MRG in Business In Vancouver: New optimism in mining?

Business in Vancouver April 21-27, 2009; issue 1017

New optimism in mining?

Fewer companies considering layoffs, and more plan on hiring in future

Krisendra Bisetty

Is the worst over already for the mining industry?

A spurt in the price of a key base metal is awakening some B.C. mine projects from a winter slumber and giving some hope of a general recovery of other commodities.

Financing deals are starting to slowly flow again, and the bleak sentiment of only months ago is making way for a dramatic change in outlook among industry executives.

“In the eyes of those executives, it would seem as though the overwhelming majority are operating under the notion that the worst is now, in fact, behind us,” said Andrew Pollard, president of the Mining Recruitment Group, Western Canada’s only purely mining-focused recruitment agency.

A new survey by the firm reveals that the overwhelming response from executives is that many companies are now in a position to ride out current market conditions beyond their control.

“For most, it would seem as though the tough decisions have been made, and the knee-jerk reactions are done with, replaced with more of a long-term vision,” said Pollard, adding there is increasing optimism in their sentiments over the short and long term.

Fewer companies are moving toward layoffs, and a lot more plan on hiring in the near future, he said.

Helping drive some of that optimism is copper, a flagship base metal of which B.C. is Canada’s largest producer.

Copper may be nowhere near its high of US$4 a pound of last summer, but the metal is hovering at half that – a significant upward movement from a low of US$1.26 a pound in late December.

In an industry that was stunned by its rapid reversal of fortunes after being hit by the effects of global recession, that movement is a godsend for development and expansion projects in B.C.

“It’s nothing but good news for projects like those,” said John McManus, senior vice-president of operations at Taseko Mines Ltd. (TSX:TKO; NYSE:TGB). “How long does it continue, we don’t know.”

The concern, however, is that the copper demand fundamentals haven’t changed in the last six months, other than the fact that China, has been stocking up on large quantities of copper in recent weeks. “The fundamentals in the United States, Europe and Asia for actual demand for copper, even with all the stimulus packages, are not strong,” said McManus. “It’s still in bad shape.”

With copper in the US$2 range again, scrap copper, which accounted for approximately 30% of world supply at its peak price last year, will again flood the market and prove to be a major competitor for producers, who can’t turn on and off as quickly as the scrap market.

Even so, producers like Taseko remain very bullish on copper in the long term, despite predictions the price could pull back within the next six months.

“I hope not, but that’s what we are planning for.”

After spending $250 million in upgrading its Gibraltar mine in south-central B.C. over the past two years, Taseko could only watch in agony as the copper price plunged and markets collapsed.

The saving grace, though, is that if the company hadn’t made the investments at the mine, which it acquired in 1999 and reopened in 2004, it would likely have been out of business by now. “We would have had to shut the place down because we would have had a too-high operating cost,” said McManus.

To increase production and get costs down from more than US$2 a pound to US$1.15 a pound, the company spent $75 million expanding its mill, $60 million to remove waste rock to gain access to the ore body and around $50 million on new mining equipment.

Now that copper prices have risen again, Taseko, which reported an operating profit of $56.5 million for the year ended December 31, 2008, is proceeding with a second expansion phase.

It plans to spend up to $30 million over the next year, including finishing construction of a new crusher conveyor system.

“But we’re being very careful,” said McManus. “We’re only finishing the projects when we have the cash on hand. … It’s sort of a pay-as-you-go plan we’ve got now.”

In February, Taseko closed a US$30 million financing with a European bank and this week raised $23 million in a “bought deal” share offering – sources that junior mining companies saw evaporate late last year.

Meantime, Pollard’s survey of 80 mining company executives reveals that 40% of respondents think that the mining sector will perform better over the next 12 months as compared to the last 12 months. In his last polling done in November, only 12% thought this would be the case.