Vancouver - Mining companies have a new way of surviving the commodity meltdown: getting into bed with each other.
Goldcorp and Teck Resources Ltd said on Thursday they are combining two copper-gold projects in Chile. A month earlier Barrick Gold Corporation brought in Antofagasta as a 50-percent partner at its Zaldivar copper mine.
Those deals are part of a nascent trend to run mines and develop projects that might otherwise face cancellation or long delays. It’s a contrast from just a few years ago when companies preferred, and investors rewarded, simple ownership structures and decision-making.
“You always want to have 100 percent of a project, but you weigh that against the risk that you may not be able to bring it into production alone,” Phil Russo, a Toronto-based analyst at Raymond James Ltd, said on Thursday by telephone. “Right now investors have an aversion to risk that makes these types of joint arrangements a lot more appealing.”
Signs that Chinese demand is slowing more than previously thought at a time of dollar strength are eroding industrial-metal prices and investor confidence in developers of multibillion-dollar projects. The Bloomberg Industrial Metals subindexis down about 20 percent this year while a gauge of mining stocks has plunged 26 percent even after a relief rally on Thursday.
‘Greater returns’
Greater co-operation “is something you will see a lot more of”, Ken Hoffman, a senior analyst at Bloomberg Intelligence, said on Thursday in a telephone interview. “You’ll see more tie- ups, mine mergers, a lot more coordination in the industry, just because if they don’t, their other option is to shut the mines down.”
Teck and Goldcorp said they will contribute their Relincho and El Morro projects, which are about 40km apart, to a 50/50 joint venture. The combination - for now named Project Corridor - may cut development costs by billions of dollars compared with the standalone plans, partly by reducing the duplication of infrastructure, the Vancouver-based companies said.
“Combining these two neighbouring assets is a common-sense approach that allows us to consolidate infrastructure to reduce costs, reduce the environmental footprint and provide greater returns over either standalone project,” Teck Chief Executive Officer Don Lindsay said in a statement.
Debt cutting
In July, Toronto-based Barrick agreed to sell a 50-percent stake in Zaldivar to Santiago-based Antofagasta for $1 billion, and said it may co-operate with the Chilean company on future development projects. In May, Barrick signed a “long-term strategic co-operation agreement” with China’s Zijin Mining Group and agreed to sell it a 50 percent stake in its Porgera mine in Papua New Guinea for $298 million.
More deals may be in the offing for Barrick, which has committed to reducing its debt by at least $3 billion this year. The world’s largest gold producer and Greenwood Village, Colorado-based Newmont Mining Corporation last year failed to reach agreement on a proposed merger that could have reaped a potential $1 billion of annual savings in Nevada, and other mining areas, where the companies have extensive operations.
Dormant projects
Other Barrick projects that have potential to benefit from shared development include Pascua-Lama, on the border of Chile and Argentina, Cerro Casale in Chile and the Donlin Gold development in Alaska, Raymond James’ Russo said.
“All the larger companies have dormant projects that could come back to life with a split-risk approach,” Russo said. “They all have a heap of projects that would fit that bill.”
The potential exists for greater co-operation among mining companies in countries such as Canada, Zambia, Australia, Peru and the US where mines are close to each other, Hoffman said. Antitrust issues may not be an issue.
“Two, three years ago regulatory authorities might have said these types of deals are collusion,” he said. “But with things as desperate as they are right now, regulators might say, ‘Hey, if we don’t let these deals go through there’s a possibility these facilities will be shut and we’ll have thousands of people out of work’.”
BLOOMBERG