Sunday, March 2, 2014

Galore Creek as a cautionary tale for LNG

When I wrote up the factors that go into deciding if an LNG project will go ahead or not, I based it on close to 20 years of my analytical work in BC related to development on Crown Lands most specifically large scale mining projects.  There are many similarities between capital intensive mineral projects and LNG projects.   There are number of good mine projects to look at in BC, the two that come to mind are Mount Milligan that recently opened after close to 25 years of almost being developed and Galore Creek.

Galore Creek is one of the richest known undeveloped gold deposits in the world.  Galore Creek is located in North West BC about 150 kilometres northwest of Stewart BC as the crow flies or about 100 km west of Bob Quinn on Highway #37.

The fact it has not been developed when it came so very close a few years ago is a good reminder that even a very rich looking natural resource project does not work to tight timelines.   Galore Creek is an important cautionary tale when considering LNG in BC.

The Galore Creek Mine project was granted an environmental assessment certificate in 2007.  At that time the plans were for the mine to operational by 2010, which now four years in 2014 later it is not.  They  started construction in 2007 but shut down in 2008.

Galore Creek is not a small marginal project, it is a large project.

  • It has a life of about 25 years
  • It would have direct operational employment of 400 people and indirect employment several thousand, roughly on par with a large LNG plant
  • It will mine about $600,000,000 worth of copper, gold and silver per year - in comparison the two most likely LNG projects in BC would require the extraction of about $4,000,000,000 in BC natural gas
  • It will pay about $110,000,000 a year in BC Mining Tax
  • It will offer the port of Stewart a major new client

Galore Creek is proven to have

  • 5,450,000 ounces of gold - $7 billion
  • 102,000,000 ounces of silver $2.2 billion
  • 6,800,000,000 pounds of copper $22 billion
  • For a total prove value of $31,200,000,000 in resources

Galore Creek is estimated to have a further

  • 8,000,000 ounces of gold - $10 billion
  • 136,000,000 ounces of silver $3 billion
  • 8,900,000,000 pounds of copper - $28.5 billion
  • For indicated estimate of $41,500,000,000 

This project has the potential to extract a value of around $72 billion in current day values.  So why has it not gone ahead?   Three major factors have stopped the project, escalating capital costs, the 2008 economic downturn, and the concern about long term mineral prices.

The 2008 economic downturn is over and the long term mineral prices are holding better than anyone had expected, but still there is no serious plans to develop the mine in the near future.  The pay back period for the capital is too long to make it a very attractive investment.

The latest plans for Galore Creek are not the first go around for the deposit.    The deposit has been on the radar for decades now having been extensively explored since 1955.  The first major attempt to move forward with a mine in 1974 and then again in the early 1990s.   The current plans are the third serious attempt.    With each iteration of the project the exploration has shown the deposit is bigger and richer than had been expected.

The reality is that many mineral deposits in BC take decades to go from initial discover to development.   There are no end of examples of significant deposits discovered more than 50 years ago that have not yet been developed.    Bringing a new mine online after all the approvals are in place takes three to five years of construction and is capital intensive upfront.   For a mine to make sense the capital costs have to repaid quickly and the mine has to have a reasonable chance to be profitable over the full 15 to 40 year lifespan.  It means when the construction starts you are looking out 20 to almost 50 years and trying decide on the economics.   For LNG the situation has a lot of similarities.

One of the biggest differences between Galore Creek and LNG is that the Galore Creek is a much smaller capital project with a better and faster pay back period.   Investing $2.5 billion in Galore Creek is a better bet than investing the same amount of money in LNG because I think almost everyone has a degree of certainty that gold and silver will retain a reasonable value in 25 years.

Another big difference between Galore Creek and the LNG projects is that the companies behind the LNG projects have a lot of their own capital and do not need to go to the market to get investment dollars.

Galore Creek has an estimated capital cost of $2.5 billion to bring in a primary economic value of $600,000,000 a year.  The two most likely LNG projects in BC have an estimated combined capital cost of  $30 billion in capital, 12 times the mine cost, for an total annual economic activity in BC of between $5 billion and $6 billion, or only eight to ten times the value of the mine.

LNG in BC is certainly not the best financial home-run for an investor.   I think given the borderline values and uncertainty into the future it is more than likely there will be delays in all the projects.   Companies can easily spend $100,000,000 playing around with the idea of BC LNG and then shelf the project indefinitely because the total spent is only in the range of 1% of the capital cost of the project.

The companies involved in the BC LNG projects are major global players and have a whole portfolio of projects they could consider.   BC is only only more 'card up their sleeves' if they need it.

If various major mineral deposits in BC can take decades to develop there is no reason to think LNG projects will not also take much longer to come online than people think.

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