Saturday, January 25, 2014

Recent Developments in Mining the Tarkine

Occasionally I go through old files and am often surprised by things I had written and then forgotten, for example:
Recently Tony Burke and the succeeding minister Mark Butler gave mining approvals to Shree Mining and Venture Minerals which basically overturned court decisions which were unfavourable to both projects. With regards to the timing, the question naturally arises as to whether these projects are being used as political footballs in an attempt by Labour to hold the seat of Braddon. Even if it can be argued that the extra conditions that have been attached to the projects ameliorate the environmental problems to some degree, some are ridiculous and obviously intended purely for public consumption like the penalties and conditions re devil and eagle management.  To my mind the question must remain as to why this is being done at all.

A quick look at the Shree Minerals website by anyone with a minimal familiarity with the industry gives a good idea of the economics of the project. Mining costs are estimated at $100 per tonne.  Haulage to the nearest port, which is Burnie is $29, for a total of approximately $130 per tonne which, last time I looked is the present price of iron ore, in a distinct downtrend. Neither is this the end of the matter, as in reporting these costs, it is industry practice that others are omitted; including development capital and cost thereof, leaseholding costs, and finally company administration. Amongst exploration companies all this is known as the ‘burn rate’ which is the speed at which shareholder’s funds (for there is rarely any other source of revenue) are converted to wages and benefits for company principals and employees, general administration and direct exploration costs. Remuneration for the CEO, directors and secretary alone could run over a million dollars per annum, and in producing miners these outside costs over and above the basic mining cost typically can run to another 40 to 100%, which is why there are so rarely any ultimate returns to investors, except at the height of commodities booms in which obscene profits are discovered and targeted by populist governments. As a long term investor in the industry this is how I always know when the end is upon us.

But back to Shree Mining- although a substantial portion of the deposit is highly desirable magnetite, very high grade and beneficiation for that part would not be required (that’s what the giant mill at Savage River does).  Neither is there an adequate loading facility present or planned. Grange Resources in Port Latta does not have the space for the output of another mine, nor can they have their pellets contaminated by this product. Nor can the reclaimer, which is the giant circular bucket that loads the belt be moved elsewhere, so Port Latta is not even a possibility unless the Savage River mine ceases production. That leaves only Burnie which presently has no such shiploading facilities and would require a huge covered ore storage area as well.

Venture Minerals has a small surface deposit with a projected mine life of about two years. With very low volume (and mining costs) their product could be trucked to the rail and there might be enough room in Burnie even to keep it under cover. Hope springs eternal.

The international market situation (outside the Chinese demand downtrend) is as follows. BHP and Rio Tinto, which are thousands of kilometers closer to the markets with the infrastructure already in place have a $50 margin per tonne at the present price and have given notice that they will not cut production to reflect falling ore prices, perhaps because they do not wish to see competition arise that might drive future prices lower if there is a drop in demand.  Which is why mining giant Glencore-Xstrata has exited the Australian iron ore industry for the foreseeable future.  Fortescue doesn’t have that option and if they have not sorted out their leverage problem could be headed back to a replay of their 2008 troubles.

All mining projects are high risk ventures. Typically less than 1 in a hundred drilled properties - hell- mining companies ever makes it to production which makes the mathematics of owning shares in these things very dubious indeed; the best a punter can hope for is a 10:1 pay-out for 1:100 odds. For a speculator this is a recipe for disaster and eventual poverty. So for state and federal governments to allocate air time, public funds, and a pretense of state backing for these schemes such that they appear to be virtually in the bag except for the efforts of a few pesky ‘Greenies’ is complicity in one of the major confidence tricks of the century. 

