The Metals Report:Rick, you have concerns about supply problems for many industrial metals. Let's start with the importance of copper and nickel to global growth.
Rick Mills: Modern society would grind to a halt without copper and nickel. Nickel has more than 100,000 applications. Copper is everywhere as well. But growing structural imbalances in the supply-and-demand equation do not bode well for future resource extraction. Mining is extremely capital intensive. The initial capital expense (capex) of building and developing a mine is high.
Company-built infrastructure assets—roads, railways, bridges, power generating stations, seaports—are often needed to extract and transport the ore and concentrate. Second, the operating expenses (opex)—rubber tires, wages, fuel, camp costs—are not stable; they keep going up.
TMR: Production costs have been high for a while. Why are you so concerned now?
RM: Copper has become especially capital intensive. The low-hanging fruit has been mined. Companies have to go further off the grid to find deposits. The deposits now being mined are getting older; the metallurgy is more complex and grades are going down. In 2000, it cost $4,000–5,000 on average to build the infrastructure to produce a ton of copper. Now that number is north of $10,000/ton. Nickel is the only other metal with that kind of increase in capital intensity.
Declining ore grades mean miners need a much larger relative scale of mining and milling operations to get the same amount of metal. New mining projects are often in remote areas of developing countries with little to no infrastructure. When you are in the middle of the jungle, without access to roads, railways or seaport, you have to build all that. That's why new copper and nickel mines cost upwards of $8 billion ($8B).
TMR: Do you think the economy is recovering and how does that impact the demand for copper?
RM: Economies in the developing world—the U.S., Japan, the Eurozone—are not recovering. (See chart below.) I would expect growth to be 1.5-2% for the next couple of years, which is not enough to stimulate new demand. In contrast, the BRIICs (Brazil, Russia, India, Indonesia and China) are expected to grow at least at a 6% average. These countries are undergoing massive industrialization and urbanization that will more than make up for the slowdown in the West.
TMR: Given the copper shortage, will senior companies like Teck Resources Ltd. (TCK:NYSE; TCK.A:TSX) and Vale S.A. (VALE:NYSE) go looking for new deposits or do you see more merger and acquisition activity?
RM: I prefer junior companies that already have a deposit. One that meets my criteria is VMS Ventures Inc. (VMS:TSX.V). Its Reed Lake project in Manitoba, Canada, is a 70/30 joint venture with HudBay Minerals Inc. (HBM:TSX; HBM:NYSE). It will be in production later this year. The ore will be trucked to HudBay's milling and concentrating facilities. By 2015, VMS will have decent cash flow after paying back HudBay, with close to $100 million ($100M) flowing to VMS over the current five-year life of mine (LOM). The deposit could grow along with the LOM. Manitoba is mining friendly, has a skilled local workforce and all the infrastructure you need.
TMR: Could HudBay take over Reed Lake outright?
RM: I would rather see HudBay continue as the operator and see VMS use the cash flow. Right now, VMS has $10M in its treasury. It could use that money to explore or acquire another project. Plus, it already owns 21% of North American Nickel Inc. (NAN:TSX.V).
TMR: What about nickel? Are there shortages there too?
RM: The biggest problem I see with nickel concerns the types of deposits. Nickel deposits come in two forms, sulfide or laterite. About 60% of the world's known nickel resources are laterites. Sulfide metallurgy is much simpler and therefore sulfide nickel is much cheaper to produce. The principal ore mined from sulfide deposits is pentlandite, which has simpler metallurgy. Laterite metallurgy is more complicated, and the deposits are often in equatorial countries that carry higher geopolitical risk. We have not had a new major sulfide discovery in years. They just are not being found anymore. We have laterite nickel deposit discoveries, but there is no simple separation technique for nickel laterites. The rock must be completely molten to enable nickel extraction. Laterite projects require large economies of scale to be viable because of their higher capital costs per unit. We are looking at north of $35/pound (35/lb) of capital intensity to build these very large ferronickel and high-pressure acid leach projects.
TMR: You mentioned North American Nickel. Can you tell us more?
RM: North American Nickel started drilling its Maniitsoq, Greenland project last year and got fantastic results. The principal ore is pentlandite, which is the first important factor. The second is that Alex Balogh, former CEO of Falconbridge, is on North American Nickel's advisory board. That is a huge endorsement.
The company has about $1.5M in the bank and is planning a 3,000-meter drill program at Maniitsoq. It will target high-priority, variable time-domain electromagnetic conductors and follow the open high-grade sulfur mineralization. This is a huge camp, a 100% owned district. VMS and the Sentient Group out of Australia are big supporters. North American Nickel is currently raising $7.5M for a huge Greenland program this year. CLICK HERE TO READ MORE