Canadian mineral production, including coal, was valued at $33.6 billion in 2006, almost 23% higher than the $27.4 billion reported in 2005. The bulk of the increase came from metallic mineral production, which reached $21.2 billion in 2006, an increase of 45.4% over 2005. The value of Canadian nickel and copper production, in particular, rose by a whopping 75.9% and 78.8% respectively, due to rising metal prices, although the actual increase in production volume for these two metals was a modest 17% and 3.1%, respectively. Iron ore production rose by 12.2% in volume and 10.5% in value during 2006, while gold production dropped by 13.5% although its value gained 8.4% to more than $2.2 billion.

2007 is on track to be another very good year for the Canadian industry, although statistics for the first half indicate that mine production of some major metals is running slightly below that of the same period in 2006.

In early June 2007, Stelco said that it had entered into an agreement for the sale of its interest in Wabush to Consolidated Thompson for $163.4 million. However, on August 31, Consolidated Thompson reported that it would not proceed with the purchase because Mittal Steel Co., through its subsidiary Dofasco, notified Consolidated Thompson that it planned to exercise its option to purchase the interests of Stelco and Cleveland Cliffs in Wabush.

However, only about a quarter of 2007’s mining investment total will go toward conventional hardrock and nonmetallic projects, while almost $16.1 billion is earmarked for the oil sands sector. Even so, investment spending for metals mining is expected to increase by almost 8% in 2007, including a 60% rise in funding for gold and silver ore mining, to $728.7 million; and an increase to $727 million for the nickel-copper sector, compared with 2006’s $595 million. Because of the completion of a number of large projects, investment in copper-zinc projects is expected to drop by more than 36% in 2007, to $253.9 million.

NRC also predicts that planned spending for non-residential construction in mining (complex development) should increase by 31% over 2006, totaling about $13.5 billion; while investment in mining machinery and equipment will rise by almost 33% to $6.9 billion.

With Canada’s oil sands containing more than 13% of the world’s oil reserves—and located in a stable geopolitical environment—investment funds continue to flow into the sector. Current predictions envisage oil sands production quadrupling by 2020.

According to Canada’s National Energy Board (NEB), cost estimates for constructing all announced oil sands projects from 2006 to 2015 will total $110 billion. This figure is approximately double that indicated in NEB’s 2004 report. However, with a logjam of projects scheduled between 2008-2012, NEB predicts it will be a challenge for all of them to proceed as originally scheduled. Some of the major factors that could affect project development are natural gas costs, the high light/heavy oil price differential, management of air emissions and water usage, and insufficient labor, infrastructure and services.

But even when looking at its most conservative future scenario, NEB believes oil sands project capex will exceed $90 billion from 2006 to 2015. Currently, there are about 46 existing and proposed oil sands projects, with 135 individual project expansion phases in various stages of execution. To date, most developments have been focused on mine-related opportunities to extract the resource at shallow depths. However, conventional mining methods can extract less than 20% of the identified resource potential, and most of the high-quality mining leases are already in various stages of development. Most new projects will focus on in-situ extraction methods at greater depths.

Most of the uptick in demand for base metals, iron ore and aluminum can be attributed to rapid industrial growth in the BRIC nations—Brazil, Russia, India and China—and emerging markets elsewhere, but recent mine and plant investment at one of Canada’s leading nonmetallic mineral producers is proof of the old adage “a rising tide floats all boats.” Rising demand for basic commodities extends beyond metals or energy; agriculture is another basic industry that requires vast volumes of chemicals and products to meet rising consumer expectations, and consequently, even such a seemingly mundane commodity as potash is seeing robust market growth. Canada’s PotashCorp, which claims to be the world’s largest fertilizer enterprise by capacity, expects that global demand for potash will rise 12%-16% in 2007, following a dropoff in production in 2006 due to extended price negotiations with offshore customers. Beyond 2007, PotashCorp sees global demand potentially reaching 4% per year.

Source: Metals Economics Group, 2007

Junior companies have contributed an increasingly larger share of Canadian exploration spending.

The survey pinned these increases primarily on more off-minesite exploration activity, which in 2006 represented about 75% of total spending. Off-minesite appraisal expenditures were also a significant factor in 2006, exceeding $300 million for the first time since the tabulation of these statistics began in 1997. This trend is expected to continue as more known deposits are being fast-tracked toward production decisions.

Although exploration spending on precious metals is expected to decline slightly in 2007, intended funding for base metals, uranium and other assorted mineral commodities should show strong gains over 2006 levels, with uranium exploration— encompassing more than 350 active projects— predicted to reach a level of about $241 million in 2007, compared with $190 million in 2006.

