Ever since the Klondike gold rush at the close of the 19th century, Canadians have become extraordinarily skilled at overcoming the challenges of extracting gold from the permafrost at a profit.
Now robust commodity prices are triggering a fresh stampede to the Arctic as mineral and oil and gas producers reach farther afield in their search for undeveloped deposits to meet demand. Mineral exploration spending in Canada’s three northern territories, for example, has soared to more than $500 million from less than $200 million a decade ago, according to the federal Department of Aboriginal Affairs and Northern Development.
Activity is especially high in the Yukon as juniors try to replicate the success at the multi-million oz. White Gold deposit, discovered by prospector Shawn Ryan in 2008 and currently being developed by Kinross Gold (K-T, KGC-N).
In Western Europe, exploration spending is expected to increase 10-15% to US$590 million this year, according to Sweden’s Raw Materials Group (RMG). Most of that money will flow to the northern lands of Sweden, Finland, Norway and Greenland.
Overall, investment in the Arctic could reach US$100 billion within the next decade predicts a new report called Arctic Opening: Opportunity and Risk in the High North published by Lloyd’s, the international insurance specialist.
So the news that gold producers Newmont Mining (NMC-T, NEM-N) and Agnico-Eagle Mines (AEM-T, AEM-N) are collectively writing off more than $2 billion in investments in Nunavut at a time gold is trading near record highs comes as both a surprise and a disappointment for northerners.
“Hope Bay was the big shocker because it had such an immediate negative consequence,” says Tom Hoefer, executive director of the Northwest Territories & Nunavut Chamber of Mines. “Around 200 people are losing their jobs, so there is a big hit on small communities.”
Newmont acquired Hope Bay four years ago when it purchased Miramar Mining for $1.5 billion. The project is one of the largest undeveloped gold projects in North America, extending 1,000 sq. km along a prospective greenstone belt.
But despite drilling more than 230,000 metres along the belt and spending millions on exploration and development, including construction of a frozen core tailings dam, Newmont was unable to bring any of the belt’s deposits up to the reserve category, says Chris Hanks, vice-president of environmental affairs for Hope Bay Mining, a Newmont subsidiary.
After having additional problems securing land tenure, the company decided to write down the $1.6-billion investment before it reached the prefeasibility stage and is now preparing the site for care and maintenance.
“All options are open. We are holding the project for now but would be open to joint ventures or offers,” Hanks says.
The other Nunavut casualty, Agnico’s Meadowbank mine, was — like Hope Bay — the target of a strategic takeover. In 2007, Agnico bought Meadowbank’s owner, Cumberland Resources, for $600 million in shares. Eberhard Scherkus, Agnico’s president and CEO at the time, predicted that a “new era for the Arctic” was beginning. But five years later, in tandem with Newmont’s Hope Bay announcement, Agnico wrote down $644 million on Meadowbank, citing “persistently high operating costs.”
“Ore dilution, which resulted in lower than expected grades to the mill, and the cost of transportation, logistics, labour and maintenance continued to be much higher than expected,” said current president and CEO Sean Boyd in a letter to shareholders in March. As a result, operating costs for Meadowbank soared to more than US$1,000 per oz.
One of the often hidden yet significant costs is the high rate of absenteeism and turnover at the mine, Agnico’s Nunavut manager Denis Gourde told delegates at the Nunavut Mining Symposium in Iqaluit in April. Of the 276 Inuit workers hired in 2011, 229 have left and absenteeism is running at 5.6%.
The higher costs affect the grade of the ore that can be mined economically, so Agnico has cut the remaining ore reserves at Meadowbank from 3.5 to 2.2 million oz. and the life of the mine by three years. Production in 2012 is expected to be roughly equivalent to that of 2011, levelling out at 280,000 oz. at a cost of US$1,040 per oz.
Negotiating a realistic Inuit impact and benefit agreement and getting access to land for drilling from Nunavut Tunngavik Inc., which controls the surface rights near the mine, has also been a challenge, Gourde said.
