In 2008, we find ourselves at a time of high prices for mined commodities, active mineral exploration, expansion of mining operations and new mine construction. It is a time for mining suppliers to diversify their client base. This will help them grow and, by selecting from among a larger range of opportunities, increase their margins. Further, diversifying now will better protect suppliers when the industry moves into its next slow period.
The traditional mining cycle is driven by the mining companies responding to higher prices to bring on too much production, which tips the balance of supply and demand to oversupply, in turn leading to lower prices. At low prices, the high-cost mining companies start to lose money and shut down capacity, and this leads to supply shortage and price increases. This industry-controlled cycle has a period of about 10 years.
Superimposed on this are major events affecting supply and demand, which are not controlled by the industry, such as the Industrial Revolution, the rise of the U.S. economy at the turn of the last century, the Cold War, the collapse of communism in the Soviet Union (with the release of stocks of commodities mined at any cost during the Cold War) and now, the industrialization of China and India. It is difficult to combine these cycles and predict when mining may turn down again.
The Raw Materials Group (RMG) of Stockholm, Sweden, maintains a most comprehensive registry of mining projects. As of December 2007, this database contained information on more than 3,000 projects including all major metals (except bauxite and magnesium) and diamonds in 70 countries.
The total value of all projects in the pipeline at the end of 2007 was US$308 billion, an increase of 50 per cent over the figure at the end of 2006. During 2007, 175 new mining investment projects, valued at US$58 billion, were added to the database, up from US$38 billion added in 2006. However, the number of new projects decreased from 200 in 2006, leading RMG to conclude that the growth in the number of new projects has slowed. In comparison, in the trough of the last downturn in the industry in 2002, only 65 projects, valued at US$11 billion, were logged in.
Escalating costs are the main reason that the average cost per project has increased. RMG cites increased cost of equipment, more complex orebodies, deeper, lower grade deposits, increasingly remote locations, and the lack and cost of staff as supporting a long-term rising cost level.
Mine constructors are busy. RMG’s construction category has expanded in 2007 for the fifth consecutive year to a total value of US$31 billion, up from US$23 billion last year. RMG anticipates growth in this category to continue in 2008, but at a slower rate.
Four metals — copper, iron ore, gold and nickel — account for 82 per cent of the total project pipeline. This high percentage is to be expected, since these commodities account for US$235 billion, or 63 per cent of the total value of all non-fuel minerals production. Of the US$58 billion in new projects for 2007, iron ore investments took a 47 per cent share; copper, 27 per cent; gold, 7 per cent; and nickel, 8 per cent. The average iron ore project is valued above US$500 million; copper projects, US$345 million; and gold projects, US$130 million.
By region, Latin America leads with slightly less than a third of new projects listed in 2007. Oceania, including Australia and Papua New Guinea, is second with 20 per cent, and Africa and North America, third with 15 per cent. The leading project investments by country in 2007 were Australia, 15 per cent; Canada, 11 per cent; and Brazil, 10 per cent.
Jon Baird, managing director of CAMESE and the immediate past president of PDAC, is interested in collective approaches to enhancing the Canadian brand in the world of mining.