The vastly expanded role of junior companies in the minerals discovery process becomes apparent when looking at the survey’s figures for exploration activity split between junior and senior companies. Total expenditures for junior project operators has increased from $141 million in 1999, to almost $1.2 billion in 2007. Junior companies now account for more than 60% of total Canadian exploration and deposit appraisal spending.

PriceWaterhouseCoopers, in a recent study of trends in the TSX Venture (TSX-V) Exchange, found that junior mining companies listed on the exchange had a total market capitalization of $27.6 billion in 2006—an 86% increase from $14.8 billion the previous year. The top 100 junior mining companies had $4 billion in assets in 2006, $2.6 billion more than in 2005. Net financial losses among this group rose to $395.7 million, up from $247 million in 2005, but the report attributed the increase to the dominance of exploration-stage companies in the sector, reflecting the current high level of exploration activity.

All of the companies analyzed in the report are based in Canada, with the majority located in British Columbia. Not too startling was the report’s revelation that 51 of the TSX-V’s top 100 companies studied were not even in this category in 2005, confirming the high-risk, high-reward nature of the business and how company values can rise and fall substantially in the course of a year. This is also confirmed by the fact that, from 2005 to 2006, only one company was able to retain its ranking among the top five on the TSX-V in terms of market valuation. As shown in the table above, only Northern Dynasty Minerals, 50% owner of the Pebble copper-goldmoly deposit in southwestern Alaska following the recently announced $1.425 billion buy-in by Anglo American, carried over from one year to the next.

One-third of the top 100 production and exploration companies on the TSX-V operate in Canada, followed by the U.S. (14%) and Mexico (12%). Altogether, 17% operate in South American countries.

In 2006, TSX-V mining companies spent $409.4 million on mineral properties and exploration, along with another $103.9 million on plant and equipment costs. But perhaps the most impressive number, according to the PriceWaterhouse- Coopers report, is the $1.2 billion that exploration companies were able to raise through issuing shares during 2006, a 206% gain over 2005.

Juniors Fitting In
Almost by definition as well as by necessity, the more successful junior mining companies are staffed “lean and mean,” mostly with experienced geologists and engineers, and are generally led by entrepreneurially aggressive executives. The flexibility and willingness to take risks afforded by juniors make them a perfect fit for a business environment in which industry consolidation has resulted in fewer but larger senior companies with scaled-back exploration staffs and constant pressure to replenish mineral reserves.

Aerial view of current activity at Minefinders Corp.’s Dolores gold-silver project in Mexico.

In order to gauge the effect of these factors, E&MJ spoke with the CEOs of two Canadian companies that presently are on almost opposite ends of the project development timeline—one is nearing the start of production at its flagship project while the other is heavily involved in exploration drilling to delineate the extent of mineralization at properties in Canada and Mexico. We also talked with the chief executives of two well-known engineering firms to find out if, and how, the mining boom and its associated demands for time and resources have affected the way in which their companies conduct business.

Minefinders Corp. is a Vancouver, British Columbia-based junior with a portfolio of properties in Mexico and the United States. Its primary focus currently is on the impending startup of its Dolores open-pit gold and silver mine in Chihuahua, Mexico, which is scheduled to begin operations this month and to reach commercial production in the second quarter of 2008. Located in a historical mining district, early operations at Dolores were reported in E&MJ early in the 1900s.

The reserve base at Dolores currently stands at 2.45 million oz of gold and 127.9 million oz of silver. The reserves, which were updated in July 2006, are contained in 100.2 million mt of proven and probable ore having an average diluted grade of 0.76 g/mt gold and 39.7 g/mt silver, using a 0.3-g/mt AuEq cutoff. An updated resource was reported in June 2007, with Measured and Indicated now standing at 123.4 million mt containing 3.25 million oz of gold averaging 0.82 g/mt and 154.8 million oz of silver averaging 39 g/mt. A revised pit design is being completed and updated reserves should be reported before year end.

Minefinders has done more than 200,000 m of drilling at the site, sinking more than a 1,000 drillholes. The deposit will be mined by open-pit methods for 14 years of production, with development of an underground mine beneath the pit expected to begin in about three years. The facilities are designed for production of 18,000 t/d of ore; open-pit mine life will be 14 years. Output is expected to average 120,000–130,000 oz/y of gold and 4.5 million oz/y silver.

