Vol. 20, No. 46 Week of November 15, 2015
Providing coverage of Alaska and Northwest Canada's mineral industry

Mining News: Digging for optimism

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Alaska miners seek reasons to celebrate in low metals-price environment

Shane Lasley

Mining News

A four-year rout in metals, coal and oil prices left Alaska’s mining community digging deep for reasons to be optimistic during their annual gathering at the Alaska Miners Association convention in Anchorage.

While depressed metals prices naturally cut into the bottom lines of those companies mining gold, silver, zinc, lead and coal in Alaska, the effects reverberate across the entire mining community.

In order to adjust to lower metals prices, the producers have cut back on discretionary spending. This means that these companies are taking a hard look at programs not directly related to mining ore – exploration, development, engineering, environmental, etc. – and cutting back on any of those not deemed essential.

While these cuts are prudent in a low metals price environment, much of this discretionary work is carried out by independent contractors that make up the larger mining community in Alaska.

At the same time, the share prices of junior mineral exploration companies have been hammered by the low metals prices and a lack of investment in the sector. The per-share price of 11 exploration focused junior mining companies with assets in Alaska have fallen an average of 89 percent since their individual peaks in 2011, with the exception of NovaCopper Inc. which began trading in April 2012. These sharp losses come despite encouraging results from a number of the multimillion-dollar exploration programs carried out in Alaska this year.

NovaCopper Inc., for example, only received a slight bump in the value of its stock on late October news that the State of Alaska has decided to move forward with an environmental impact statement required for building a road that would connect the company’s copper-rich assets in Northwest Alaska to markets.

NovaCopper President and CEO Rick Van Nieuwenhuyse told Mining News that junior mining companies should not take the market’s lackluster response to news personal.

“It’s just the market,” he said.

Curing low zinc prices

Fortunately for Alaska’s mining sector, the zinc and gold markets have held up relatively well. At roughly US$2.6 billion, these two metals accounted for about 79 percent of the value of the commodities mined in the state in 2014.

Alaska mines produced 1.43 billion pounds of zinc valued at roughly US$1.4 billion in 2014, according to the Alaska Minerals Report 2014, an annual tally published by the Alaska Division of Geological and Geophysical Surveys. Record production at the Red Dog Mine in Northwest Alaska, coupled with strong prices, helped rank zinc as the top commodity mined in Alaska for 2014.

Analysts have predicted a rise in zinc prices due to several mine closures restraining supply. However, cooling demand for the galvanizing metal has sent zinc prices sharply lower, from a peak of nearly US$1.10/lb. in May to around US75 cents/lb. in recent weeks.

Red Dog, which accounted for 1.31 billion pounds of the zinc produced in Alaska during 2014, has recovered about 965.6 million pounds of the galvanizing metal through the first nine months of this year.

With a lower average price and slightly less production, the value of Alaska’s zinc production is expected to take a hit for 2015.

Teck Resources Ltd., operator and 70 percent owner of the Red Dog Mine, is optimistic about the future of zinc prices.

Teck President and CEO Don Lindsay reminded shareholders and analysts that “the best and most effective cure for low commodity prices is, and always has been, low commodity prices. And remember that the darker the winter is, the brighter the spring will be.”

Helping to administer this cure, Glencore PLC recently announced that it is cutting its annual zinc production by roughly a third, or about 1.1 billion lbs. This comes on top of the imminent closures of two large zinc producers, the Century Mine in Australia and the Lisheen Mine in Ireland.

Glimmering gold mines

With good news coming from the owners of Alaska’s big three gold mines – Fort Knox, Pogo and Kensington – the precious metal provided some glimmer to this year’s AMA convention.

So far, gold prices have averaged about US$1,174/oz. in 2015, which is only 7 percent lower than the US$1,266/oz. average price in 2014. Despite performing better than most metals, gold is still down around 41 percent from its 2011 peak price of US$1,900.

During 2014 Alaska produced roughly 948,547 oz. of gold, down from just over 1 million oz. in output a year earlier, according to Alaska Minerals Report 2014. The retreating prices and lower production adds up to US$1.2 billion worth of gold produced in Alaska last year, about 23 percent less than the US$1.55 billion value of the precious metal produced in the Far North State in 2013.

