As project costs soar, miners attract suspicion
Tue Nov 27, 12:20 PM
ca.news.finance.yahoo.com
By Jonathan Spicer
TORONTO (Reuters) - As large-scale mining projects face soaring prices for construction materials and labor, investors are growing increasingly skeptical of new ventures that tout outdated cost estimates, especially when any signs of production are far off on the horizon.
Canadian miners Teck Cominco Ltd and NovaGold Resources saw their stocks battered this week after they said construction costs at their big Galore Creek joint venture could more than double to C$5 billion ($5 billion).
That's a whopping C$2.8 billion more than the latest capital cost estimate, issued just over a year ago.
Armed with the new numbers, Teck and NovaGold pulled the plug at the copper-gold-silver asset in northern British Columbia, whose production startup had been pegged at 2012.
Their shares, especially those of smaller NovaGold, got crushed as observers wondered aloud about cost overruns that could be lurking just under the surface of similar, long-term projects.
"People will be looking at every development-stage company ... with big projects that are going to take a lot of capital, and for a lot of them, capital is going to be much higher than what people think," said Kerry Smith, senior mining analyst at Haywood Securities.
"It's obviously a trend; it's going to continue."
NovaGold shares plunged 53.7 percent on Monday following the Galore Creek news, while Teck sagged 4.9 percent.
MATERIALS AND LABOR COSTS
Citing pricey raw materials, Japanese shareholders Sumitomo Metal Mining Co and Mitsui & Co said earlier this month they would push an extra $280 million into the Goro nickel project, one of the world's biggest, in the French Pacific island of New Caledonia.
Goro, which is operated by Brazilian mining giant CVRD , has been delayed more than a year and is slated for start-up in late 2008. Over the years, its cost estimate jumped from less than $2 billion to the current $3.2 billion -- and analysts are still unsure if they've seen the last of it.
"Most projects have had cost overruns, but the bigger it is the more likely we are to find the overruns are significant," said David Davidson, senior analyst at Paradigm Capital.
Which is not to say smaller projects are immune.
Junior Canadian miner Silver Standard Resources Inc blamed "increased costs in global construction materials and inflation pressures in Argentina, particularly labor," on Monday for a doubling of the price tag on its Pirquitas silver project, which is set to come on line at the end of next year.
Like the Teck-NovaGold news, the revelation from Silver Standard came on Monday, and may have played a roll in paring value off other miners with promising but bulky projects in the pipeline.
Anglo American and Northern Dynasty Minerals Ltd -- which own the Pebble copper mine in Alaska 50-50 -- tumbled 2.7 percent and 3.2 percent respectively on Monday. Anglo said in August it would make a staged cash investment of $1.425 billion in the project.
Likewise, world No. 1 gold producer Barrick Gold and Kinross Gold fell 2.9 percent and 2.7 percent respectively on Monday.
Kinross owns 49 percent of Cerro Casale, the massive gold and copper deposit in Chile, and Arizona Star Resource Corp -- the target of a friendly bid by Barrick -- owns the majority. The cost for developing Cerro Casale was estimated last year at about $2 billion, but the project has awaited a start for years.
In the end, these projects may not have capital cost surprises. But as the overruns roll in for their peers, the one piece of positive news for investors is that metals markets can more accurately reflect world supply.
"In the clear light of day, the cost overruns and time delays are good for commodity prices," said Davidson.
($1=$1 Canadian)
(Reporting by Jonathan Spicer; Editing by Rob Wilson) |