Engineering design work has been farmed out to a number of firms, including Golder Associates for leach pad and geotechnical requirements; Terra Nova Industries for the crushing and stacking systems; Lyntek for the mine’s Merrill- Crowe plant and smelter; and Ausenco for ancillary systems and tie-in for overall engineering. Once commercial production is achieved through the heap-leach and Merrill Crowe plant facilities, Minefinders intends to build a mill to handle higher grade ore from the pit.

“Our original study looked at installation of the heap leach and the mill at the start of the mine, but that would have cost more than $270 million,” Minefinders President and CEO Mark Bailey said. “We weren’t going to be able to raise that much money for our first mine, however.”

Bailey, who has been associated with the company since 1994, said the biggest challenge in the critical path of the construction so far has been timely completion of earthworks in the mountainous host terrain. Earthworks for the phase-one leach pad took longer than expected, because of higher volumes of material than those estimated in the feasibility study, the need for additional blasting, and slow progress during an unusually wet monsoon season in July. However, a section of the phase-one pad will be available for lining in September and loading in late October, in conjunction with the commissioning of the three-stage crushing plant. The village of Dolores is situated on a portion of the property to be mined and the company is in the process of relocating the residents to new homes built about 5 km away.

Bailey identifies the largest problem faced by his company—and the industry as a whole—as being able to find qualified people. “There are a number of factors involved,” said Bailey. “We had to look far and wide to assemble our operational team, and I know of other operators who have had to pull guys out of retirement because there simply wasn’t anyone else available.

“Engineering and service firms are in the same boat. They’re overwhelmed by the amount of work that’s out there, and they’re having trouble finding good people, too. During the down-market years in the 1980s and 1990s, a lot of young engineers and geologists had to look elsewhere for jobs, and now we’re missing a whole generation of engineers. Most of our guys have 20 or 30 years in the industry, but it’s very hard to find young engineers with any mining experience.

“Looking forward,” said Bailey, “I don’t see the high current demand for commodities changing any time soon. This is good for juniors and for the industry as a whole, but it will put tremendous strain on [mining] resources.”

According to Bailey, another factor that weighs heavily on junior miners is compliance with the requirements of the Sarbanes- Oxley Act of 2002, the U.S. federal law that expanded financial reporting regulations for public companies and accounting firms. “As a junior company, we have essentially the same reporting requirements as a $60-billion company, but we don’t have a big staff of lawyers and accountants to handle the work,” he said. “We’re spending a tremendous amount of money on outside auditing and legal work to comply with the law, and that’s money that we can’t use to go out and explore for minerals, which is what we do best. I don’t think you can legislate honesty and morality into law. They need to take another look at Sarbanes-Oxley and try to make it ‘saner’ for small businesses.”

Bailey doesn’t view new technology as a major near-term benefit for exploration companies. “We’ve made our discoveries by putting geologists on the ground, beating on rocks. That’s the way it’s been done for hundreds of years, and I don’t see any magic black box that’s going to give better results than an experienced geologist working in the field.”

Nor does Grant Ewing, president of Linear Metals Corp., Toronto, Ontario, a junior company focused on exploration for base metals and molybdenum. Linear currently has two “core” projects: the Kilometer 61 porphyry-type molybdenumcopper property in Ontario and the Cobre Grande copper-molybdenum-zinc-silver skarn deposit in Oaxaca State, deep in southern Mexico. Linear is in the early stages of drilling at both properties, collecting data needed to conduct initial resource evaluations during 2008.

Linear’s exploration staff includes several senior-level geologists with years of prior service at large Canadian base metals producers, but Ewing is very aware of the industry’s manpower problems. “It’s very difficult to find experienced geologists these days to expand a technical staff. I’m sure that any good geologist who wants to work already has a job.” And he doesn’t see any technology on the horizon that will replace field experience. “We’ll consider any geophysical or geochemical method that would help us explore the ground we hold, of course, but we depend primarily on the experience of our exploration team to develop our exploration programs.” Linear recently announced encouraging results at the KM61 site, where it was able to evaluate samples from a core drilling program conducted by Noranda and Falconbridge when the property was optioned in 2004-2005. Much of the drill core generated during those programs was left unsampled because the companies were targeting copper mineralization. Results from Linear’s analysis of the unsampled core included 143.2 m of 0.068% Mo, 0.14% Cu and 6.1 g/mt Ag; and 193.6 m of 0.052% Mo, 0.11% Cu and 7.1 g/mt Ag. “These results indicate that what was previously thought to be two distinct, and relatively narrow zones, may instead be one broad stockwork zone. This increased total width of mineralization has clearly increased the size potential of KM61 at grades that appear comparable to that of other large molybdenum projects currently under development,” Ewing said.