New and amended legislation
“We’re trying to get a stronger dialogue between all the parties that can influence the operating environment to see what we can do to help address costs and other challenges that we face, such as regulatory complexities,” Hoefer says.
An initiative launched by the federal government is pulling apart the existing legislation in both the Northwest Territories, where exploration spending is falling because of the convoluted regulatory regime, and Nunavut. The hope is that the resulting changes and amendments will streamline the regulatory process and encourage more mining investment.
Meanwhile, Agnico remains optimistic that its Meliadine project farther south will succeed because it is a larger deposit than Meadowbank with better grades and a more favourable location just 25 km from the community of Rankin Inlet. The community has a long mining tradition that dates back to the 1950s, having been founded as a mining town to support the Rankin North nickel mine. Agnico acquired Meliadine from Comaplex Minerals in 2010 and expects to make a production decision next year.
Agnico’s other northern mine, the Kittila gold mine in northern Finland, is also humming along. As Europe’s largest gold mine, Kittila produced 143,560 oz. at a total cash cost of US$739 per oz. in 2011 and Agnico is considering a second expansion underground.
Another company making strong inroads in the north is Elgin Mining (ELG-T), a Vancouver-based junior that bought the past-producing Lupin mine and Ulu gold project in Nunavut last year and recently merged with Gold-Ore Resources, owner of the Bjorkdal gold mine in Sweden.
Elgin plans use cash flow from the Bjorkdal mine (about $12 million in 2011) to fund exploration and development activities, including a rapid ramp-up to production at Lupin. Lupin is fully permitted, boasts existing mine and mill facilities and has access to the Tibbitt to Contwoyto winter road leading to the Northwest Territories’ diamond mines from Yellowknife.
The infrastructure hurdle
But while Kittila, Bjorkdal, Lupin and Meliadine (which has barge access to Hudson Bay and its own winter road from Rankin Inlet) are blessed with relatively good access, one of the biggest hurdles to mining north of 60° remains a lack of infrastructure.
Generally, if a company wants to build a mine in the Arctic, it has to build the road, railways, airstrips and power lines leading to it too. Mining commodities such as gold and diamonds are at an advantage because they don’t need to haul bulk products. But they still have to transport personnel and supplies.
“The same project in southern Canada would have much better economics,” points out Grant Pearson, vice-president of business development for Nuna Logistics, which builds and maintains much of the infrastructure in Canada’s Far North, including the 108-km all-weather road leading from the community of Baker Lake to Meadowbank. “But when you have to fly people in and out there is a huge transportation cost and there is the cost of getting fuel and supplies into the site, and your product out. Those are not so much mining challenges but logistics
Winter roads can be unreliable. In 2006, Jericho looked like a promising new diamond mine in Nunavut until unseasonably warm weather made the winter road to the site unusable before all of the fuel and explosives needed to run the mine could be brought in. The shortened season was the catalyst for a string of misfortune that eventually shuttered the mine, now owned by Shear Diamonds (SRM-V), before its second birthday.
Climate change may make these episodes more common. “Accessibility may decline as melting permafrost damages fixed infrastructure and as shorter winter road seasons reduce accessibility to land,” says the Lloyd’s report.
So far though, Nuna Logistics has been able to adapt the world’s longest winter road, the Tibbit to Contwoyto joint venture, to changing circumstances. The company says it has applied lessons it learned in the shortened 2006 ice-road season in subsequent years.
“In 2010, the weather was almost identical to 2006 and we had no problem,” says Nuna president and CEO Mervyn Hempenstall.
“Before, Mother Nature sort of took care of things and now we have to help Mother Nature take care of things,” Hempenstall adds, explaining the company has honed techniques to build, flood and better monitor the ice thickness.
Another danger for underground mines is that higher temperatures would require larger rock pillars to replace the strength of the permafrost, increase flooding and boost the cost of cooling the air in deep mines.
