Control your costs, Scotiabank expert warns Nunavut mining interests

Patricia Mohr, the Scotiabank group’s in-house expert on commodity markets, warns that Nunavut mining companies may have to keep a close eye on operating costs. (PHOTO BY JIM BELL)

Patricia Mohr, the Scotiabank group’s leading expert on commodity markets, never shows up to the Nunavut Mining Symposium without a story to tell.

This year, her story contains a caution: those who promote and tout Nunavut mines should start paying attention to their operating costs.

“I think mining companies are going to be very interested in controlling costs, which they haven’t put a lot of emphasis on in recent years. They are going to move into an environment of greater cost control and be much more selective about their developments,” Mohr said April 17 inside a packed screening room at Iqaluit’s Astro Theatre.

For Nunavut, that means mining companies and their allies must make sure Nunavut-based projects are competitive in relation to similar mines in lower-cost countries, such as Australia.

That’s because economic growth in China, which consumes vast quantities of base metals imported from Canada and other producing countries, is likely to slow down a little over the next year or two.

“I think it’s fair to say that GDP growth in China, which is now very dominant in mining markets, is slowing to a somewhat slower pace — still very good, but somewhat slower,” Mohr said.

At the same time, global commodity prices, especially for many key minerals, have softened in recent months due to a variety of factors, especially the European Union’s sovereign debt crisis.

Since April 2011, a global metals price index that Mohr maintains shows a price decline of about 13 per cent.

Because of this, Mohr said Canadian mining companies, including those with developments in Nunavut, must now trim costs.

And for governments, and other non-business players in the Nunavut mining economy, this means keeping a close eye on those costs that are imposed by regulatory red tape, Mohr said.

“I think the challenge for governments is to really move projects along through the regulatory environment. Try not to get them bogged down too much. Show some flexibility and keep the projects going,” she said.

Another factor is that as metals producers respond to strong prices by developing new mines, new supplies flowing onto the market in the future could also cause prices to soften.

But at the same time, China’s hunger for base metals and iron, the building blocks for an industrial economy, will remain unabated for the foreseeable future.

For example, Mohr said China plans the construction of 36 million social housing units over the next several years.

This will fuel continued demand for rebar, the steel reinforcement used to build concrete apartment buildings, she said.

Another source of Chinese demand will be the country’s growing automobile industry and the country’s plan to build new roads.

All this means that potential iron projects, such as Baffinland’s Mary River and a long list of projects in northern Quebec’s Labrador trough, such as those near Aupaluk and Lac Otelnuk, are likely to find good prices for their products in the foreseeable future.

And even though annual GDP growth in China may slow to “only” eight per cent, Mohr said the long-term outlook for commodity producing nations like Canada looks good.

China consumes more than 40 per cent of all industrial metals produced globally. This means the slightest downturn in Chinese demand has consequences for metals producers everywhere, including Nunavut.

India’s economy will also continue to grow by leaps and bounds, Mohr said, and consumer demand in that country for automobiles may be greater than in China.

And even the recently moribund U.S. economy is showing signs of perking up, due to a revival of that country’s auto industry.

The U.S. has replaced about two million of the eight million jobs lost there during the Great Recession of 2007-08, and U.S. consumers have started buying cars again, she said.

There’s one commodity, however, that’s doing badly: uranium.

Because of the Fukushima nuclear reactor fiasco in Japan, uranium prices now sit at near-historic lows, having sunk to about $50 a pound from a high of $136 a pound, Mohr said.

But she said that is likely to change as China, Russia and India expand their nuclear reactor programs.

And she expects that Canada will soon sign a deal with China that will permit the sale of Canadian uranium concentrate to that country.

As for the global price of gold, important for producers like Agnico-Eagle and Newmont, Mohr said she believes it has “already peaked.”

Gold prices reach a high of $1,921 per ounce in September 2011 — but Mohr said she expects that figure to settle into a range of between $1,650 and $1,700 an ounce this year.

The next “big play” Mohr said, is likely to be zinc, which could be good news for companies sitting on undeveloped zinc projects like MMG’s Izok Lake in Nunavut’s Kitikmeot region.