The Cobre Grande property also has produced some impressive core samples, including 130 m of 1.62% copper, 0.51% zinc, 0.01% molybdenum, and 29 g/mt silver starting at 48 m; and 7 m of 0.91% copper, 0.05% zinc, 0.01% molybdenum, and 19.14 g/mt silver, beginning at 188 m. For a company at Linear’s stage of prospect development, dependable drilling service is a critical factor. “There’s certainly a difference between drilling contractors in terms of production rate, and I’d attribute that difference mostly to quality of manpower and equipment. Contractors Ateams,— the crews that consistently produce large quantities of core with good recoveries—are in extremely high demand by mining companies,” said Ewing.

Installation of a three-stage crushing facility at Minefinders’ Dolores project is progressing
on schedule to handle startup of mining in September and commencement of production in
the second quarter of 2008.

SRK—whose client list ranges from CVRD, Centerra Gold and DeBeers to iron ore producer MMX, NovaGold, Teck Cominco and includes many others—has been in the somewhat painful position, along with other major firms in its sector, of having to decline or delay requests for work because of the overall volume of activity and shortage of experienced people. Along with that, notes Barrett, comes a higher degree of selectivity in accepting projects and much greater emphasis on human resource management.

“In this business,” explained Barrett, “you’re only as good as the people you have on the ground, and we realize that our competitors are looking for the same kind of people that we are. This has resulted in upward pressure on salaries and has required us to search farther afield to find the people that we need.

“From the start of this boom we’ve also recognized that we need to be very careful to manage the quality aspects of our work,” Said Barrett. “With the current high volume of work we’re experiencing, we can’t afford to allow things to slip, and we’ve ratcheted up our formal review procedures accordingly, to prevent the kind of mistakes that can happen when people are working long, hard hours.”

When asked how the mining boom has affected the type, locale, makeup or focus of SRK’s overall mining project portfolio, Barrett quickly ticked off several distinct trends. These include:
• Re-opening of old projects (gold and base metals) with hopes of getting them back into production.
• Increased demand for NI 43-101 reports that allow companies to announce results from new properties/projects and raise money, or to get listed on the stock exchange.
• Increased confidential due diligence reviews for acquisitions and assistance with defense against hostile takeovers.
• Increased assistance to foreign companies seeking Canadian listings.
• Increased involvement in existing operations to fill technical skills gaps.
• Substantially more uranium work.
• Projects in Brazil, China and Russia/FSU becoming increasingly prominent.
• Emergence of private equity firms in the sector.

Vancouver, B.C.-based Wardrop Engineering has been in business since 1955 and has been serving mining clients since the early 1960s. It offers a full range of services including project scoping, pre-feasibility and feasibility studies, EPCM and ongoing technical support. Recent project involvement includes EPCM services for Baja Mining Corp.’s Boleo copper-cobalt project in Baja California Sur, Mexico; and engineering and procurement for Redcorp Ventures’ Tulsequah polymetallic project in British Columbia. Wardrop also conducted the feasibility study for the Tulsequah project. Other work ranges from resource evaluations for Western Copper Corp.’s Carmacks copper project and an optimized feasibility study for development of Yukon Zinc Corp.’s Wolverine underground mine; to various assignments for Teck Cominco, Xstrata, CVRD Inco and Cameco.

Brent Thompson, president of Wardrop, said the industry’s rush to get mineral assets into development, coupled with manpower, materials and equipment shortages, adds another degree of pressure to the scheduling process. “For many of these projects now nearing the construction phase, availability of the required materials and equipment is constrained. When it comes to doing capital cost estimates and construction scheduling, we have to keep very close tabs on equipment lead times. In fact, we now tend to fasttrack the longer lead-time items. When we perform EPCM services for project development we’ll actually start working on the engineering and procurement for long-lead items as we complete the feasibility study. It’s the only way to make sure we can keep projects moving forward in a logical fashion.”

However, Thompson noted that his biggest challenge at the moment is effectively managing and maintaining the company’s talent pool—and he envisages future consequences for mining that might not become apparent until the current boom runs its course. “The mining industry’s demographics are working against it,” he said. “Older professionals with 30 or more years in the industry will be retiring in five years or so. I think there are enough experienced workers around now to get us through this boom, but when it eventually tails off and then picks up again in the future, the mining industry is going to be very different from the way it is today. It’s likely there won’t be a lot of people around with the experience needed to move projects forward.”