High oil prices may spell the death knell for major new additions to global gold reserves, according to one of Australia's foremost equities analysts. Addressing the 2008 Paydirt Gold Conference in Perth, Western Australia, earlier this year, corporate analyst and equities market author, Peter Strachan, said oil-reliance could hamper future growth in gold production volumes.
We have spent the past three to four decades developing technology, science, chemistry, advanced geological models, satellite imagery and the like to drive gold output by increasingly expanding the gold extraction footprint across lower and lower grade mineralisation, he said. All this has led to is larger and larger energy consuming ball mills, haul trucks, conveyor systems, processing tanks and crushers - yet gold production [in Australia] peaked seven years ago despite this technology, he said.
Strachan said peak oil and its associated escalation in price would increasingly spike low to medium level attempts to economically mine gold, particularly lower grade deposits, even in strong gold price environments. Running diesel at a remote site at 30 to 40 cents a litre is a lot different to running it at a cost of $2-3 a litre - and at that point, gold mining either ceases, slows or never gets off the ground.
The cost of all inputs to mine construction has increased dramatically over these past boom years and is a growing problem in the industry worldwide. The impact is great, whatever the size of operation, but can be demoralising where mega projects are concerned. It is to be hoped that Freeport McMoRan Copper and Gold, for example, is not faint hearted. Expected costs to build the Tenke Fungurume copper-cobalt project in the DRC have nearly doubled due to rocketing construction and infrastructure expenses. Freeport (57.75%) has increased the capital cost estimate to $1.9 billion, up from $1 billion last October.
Freeport sought to allay mining analysts' fears about these soaring costs, explaining that a majority of the cost increases involve expanding the massive cobalt-copper project to accommodate future development of a mining district. Nevertheless, Freeport President and CEO Richard Adkerson did admit that everyone in the industry is having their eyes pop out at current project costs.
In another example, Vale announced that the budget for its 58,000 t/y Onca Puma ferronickel project, scheduled to start up in 2009, has been significantly increased - by 64.7% from $1.395 to $2.297 billion. Of the escalation, $313 million was due to the depreciation of the dollar, with the remainder attributable to rising material costs, equipment and services, and reduced synergies with Vermelho, a 46,000 t/y nickel project planned for completion in 2012.
A shortage of sulphuric acid (and the cost when you can get it) is another issue for many companies. Adkerson called the shortage an important business issue for us.
Adkerson noted what most of us already know, that huge issues exist with all elements of the industry, including long lead times for equipment, and contractors stretched on the development of underground mines or project construction. However, Adkerson declared that the biggest issue as far as Freeport is concerned revolves around finding qualified people to fill mining jobs. He said the staffing crisis is the result of years of underdevelopment, slow times, and conservatively managed companies.
The situation can be aggravated in countries like the DRC, where ruined infrastructure and logistics problems add to the costs. For instance, Anvil now faces a bill of $380-million after the costs of developing the Kinsevere Stage II project rose by 48% over the $257-million that had been estimated in the feasibility study.
However, cost over runs are not always the case. For example in May, at the Angas zinc mine in South Australia, Abesque Engineering and Construction, the principal construction contractor, completed its task in May. The A$29.2 million contract, signed in March 2007, was completed on budget together with A$130,000 of company initiated design variations. Dr Kevin Moriarty, Terramin's Executive Chairman said it was an outstanding result when many recent mining projects have had cost blow-outs of 60-100%. Progressive plant commissioning commenced in June 2008.
Looking at some specifics, effective June 1, Cytec Industries announced the implementation of a global price rise of 7 to 15% on all its mining products used in mineral processing and SX, including frothing, promoters, flotation reagents, extraction reagents, flocculants, surfactants, and SX reagents. This, the company said, is being implemented to offset the increased costs of raw materials, energy and transportation.
In May ArcelorMittal announced that another 5% hike in steel prices was on the cards for June, bringing total steel price increases for 2008 to then to a very significant 65%. ArcelorMittal said the price of flat steel products was to rise by about 5% - the fifth increase this year - in line with rising international prices, soaring input costs and a weaker exchange rate. The price of long steel products was to remain unchanged.
In Australia, Intrepid Mines' Chairman Colin Jackson at the gold company's AGM noted: Year-on-year, the cost of diesel for power generation is up 47% and grinding balls are up 30%. To put the cost of diesel into perspective, on-site generation costs are equivalent to $72/oz of gold recovered based on the life of mine reserve grade. On this basis I am glad that Paulsens is a high-grade underground mine rather than a low grade, high-strip-ratio openpit mine.
Abare reports: Australia's mineral resources sector is facing difficulties in securing inputs such as grinding mills, draglines and locomotives. This reflects the recent acceleration in global exploration and development in order to meet growing global demand for mineral and energy commodities, particularly in China.
As such, the lead times for key items of equipment have increased considerably over the past few years. For example, according to Rio Tinto, lead times for obtaining large haul trucks and tyres have increased from around three months to around two years.
In response to the long lead times for sourcing key items of equipment, many companies are announcing pre-approval funding (prior to the final investment decision) to allow for procuring certain items of equipment in time for the expected project start up. After all, if the project should not go ahead, for some reason, that item of equipment will likely be very saleable.
Other long lead delivery times noted by Rio Tinto include three to four years for grinding mills (normally less than two years), three years for draglines (twice the norm), two years for crushers (normally about 1.5 years) and two years for rope shovels (compared with a norm of nine months).
One of the big constraints in delivery times for mining machines is the delay in OEMs receiving hydraulic pumps of certain sizes. However, another problem is looming. Some years ago, the construction of Hong Kong's new airport was, effectively for a while, the world's largest open pit. In that case the mined material was being dumped in the sea to increase the surface area available to the island airport.
The latest mega construction project (over $60 billion) may well have a very noticeable effect on the availability of earthmoving machines. Dubai based development company Limitless has begun work on the ‘Arabian Canal', designed around a 75-km long canal. Once the canal has been finished - after about three years from work commencing in December 2007 - an extensive waterfront development will be built. This will cover more than 20,000-ha of waterfront land stretching 33 km along the canal's inland section. Once completed, this ambitious development will include residential communities, luxury marinas, and business centres.
The canal will flow inland from the Dubai Waterfront at Jebel Ali, passing to the east of the Dubai World Central project before turning back towards the Palm Jumeirah development. The canal will be up to 150 m in width, at least 6 m deep and is expected to cost around $11 billion. This mammoth earthmoving task will involve digging and moving over a million m3 every day!
Letters of Intent have been issued to various contractors. Whoever wins the canal contract(s) is going to require a large number of large shovels and trucks (and ancillary equipment) for a short period of time. This poses quite a dilemma for the manufacturers of surface mining machines in regard to the effect this large earthmoving fleet could have on the world's open-pit mines and coming projects. Firstly, from the mines' point of view there is likely to be ever longer lead times for equipment (and tyres?) once this project gets underway. Secondly, from the suppliers' point of view, there will suddenly be a glut of relatively new, used equipment available for ready sale once the project is complete.
John Chadwick is Editor, Publisher and Proprietor of International Mining magazine - www.im-mining.com