On the flip side, climate change is opening up new shipping routes in the north as the sea ice melts. The average number of ice-free days in the Beaufort Sea, for instance, has increased to 105 from 93 in the 1990s, says the Lloyd’s report. In Greenland, the warming trend has opened up coastal areas to exploration as a result of the retreating ice cap.
Alaskan mines show promise
Alaska’s three main producers, Pogo, Kensington and Fort Knox, also struggle with costs, but their higher grades (12.6 gram gold per tonne at Pogo and 7.6 grams gold per tonne at Kensington), economies of scale (Fort Knox) and/or good exploration potential provide somewhat of a buffer.
Recent exploration near Pogo, which is expected to produce its two-millionth ounce this summer, has boosted reserves by about 20%. The new East Deep deposit lies northeast of the main Liese deposit at Pogo and contains about 1.3 million oz. gold at an average grade of 13.1 grams gold, says owner Sumitomo Metals Mining.
At Coeur d’Alene Mines’ (CDM-T, CDE-N) Kensington mine, cash costs exceeded US$1,000 per oz. in 2011, the mine’s first full year of production. But after the company temporarily reduced mining and milling activities in order to complete several underground and surface projects, full production is resuming ahead of schedule, allowing the mine to produce about 85,000 oz. of gold mostly in the second half of the year.
The Fort Knox mine, sharing the neighbourhood with Kinross’s White Gold development project to the east and its highly profitable Kupol mine in Russia to the west, is an open-pit operation that uses a combination of carbon-in pulp milling, heap leaching and gravity to process ore grading, on average, just 0.43 gram gold per tonne.
Last year, Fort Knox produced almost 290,000 oz. of gold at a cash cast of US$692 per oz. Remaining proven and probable reserves total more than four million oz.
But it is Kinross’s Kupol mine in Russia’s Far East, just across the Bering Strait from Fort Knox, that is the real motherlode. In 2011, the mine produced more than 650,000 oz. of gold at a cash cost of US$378 per oz., making Kupol by far the largest and lowest cost operation in the company’s stable and a prime example of how good geology can trump the difficulties of mining in a remote, inhospitable location with limited infrastructure.
Northern Europe has a competitive advantage in climate and infrastructure.
Although northern Europe’s gold mines in Finland and Sweden are just as far north as those in Canada, Alaska and Russia, they have the advantage of the warming effect of the Gulf Stream. And because Europe is more densely populated in comparison, the infrastructure leading to the mines tends to be better.
At Elgin’s recently purchased Bjorkdal mine, for instance, the moderated climate is more like Timmins than Yellowknife, even though Bjorkdal is farther north than the Northwest Territories capital. Available infrastructure includes a railway and paved highways connecting the region to the rest of Sweden as well as low-cost hydropower.
Other advantages the Nordic countries have over other jurisdictions, says RMG, include plenty of underexplored territory, a skilled and experienced workforce, and positive attitudes towards exploration and mining.
“The Nordic countries continue to cement their position as the premier European exploration and mining hub,” says RMG. The corollary is that the dominance of the Nordic countries in the mining sector will continue for the next decade or more.”
But as more mineral investment pours into the underexplored north worldwide, companies will have to do a better job of managing costs while protecting the Arctic ecosystem and negotiating fair terms with the communities affected. This has never been an easy task, and it’s not about to get any easier.
“The Arctic region is changing more rapidly than anywhere else on Earth,” says Charles Emerson, lead author on the Lloyd’s report says. “More research into the unknowns is essential to ensure that the risks and incentives of further exploration in the region are better aligned.”
No doubt Agnico-Eagle and Newmont would agree as they absorb the string of significant writedowns on their northern investments.
— The author is a freelance writer specializing in mining issues, and principal of Toronto-based GeoPen Communications (www.geopen.com).
This article originally appeared in the June 2012 issue of Mining Markets magazine.