing middle class, there’s room for strong GPD growth, and they make some pronouncements about things they are going to build that are really quite extraordinary,” Lindsay said. “If those numbers are close to correct the amount of coking coal they are going to need is also quite extraordinary, and I should be investing $4 to $5 billion right here in BC right now.”
China and India are examples of how the world needs mining products and will continue to need them for the foreseeable future, even if global economic woes have made for a few rocky years
.
“It’s important that, as an industry, we can’t be guided by the short-term up and downs – we have to take a longer-term approach,” said Lindsay. “It’s the long-term trends that underpin our growth and drive today’s decisions, and these long-term trends I’m absolutely convinced will remain in place.”
Finally, demand will be robust but Lindsay cautioned that the mining sector cannot focus solely on that. Public perception is increasingly important, he noted, which means the industry needs to help the general public understand the vital role that mining plays in our society.
“The metals we produce are fundamental to producing a better quality of life for people around the world, but sometimes people forget about that,” he said. “We need to do a better job of reminding them. We need to remind them of the connection between their smartphone and the copper that is mined at Highland Valley. We need to remind them of the importance of the zinc mined at Trail in keeping their cars from rusting, and how the coal that’s mined in BC is used to make steel that’s used in everything from hospitals to rapid transit.”
“We need to remind people that mining is essential to our modern world, because every single thing in life comes from one of two sources, and if you can’t grow it you have to mine it.”
I attended the tremendous speech of Mr. Lindsay and he is spot on with respect to countries changing the mining laws to try and take advantage of high metal prices. Many of the developing, resource-endowed, countries already have high NSR rates, often 3% or more, PLUS free carried interests. But the changing rules in the middle of developable property is devastating to the companies developing the mines.
If countries want to have cash flow to their citizens from mining investments, the counties need to take heed and please don’t change mining tax regimes mid-stream.