Year of the Survivor for mining industry

Age and guile beat youth and energy in 2000, as companies fought for survival.

Survival of the fittest was the overarching theme of the year as exploration and mining companies competed for life-sustaining capital with each other, and with a charmed species believed to be exempt from the laws of nature and economics. The illusion of something new under the sun persisted for much of the year, taking its toll on the small, the young and the weak in the mining sector before investors realized that a rising sun also sets, that fundamentals do matter, and that profits matter even more.

The irony of mining’s Year of the Survivor is that it took place against a backdrop of booming equity markets and improved prices for some metals. Yet attracting capital was a relentless challenge, particularly in the first half of the year, when institutional and retail investors were obsessed with “new economy” stocks. The massive shift in investor sentiment devastated resource funds, with some losing 90% of their previous value.

At an industry conference last March, Pierre Lassonde, president of Franco-Nevada Mining (FN-T), described the dot-com bubble as “a giant vacuum cleaner, sucking money from all other sectors, and none more so than our industry.”

But Lassonde laid some of the blame on the industry’s poor economic performance. “Either the industry moves to get bigger, smarter and more profitable or it risks being seen simply as a collection of low-margin, mom-and-pop commodity producers in small stagnant market niches. For too long, we have dug deep for our metals and milled, smelted and refined them, only to sell the final product too cheaply.”

Even the best of the best were forced to heed the wake-up call and turn their attention to improving returns to shareholders. Industry leaders called for a stepping-up of consolidation efforts, if only to avoid disappearing from the radar screens of the large funds, which viewed companies with market capitalizations below US$2 billion as “low-cap stocks.”

This survival mechanism found particular favour in the base metal sector, which, in 1999, underwent a major consolidation of copper producers when Grupo Mexico acquired Asarco (and its subsidiary, Southern Peru Copper) and Phelps Dodge took over Cyprus Amax.

The world’s mining giants — conspicuously absent during the high-priced acquisition boom of the 1980s and ’90s — used their war chests to go bargain-hunting in droves. The commodities of interest were as diverse as the geographic regions in which they were situated, pushing the concept of “pure-commodity plays” farther out of fashion in 2000. Ore, once again, was whatever could be mined at a profit.

British giant Rio Tinto (RTP-N) launched a hostile US$1.7-billion takeover bid for Australia’s North Ltd., and beat out a rival suitor to win the day. The main target was North’s iron ore operations in Australia’s Pilbara region, near Rio Tinto’s own iron ore mines. The deal gave Rio Tinto exposure to Canada through North’s 56.1% stake in Iron Ore Co. of Canada (IOC), which operates a mine, concentrator and iron ore pellet-making plant at Labrador City, Labrador, as well as port facilities at Sept-les, Que.

In the U.S., Reynolds Metals and Alcoa merged 10 months after Alcoa swallowed Alumax, thereby creating an American aluminum giant. And Canada’s Alcan Aluminium (AL-T) concluded a merger with Switzerland’s Algroup, though political pressure scuttled a 3-way merger with Pechiney of France. Alcan President Jacques Bougie expressed concerns about regulatory complexities, which are thwarting companies’ plans to grow through the merger process.

On the base metals front, Noranda (nor-t) made an unsolicited $1.5-billion takeover bid for Rio Algom. While that wasn’t a surprise (Rio Algom was a bargain at $18 a share), Noranda’s plan to sell half of Rio to Corporacion Nacional del Cobre de Chile (Codelco) was unexpected. However, Rio ran to the waiting arms of Billiton, which made a successful bid of US$1.7-billion, boosting its exposure to copper in the process.

Some companies got smaller, including troubled miner Cambior (CLT-T). After rejecting an offer to merge with Aur Resources (AUR-T), Cambior sold most of its base metal operations to become a gold company, albeit one with mostly marginal operations.

Aur was a persistent opportunity hunter, even after a bid to buy half the Zaldivar copper mine in Chile went off the rails. It eventually bought a majority stake in the Quebrada Blanca copper mine in Chile, though not without a bump or two on the way. Aur is one of the few juniors spawned in the flow-through boom of the late 1980s to have survived, and alone has made the transition into a sizable producer. It now has three operating mines but faces challenges in the coming years, such as paring debt and improving its bottom line.

The past year was no picnic for Boliden (BOL-T). The company was forced to shed assets in order to improve its financial footing, which had been weakened from a 1999 tailings spill at the Los Frailes copper mine in Spain.

Gold sector

The gold sector began 2000 with optimism. Prices had rebounded from the previous year’s lows, and expectations were that central bank sales would be less disruptive than in the past. These hopes were dashed, and prices ended the year in a narrow range between US$260 and US$270 per oz.

The industry consolidated throughout 2000, but more by attrition than anything else. Former investor darling Greenstone Resources sank in a sea of debt, while creditors scavenged what they could from the company’s roster of mines in Central America, which were either shut down or sold.

To no one’s surprise, Dayton Mining (DAY-T) pulled the plug on its Andacollo gold mine, near La Serena, Chile, owing to low prices and lower than expected production. Grades were low and erratic, prompting even company officials to dub it “the pit from hell.”

