I think the business section of the paper is consistently the most interesting; there is always some article which catches your eye. Today’s point of interest has a mining basis which relates to one of the major Northwest Territories diamond mines, Diavik. In short, Rio Tinto is looking to sell its stake in the mine in order to focus on “expanding into more scalable and profitable commodities such as iron ore, copper and uranium” as their investment in diamond mining amounts to less than 2% of total profits.
They are not the only major mining company that is trying to get out of mining for diamonds in the area. BHP Billiton is also selling up and putting Ekati up on the market. According to the article, both companies produce only 7% of the world’s diamonds each, which amounts to a third of each of the world’s top two producers.
From the newspaper reader’s viewpoint, this all looks very logical. Employ your capital more effectively elsewhere and let the other interested parties buy you out of an industry you are only a relatively small player in. However, what if the BHPs and Rios of this world have caught on to something ahead of the pack and this is an harbinger of things to come?
Logistics in a mine are of obvious importance, so we can all appreciate the enormous effort that must go into getting equipment to the mine in a short window in the depths of winter. This article talks of the ice roads operational days being reduced from an average of 70 to 50 days in one particular season, and the measures put in place to overcome this climatic hurdle. This put severe strain on supplying the mine with everything it needs, especially diesel which is the sole source of power for the mine, threatening to halt operations.
That case was in 2006 and if you believe in global warming, then this is set to become more frequent in the future.This is hardly a new idea and much has been written about what climate change means for the industry. This article on Adapting to Climate Change offers some perspectives on this issue.
Have these companies weighed up their options, looked at their capital employed, relative profit return, and the future difficulties they expect to encounter, and decided to get out before the tenuousness of their operations in the light of impending global warming? Could these mines be global warming’s first mining casualty? Or do British and Australian miners just not like the Northwest Territories?
I read Fergus’ posting above just before leaving the office. On the SeaBus, I read the March 26, 2012 issue of MacLeans, that Canadian weekly of good writing and Canadian focus.
Fergus asks the interesting question: are Rio Tinto and BHP Billiton seeking to divest themselves of the Diavik and Ekati Diamond mines because they fear that global warming will make access along the winter ice roads less available?
The implication is that climate warming will reduce the period over which the ice roads may be used to get vital supplies to these far-north mines. And if the available period for ice-road transport decreases, you can be sure the cost of operating these mines will increase dramatically.
A few years ago, I read a report comissioned by Rio Tinto on the potential impacts of global warming on mining. I cannot now find that report. But I recall it noted the possibility that decreased availability of ice roads could impact access and increase the costs of mining in the far north of Canada. Rio Tinto has clearly been long aware of the possible impact of increasing temperatures on profitability. Maybe indeed they have now decided to act.
The McLean’s article is headed The Year That Winter Died. It is a mushy, sentimental survey of the impact on the soul of Canada of the past winter that was one of the nicest (warmest) in history. But the article includes this paragraph:
“The warm winter hindered the construction of ice roads across the North, prompting some chiefs to declare an emergency in January. In the Mackenzie district, temperatures have risen 5 degrees C over the past several decades. Every year, efforts to truck food, fuel and other essential supplies into the North are increasingly jeopardized.” (sic the bad writing)
It is almost as if this observation has hit home in the head-offices of Rio Tinto and BHP. if I were their advisor, I would not hesitate to tell them to get out of Northern mining while the price is good.
As an individual investor, I do not need to consider the causes or the politics of global warming. Leave that to dumb US Republican politicians. All I need consider is the hard reality of what might make a share price go up or down. And it seems to me, as an old investor, that warm winters, short transport periods, no ice roads, and more expensive diamond mining, might be a bad thing to invest in. So tomorrow I will rebalance my portfolio based on global warming.
Are the big boys pulling out of Canada’s north then? The latest circular from FMC on the new federal streamlining process includes a map of major projects in the MPMO and there is not a single one in the territories!
And Jack, hope you are on the mend! I am intrigued by your bringing in other commentators to “your” blog. Not complaining though! Let’s go to the pub next week this being a short one. My shout!
I think you’re reading too much into this. In a report to the SEC, Rio Tinto states that they are reviewing their position at all their diamond mines: Argyle in Australia, Diavik in Canada and Murowa in Zimbabwe.
I’m not sure what BHP Billiton’s position is at the Ekati Diamond mine, but to imply that global warming has convinced major mining corporations to stop mining in northern Canada seems to be going too far. What would be the rationale for getting out of the diamond mining business in Australia and Zimbabwe?
MiningUniversity.com
Some comments on the BHP/ Rio Tinto desire to get out of diamond mining:
Diavik-
The A-418 open pit runs out of ore later this year. The underground operation has been slow to ramp up. Production is set to drop by about 50% in 2013 since the mill will likely only have about 1 million tonnes of mill feed, PROVIDING underground lifts its game.
Harry Winston states that the capital cost to get the A21 pipe into production will be in the order of $500M and 2015 will be the first year of pit production. This looks like a breakeven proposition anyway.
So it is obvious to me that Diavik may be free cashflow negative in 2013/14. This is my mind is the key reason Rio wants out.
Other reasons- much higher unit fixed costs coming due to fewer carats produced per year, rehabilitation costs. Rio also doesn’t want to be the bad guy laying off the workforce.
Ekati-
High stripping ratio for the pit pushback ruins the economics of remaining mining. Plus rehabilitation costs coming.
I think BHP had hoped that Ekati would buy them out in order to have mill feed once A-418 runs out of ore but this is obviously not going to happen.
A real bind up there. Ironically Diavik should have a really good year net income wise until Q4 when the lose of open pit ore ecomes obvious to the market. Harry Winston has stayed very quiet on the unfolding situation by not releasing the mine plan. This almost warrants a complaint to the OSC since they are holding back negative insider information.