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Teck Cominco, NovaGold step back from Galore Creek plan
JOHN PARTRIDGE
Globe and Mail Update
November 26, 2007 at 1:56 PM EST
Investors buried NovaGold Resources Inc.'s share price Monday morning after it and partner Teck Cominco Ltd. shocked the market by suspending construction of a massive gold and copper mine in Northern British Columbia, saying that much higher than expected capital costs would make the project uneconomic based on long-term metals price forecasts.
The two companies said Monday that an evaluation of the Galore Creek project by an independent engineering firm, along with their own review, concluded that the capital cost of the project “could approach as much as $5-billion,” while adding 18 to 12 months to the construction schedule.
This is fully $3-billion higher than estimates in the initial feasibility study just over a year ago, an increase that clearly shook some analysts who took part in a conference call held by the mining companies.
However, Teck has committed to spending an additional $72-million over the next five years to see if there is another way Galore Creek can be developed in a way that makes economic sense.
Teck Cominco Ltd.
The Globe and Mail
Both companies rejected the idea of selling their stakes in the project.
NovaGold's shares plunged by more nearly 42 per cent — or $8.38 — to $11.58 on the Toronto Stock Exchange as investors digested the bad news, while those of much larger and more diversified Teck Cominco slid by $2.20 or 4.8 per cent to $43.50.
“It's very serious – it was a significant portion of [NovaGold's] overall perceived value,” analyst Haytham Hodaly of Salman Partners in Vancouver said in a telephone interview.
“It's one of two key projects that the company has,” concurred analyst David Stein at Cormark Securites Inc. in Toronto. The other is the Donlin Creek project in Alaska, which NovaGold is developing in a 50:50 joint venture with Barrick Gold Corp. of Vancouver, the world's largest gold miner.
Both Mr. Stein and Mr. Hodaly said they were in the midst of revising the “buy” recommendations they had on NovaGold shares and their 12-month target prices of $23.50 and $23, respectively.
The decision to suspend construction on the Galore Creek project may be another signal that commodity prices have peaked and that more projects may be delayed or cancelled by the global mining industry — although it is not clear whether Teck and NovaGold would have decided to move ahead as they did with a more accurate capital cost estimate.
However, the two analysts said the quantum leap in capital costs appears to have had much more to do with the decision to back away than the decline in metals prices.
“The increase in cap-ex is really the key thing,” Mr. Stein said.
He also said it might be possible for the companies to salvage Galore Creek by cutting back the scope. “A few years ago, this was a much smaller project that focused on a few higher-grade zones,” he said. “They could perhaps go back to that kind of a project and see whether it works given the infrastructure requirements.”
Under the plan that the two companies have now suspended, the B.C. mine was to have come on stream in 2012 and, within five years, ramp up to producing about 340,000 ounces of gold a year, along with 430 million pounds of copper and 4 million ounces of silver.
The feasibility study for Galore Creek, conducted by Hatch Group, an international mining and engineering consulting firm, “clearly underestimated” the amount of time and labour needed to build a tailings dam and various water management structures NovaGold chief executive officer Rick Van Nieuwenhuyse said during the conference call.
Asked if NovaGold and Teck may have some sort of financial recourse to the feasibility study's authors, Mr. Van Nieuwenhuyse also said the mining companies “Will certainly be talking to Hatch” and other consulting firms involved.
Hatch officials could not immediately be reached for comment.
“It is indeed a very disappointing moment,” Teck CEO Don Lindsay said during the call. “I know there are many stakeholders who would have preferred that we push [ahead] in the hopes that commodity prices would stay high. But in the end, we feel compelled to take the prudent decision and cut back spending to a minimum while we determine a new more economic way forward.”
Challenged by an analyst, Mr. Lindsay defended the “due diligence” his company performed before recommending the project to its board of directors.
“But clearly, if we had it do over again we would have spent a lot more time on the civil [engineering] work and that aspect of it, because we relied fairly heavily on the Hatch feasibility study — as people do in the industry,” he said.
Teck and NovaGold also will conduct a comprehensive review to evaluate alternative development strategies for the 50-50-owned project, while also conducting an “orderly suspension” of construction activities minimize the impacts of this decision on the local community.
They said the development also has been affected by the “rapidly escalating capital costs affecting major construction projects world-wide.”
About 400 contractors and other employees are currently working at the Galore Creek project.
“We reached this decision after considerable review and we share the disappointment of our employees, the Tahltan Nation, all stakeholders and local communities,” Mr. Van Nieuwenhuyse said, adding that the company will now be “advancing” the other projects in its portfolio, particularly the Donlin Creek project in Alaska.
“Very few copper-gold deposits of this quality have been discovered over the last few years even though the industry has invested billions of dollars in exploration world-wide,” said Mr. Lindsay. “Galore Creek is a substantial resource and we will continue to work to determine how and when it can best be developed.”
By the time the development is effectively mothballed, the two companies will each have spent a little more than $400-million on it.
This will include the additional $72-million Teck has committed, as well as another $100-million, split 33 per cent for Nova Gold and 67 per cent for Teck, to be spent largely on “care and maintenance” at Galore Creek.
Mr. Lindsay said that although Teck will take a writedown on its investment in the project in the fourth quarter, it will not write it off entirely. “We will not write it down to zero because we think it still has significant value,” he said.
The companies said that the stronger Canadian dollar has had very little impact on projected capital costs, but that it has affected forecast operating profit margins and make Galore Creek “uneconomic at current consensus long-term metal prices.”
Mr. Lindsay declined to the specific prices on which the companies have decided to pull back, but did not appear to quibble with figures suggested during the call by several analysts of about $1.50 (U.S.) a pound for copper and $600 an ounce for gold. These compare with current prices of more than $3 a pound for copper and $820-plus an ounce for gold.