And this brings the artful dodgers flocking to the state.  Who could forget Paul Lennon being helicoptered over the survey operation for the rail line to the Burnie magnesium smelter.  Golden Triangle CEO Peter Salter arrived from a Perth shopfront, had a dog and a pick-up truck and the next thing you knew he was junketing overseas seeking a couple billion dollars to finance the operation.  Everyone I knew in the mining business was horrified.  The drillers were laughing as their rods fell into empty space that connected to the Flowerdale River where the open pit was supposed to go and meanwhile Normandy, Ford Australia and the Queensland government were trying to get one up in Gladstone where the state government would guarantee a dividend and it would be big enough to supply virtually all of any world shortfall in magnesium.  And THAT couldn't  get off the ground.  Lennon didn't have the decency to resign over it, probably didn't even understand that people of integrity do those things outside the third world.  As Mark Twain said; “A mine is a hole in the ground with a liar at the top.” And he knew, his whole young life was spent not only in poverty because of his father’s incessant speculating, but an even more debilitating poverty in which they remained ever hopeful and on the verge of great wealth. Is that familiar?
On election day I spoke about Shree Minerals chances with Senator Richard Colbeck outside the Burnie Council Chambers.  He replied "But that is the business case." 
I was fairly gobsmacked.  If a project like this isn't a goer in its own right there really  isn't any other case outside of some cynical desecration of a green icon for purely political reasons.

And wonder of wonders no sooner have I posted the above I hear there are cash flow problems at Shree due to legal costs re environmental challenges.  And they want a two year royalty holiday.  I suggest the problems are deeper than that and if the proponents hadn't budgeted for an environmental battle from the moment they took up their exploration permit maybe they should find another job.  I predict worse in the future; Tasmania on the hook again now that '70 Circular Head jobs are at stake', falling iron ore prices in the usual unfolding of the commodity cycle exacerbated by debt problems in China and America and Europe and a pending bond and share market calamity.  Unless those two asset classes have reached 'a permanently high plateau...' something like moral hazard in the island state. 

Update: March 10/2014
World price for iron ore now $103

Update: July 1, 2014

"Life can never be exactly what we want it to be
I should be satisfied........"
                                     The Mamas and the Papas

Shree Minerals' Nelson  Bay mine is now closed, on 'care and maintenance'.  Too bad nobody had offered me a directorship, they might have lost a lot less and everyone on all sides might have been happier if unsatisfied.  Or an advisory job with the Premier's Department in Hobart on 120k$ or thereabouts.  But no-one comes knocking, it seems the expertise required has to do more with spin and the cub scout motto:

"Dyb dyb dyb."

"We'll dob dob dob."

Which means we will "Do our best" (to appear to get any crapper up and running and some weasel  thereby re-elected).  Furthermore 'care and maintenance' means (coupled with the ever-deteriorating financial situation) there will be no remediation in the near future regarding waste and the inevitable acid mine drainage which wasn't ever supposed to be a problem, pyrite content having taken the company geologists completely by surprise. 

So what does the future hold?  History will repeat itself, as in the takeover of the Mt. Lyell Copper operation wherein any new interest (if ever) will fire it up again only if indemnified or somehow absolved of any existing environmental obligations.  This is standard operating procedure - the other way is simply to squeeze some minimized bond into the contract from which you walk away, leaving only one more drainage -polluted river (make that  twenty one in Tasmania) and the public to cope with the burden.

Sorry about Mt. Lyell.  That was one of the great copper mines of the world and I have worked there myself - on shutdowns, welding wear plates in ore chutes, or standing on top of a step ladder under the flotation cells welding pieces of steel plate over holes while sand and water pissed down over me and the current twitched through my wet gloves and body with every new welding rod.  And way up high  on the catwalk in the concentrate shed we accidently started a rubbish fire welding up the travelling chute system.  It looked OK at the time but I think that was where the roof collapsed not long after.  Ah, nostalgia!  And old age.  Every company I ever worked for has fallen down eventually.

But I was never so stupid as to hang around for too long.  That's probably a parental thing.  Yesterday an interesting statistic on ABC radio.  1.5% of expectant mothers in the north shore of Sydney smoke as opposed to 25% in Wide Bay, Queensland where so many helped secure Campbell Newman.  That is apparently worth a 10 point discrepancy in childhood IQ (smoking I mean, see my 'Separation of Powers' piece).  And I would really like to know the numbers for Circular Head.  Anyway I intend to wear my 'Shree Minerals Yes' Tshirt until it rots off my shoulders.