Minto: More bad news for the mining sector

The Minto copper mine's announcement of reduced mining activity in 2016 and a temporary closure in 2017 brought more bad news to an already battered Yukon mining sector.

The Minto copper mine’s announcement of reduced mining activity in 2016 and a temporary closure in 2017 brought more bad news to an already battered Yukon mining sector.

Capstone, Minto’s owner, put out its “2016 Operating and Capital Guidance” for investors. First, underground mining will be “paused” sometime in the first three months of this year. Surface mining will continue until August 2016 in the Minto North pit. The mill will keep going until stockpiles are used up in mid-2017.

As these milestones pass, an increasing number of Yukon and fly-in workers at Minto will be laid off.

Capstone’s stock price has been trading around 30 cents since the announcement. That’s down from a 52-week high of $1.71 and far below the heady days of 2011 when the stock traded at over $4.

Interestingly, Capstone forecasts that Minto’s all-in cost in 2016 will be US$1.30-1.40 per pound. That’s lower than their other two mines, and comfortably below even US$2 copper.

So, why close your lowest-cost mine? It’s because the low costs are thanks to the rich Minto North deposit. Minto’s other deposits are less economic. The mine told the Yukon News that its cost per pound last year, before Minto North was fully operational, was in the US$2.40 per pound range.

So when Minto North runs out, the mine’s cost per pound will go up. Too bad Minto North isn’t a lot bigger.

Capstone is also cutting operational costs and capital budgets. Over one-fifth of head office jobs have been eliminated and the company promises “strict capital management” to investors. This means no major investments in the Yukon in the near future to develop new ore bodies as Minto North is depleted.

Capstone says that re-opening Minto after that depends on “a number of factors, most notably an improvement in the copper market outlook.”

A quick look at a chart of historical copper prices shows the problem Minto is facing. Over the last five years, copper has been on a steady downward trajectory. In 2011, it averaged US$4.00 per pound. It has been lower every year since then, averaging US$2.50 in 2015. That’s a 40 per cent drop.

The falling Canadian dollar took some of the sting out of this. Copper was C$4.12 per pound in 2011 using that year’s average exchange rate. In 2015, it was C$3.32, which was a relatively less painful 20 per cent drop.

However, 2016 isn’t looking great so far. The average price for the first three weeks of the year was US$2.02. Even though the Canadian dollar has fallen further, this still worked out to only C$2.86 at last Friday’s exchange rate.

The only good news is that we haven’t hit 2003’s price of just 81 US cents.

The outlook is highly uncertain. A lot depends on which way the Chinese economy goes. Neil Hume, the Financial Times’ commodities editor, reviewed the supply and demand trends last month. The upshot is that some big new copper mines launched during the boom years will be coming on stream in the next few years, which will put downward pressure on prices.

Going out five to 10 years, however, the picture looks more positive. This is because it seems to be getting harder to find and develop big copper mines. By the end of the next decade, some large existing mines will likely be hitting the end of their lives. A decade is a long time for Yukoners to wait for job opportunities, however.

Unfortunately, we are soon going to get a refresher course in how many ways the mining industry contributes to the Yukon economy. The ripple effects will be widespread.

The Selkirk First Nation gets two kinds of royalties from Minto, a share of production (or net smelter return for the cognoscenti) and a profit-based royalty. The latter was $5.9 million at its peak in 2009. Temporarily closed mines don’t tend to pay royalties.

The Yukon government will lose corporate and personal income taxes as well as fuel taxes. Yukon Energy will lose a big customer, leaving the rest of us to cover its fixed costs.

Air North will also lose a steady flow of fly-in/fly-out workers. Yukoners often complain about such non-tax-paying interlopers, but at least they contributed to keeping Air North flying. Local hotels, restaurants and retailers will also share the pain.

I will be curious to see what happens to enrolment in the mining training courses at Yukon College. Politicians have made a big deal about boosting training so Yukoners can take advantage of opportunities created by the mining industry. This is a good thing. But prospective students can be forgiven for wondering what kind of jobs await them at the end of their program when so many experienced Yukon miners are already unemployed.

An economic slowdown can be a good time to go back to school for some upgrading. Students might want to think about programs with broader ranges of job options. For example, the College’s heavy equipment technician program positions students for jobs in and outside the mining industry. Its underground mining operations course is more specific, although it offers great learning at the University of Alaska’s Delta mine training centre.

There’s not much most of us can do other than watch the copper price.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. He won this year’s Ma Murray award for best columnist. You can follow him on Channel 9’s Yukonomist show.