The Refugio mine in Chile continued to live up to its “refuse-to-go” nickname. Operations were suspended for a time by Kinross Gold (K-T), much to the dismay of partner Bema Gold (BGO-T), but resumed at year-end. However, unless gold prices improve, operations will cease again, in May 2001. The past year hasn’t been kind to Bema, which saw Placer Dome (PDG-T) withdraw from the giant Cerro Casale gold-copper project, also in Chile. Bema owns 49% of Cerro Casale, with the remainder held by Arizona Star Resource (AZS-V).

Campbell Resources (CCH-T) stopped mining at the Joe Mann gold-copper mine in Quebec’s Chibougamau region. With gold mining already suspended at Santa Getrudis in Mexico, Campbell ended the year with no operating mines.

Geomaque (GEO-T) stopped construction of its Vueltas del Rio gold project in Honduras and pulled the plug on its San Francisco gold mine in Mexico. Work has since resumed at Vueltas.

Morila deal

Like Cambior, Ashanti Goldfields (ASL-N) spent the year trying to reduce debts associated with its failed hedging program. AngloGold (AU-N) bested numerous bidders to win a 50% stake in Ashanti’s Geita mine in Tanzania. The major announced a second blockbuster deal in Africa: the US$132-million cash acquisition of a 40% stake in the Morila gold mine in Mali.

Some big producers got much bigger in 2000. Newmont Mining (NEM-T) inked a deal to take over Battle Mountain Gold in a friendly transaction that consolidated the major’s holdings in gold-rich Nevada. The addition of Battle Mountain’s 760,000-oz. production boosts Newmont’s output to 5.4 million oz., second only to AngloGold, which cranks out 7 million oz. annually.

Unfortunately, one of the few friendly mergers to come forward during the year was scuttled by political intervention. Gold Fields (GOLD-Q) and Franco-Nevada Mining tried to transform themselves into one of the world’s largest producers but were thwarted at the eleventh hour because the South African government feared an erosion of the country’s tax base.

Barrick Gold (ABX-T) held its acquisition impulses in check for most of 2000, though it did acquire Pangea Goldfields in order to tie up the junior’s projects near its Bulyanhulu mine in Tanzania. Barrick is now reported to be examining gold assets in South Africa.

Placer Dome also pulled in its horns after taking heat from shareholders for high-priced acquisitions, such as the under-performing Getchell gold mine in Nevada. The major put several projects on the back burner, including the Las Cristinas gold project in Venezuela. However, it is now reporting hefty profits from a previously criticized acquisition — the Zaldivar copper mine in Chile.

The past year was not easy for smaller producers, which lack hedging programs of the type that shielded Barrick and Placer Dome from low prices. One exception was Goldcorp (G-T), which cut the ribbon on its re-christened Red Lake mine in Ontario. Goldcorp gave the Red Lake camp a shot in the arm when it began mining reserves in the aptly named High Grade zone, which boasts reserves grading more than 1 oz. per ton.

Some gold companies adopted an “engineering” approach to survival, though not always with good success. McWatters Mining (MCW-T), which started the year with an expansion program at its Sigma mine in Val d’Or, Que., was still losing money at year-end. Agnico-Eagle Mines (AGE-T) expanded its LaRonde gold mine in northwestern Quebec. Though still in the red at year-end, the company is expecting healthy profits in 2001.

Margaret (Peggy) Kent (formerly Witte) is still trying to get her latest vehicle, Eden Roc Mineral (EDN-T), out of shark-infested waters and on to any island that offers survival. The company still has an exploration permit for the Afema gold property in Ivory Coast but is looking for potential acquisitions in Latin America. So far, none has met the company’s investment criteria.

Good news and bad

The good-news stories of the past year involved platinum group metals (PGMs) and diamonds. Major companies dominated acquisitions in the diamond sector, and further consolidation into senior hands is expected.

Stillwater Mining (SWC-X) and North American Palladium (PDL-T) were big stars in 2000, helped by strong prices for PGMs, particularly palladium. Their success triggered an exploration boom, mostly focused in Canada, that kept more than a few juniors alive during the past year.

Political risk and social risk reared their heads again in 2000, particularly in unstable regimes such as the Democratic Republic of Congo (DRC), where rich copper deposits, such as Tenke Fungurme, continue to languish.

Russian nationalism took its toll on 70-30 partners Pan American Silver (PAA-T) and Western Pinnacle Resources (wpn-v), which gave up attempts to bring the huge Dukat silver mine into production.

North American projects were also battered. Voisey’s Bay sat undeveloped for yet another year, as did the Crown Jewel gold deposit in Washington state. The Cheviot coal project was placed on the back burner, even though its owners managed to prevail in a lengthy legal dispute initiated by anti-development environmental groups.

New Caledonia rolled out the welcome mat for Canada’s nickel producers, both of which enjoyed healthy profits during 2000. Inco (N-T) is forging ahead with its Goro project, while Falconbridge (FL-T) is pursuing the Koniambo project. Both will employ hydrometallurgical processing methods that bear some similarity to those being used by producers in Australia. But Inco and Falco are taking the cautious, pilot-plant approach — un- like their Aussie competitors, most of which experienced serious startup problems with their nickel laterite projects.

Technical innovation has also come into play in the junior sector, with several companies hoping to revive dormant projects using new processing technologies.

The Howards Pass zinc-lead deposit, in the Yukon, is being re- examined for its production potential, but without the help of Billiton, which opted out of a deal with Copper Ridge Explorations (KRX-V). The junior hopes to find a new partner that will determine the suitability of zinc oxide processing methods for the dormant project.