Wolverine worries

Mine closures are always bad news for the employees working at the mine, businesses servicing it and governments collecting income taxes and royalties.

Mine closures are always bad news for the employees working at the mine, businesses servicing it and governments collecting income taxes and royalties.

Yukon Zinc’s announcement last week that it was temporarily shutting down the Wolverine mine has even more to worry about however.

The first extra worry is what Wolverine’s closure tells us about mining economics. Wolverine produces zinc, copper and silver as well as lead and gold. The prices of these commodities have indeed fallen lately. But they remain higher than their long-term averages over the last 10 or 20 years.

Zinc has been bouncing between 80 – 110 cents per pound (mineral prices in US dollars) for most of the last five years and closed earlier this week in the mid 90-cent range. But it spent much of the 1990s around 50 cents.

Silver has fallen from over $40 per ounce less than five years ago to under $20 this week. But current prices are still three or four times higher than where the metal spent most of the decade prior to 2005.

Copper was above $3 per pound for most of the last five years, but closed earlier this week around $2.50. Again, it was much lower in the 1990s. It was below a dollar a pound for a few years around the turn of the century.

The story is roughly similar for gold and lead, Wolverine’s other products.

It all comes down to the supply curve, a graph loved by resource economists. Some mines can make money at low prices. They run all the time. Some mines can make money at medium prices. These will tend to stay open, except during severe price plunges. They will even stay open during temporary downturns since they still can cover their cash costs when losing money in accounting terms after depreciation and non-cash items.

Then there are the mines that only make money when mineral prices are high. Economists label these mines as “marginal.” They open and close depending on market conditions, and are the flex capacity that helps match supply and demand.

Wolverine’s owners are, in effect, showing us where Wolverine stands on the cost curve. We don’t know detailed financials for Wolverine since it is a privately-held company. But presumably they closed since they weren’t covering their cash costs.

The bad news here is that, according to this interpretation, Wolverine is signalling that it may be a high-cost producer. It operated when prices were high, and has closed now that they have slipped.

We can’t generalize their position on the cost curve to other mines in the Yukon, which may have different minerals, extraction technology and cost structures. However, it’s worth noting that Bellekeno has now been closed for over a year while Minto continues to operate.

It is troubling that of the three operating mines the Yukon had in 2013, two of them are now closed (temporarily, we are told). This suggests it is not easy for small northern mines to have the low cost structures that allow some mines to operate through all of the ups and downs of mineral price cycles.

The second worry is more specific to Wolverine and its majority-owner, Jinduicheng Molybdenum Group (JDC). According to Yukon Zinc, JDC is a “publicly traded state owned mining enterprise with strong support from both Chinese state and provincial governments.” It has the biggest open pit molybdenum mine in Asia.

The Yukon News reported last Friday that “Wolverine mine has been out of compliance with its mining licence since October for failing to pay a security earmarked for mine reclamation and closure plans.” The amount outstanding is around $3 million (Canadian).

JDC was one of the early movers as Chinese state-owned companies began investing overseas and acquiring resource properties for China’s growing economy. The company highlights investments in the Yukon and Argentina as milestones in this new strategy, which began in 2006.

You can be sure that this occurred with the full backing of the Chinese government at the highest level.

It is surprising that the subsidiary of such a large and prominent Chinese company would be behind on its payments to the Yukon government. It is common for mining companies to have many legal entities, and in theory they can let a company they own in a distant land go bankrupt without having to pay its bills (unless the mother corporation has guaranteed them directly). But despite the bad press that large Western mining companies get, they do this relatively rarely.

They know their brand is at stake, and they have regulators and business partners in other countries that will look askance at a company that walks away from its projects even if legally possible. This brand effect is more powerful than ever in today’s world of instant communications and social licence.

The spotlight is even brighter on JDC since their actions will affect how Canadians view other state-owned Chinese companies as corporate citizens. There has been considerable controversy over Chinese state-owned companies buying North American resource assets in the last few years.

There have undoubtedly been some awkward conversations at JDC headquarters in Shaanxi and at the Chinese embassy in Ottawa.

JDC would have benefited if Wolverine had been a roaring success. It should ensure its subsidiary pays its bills (including to Yukon suppliers, if any have bills outstanding) and fully meets its obligations under Yukon law.

In the meantime, all eyes are on the Yukon’s remaining operating mine at Minto.

Keith Halliday is a Yukon economist and author of the MacBride Museum’s Aurore of the Yukon series of historical children’s adventure novels. You can follow him on Channel 9’s Yukonomist show or Twitter @hallidaykeith