This year it looks like gold production in Alaska will once again top the 1-million-oz. threshold.

Strong production at Kinross Gold Corp.’s Fort Knox Mine near Fairbanks is expected to be a key to Alaska reclaiming seven-digit gold production in 2015. Through the first nine months, this Interior Alaska mine has produced 313,992 oz. of gold, which puts it on pace for roughly 420,000 oz. in total output for the year.

Sumitomo Metal Mining Pogo LLC Sept. 30 reported production of 3 million oz. of gold at its Pogo Mine in Interior Alaska.

This production milestone comes just over a month after the mine workers had achieved two years without a lost-time injury.

“It is very special for us, it doesn’t happen a lot in an underground mine,” Chris Kennedy, the mine’s general manager commented on the safety milestone.

“Safety is No. 1 for us,” he added.

Pogo’s 2015 gold production is anticipated to dip slightly from the 347,127 oz. produced last year, due to lower grades.

The Kensington Mine in Southeast Alaska has produced 92,442 oz. of gold through the first three quarters of 2015 and is expected to recover roughly 120,000 oz. of the yellow metal this year.

Coeur Mining Inc., the owner of Kensington, is looking forward to increasing the mine’s gold output once it taps higher grade ore from the historic Jualin Mine area.

“Currently, Jualin is estimated to contain about 289,000 tons of inferred resources with an average grade of 0.62 ounces per ton, which is over triple Kensington’s average reserve grade,” said Coeur President and CEO Mitchell Krebs. “Once we gain better access from underground, we will begin to more efficiently drill Jualin to better define and hopefully expand this new high-grade discovery before mining begins in 2017.”

Plummeting silver

Silver – the primary metal produced at the Greens Creek Mine in Southeast Alaska and an important byproduct of Red Dog Mine – is selling for around US$15/oz., a staggering 69 percent off its peak of $48.70/oz. in 2011.

Fortunately for owner Hecla Mining Co., once you credit the gold, zinc and lead also recovered, Greens Creek is one of the lowest cost silver mines on the planet.

Through the end of September, Greens Creek had produced 5.9 million oz. of silver at a cost of US$3.79/oz.

“Greens Creek continues to drive Hecla’s strong, consistent production performance,” said Hecla President and CEO Phillips S. Baker, Jr.

Greens Creek is on pace to produce roughly 8 million oz. of silver, 58,000 oz. of gold, 120 million lbs. of zinc and 40 million lbs. of lead in 2015.

Oil uncertainty

Sharply lower oil prices are a mixed bag for Alaska’s mining community. While lower costs for diesel certainly bolster the bottom lines of the mines that depend heavily on the fuel to run large machinery and oftentimes to generate electricity, most of the 1,000-plus participants in the AMA convention live in Alaska, a state that depends heavily on revenue generated from its rich oil reserves.

How Alaska is going to reconcile a roughly US$3.5 billion budget deficit resulting from oil prices that have dropped below US$50 per barrel was a hot topic at the gathering of miners.

“There is really a lot of uncertainty that has been created by low oil prices,” Mark Edwards, economist, Northrim Bank, informed the crowd gathered for a Nov. 2 luncheon at the AMA convention.

Despite the drag low oil prices are creating on Alaska’s government and overall economy, Edwards said he is very optimistic about the future of the state.

“We have trillions of dollars of natural resources left to be developed in this state, I think that we are still a very young state, and in the long run, this is going to be the beginning of Alaska’s resource development curve,” the economist explained.

In the short term, however, the Alaska Legislature and administration are tasked with tough decisions on how to balance the budget, while the state still has a reserve of cash that was stashed away when oil prices were much higher.

Lt. Gov. Byron Mallott prefaced his talk on Alaska-British Columbia coordination on transboundary mining with an update on the administration’s plans to close the gap in the state budget.

He told the mining crowd that Gov. Walker will present a plan to close the fiscal gap by using some of the earnings of Alaska’s vaunted permanent fund, implementing broad-base taxes and making adjustments to existing state taxes.

Mallott said immediate execution of this plan will help Alaska weather low oil prices by slowing the rapid drawdown of Alaska’s dwindling budget reserve.

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