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General Market Commentary
How to Bring a Mine Back to Life
Even with good intentions and a seemingly concrete plan of action, market shifts and commodity crashes can lead a mine to close.
While many mines manage to be successful, profitable operations for everyone involved, others don’t always pan out as planned. Factors ranging from a company’s balance sheet to geopolitical issues can cause a mine to have its operations halted, be put on care and maintenance, or in other cases, abandoned entirely.
On the other hand, sometimes a company will opt to breathe new life into an old mine. When a mine is revived, it can often come after the asset changes hands, with the new owner putting direct focus into renewing its worth. Other times, if a commodity’s price point makes a comeback, original owners will choose to give their mine another shot.
However, before one can cross into restart territory, it’s important to examine the reasons that the operation shut down in the first place. Read on to get a better idea of why mines close and what it takes to bring them back to life.
Why mines close
As previously mentioned, if a commodity finds itself in a precarious pricing situation, the mines that focus around that metal or material can struggle in a domino effect. The price of a commodity can fluctuate for a number of reasons including global trade wars, turmoil in major producing countries and the always ongoing game of supply and demand.
According to Leah Wong, Senior Issues and Media Advisor for Ontario’s Ministry of Energy, Northern Development and Mines, the mining industry can be just as vulnerable to market volatility as other sectors.
“Not unlike other global industries, mining is subject to impacts of global market conditions and variation in commodity prices for the product produced,” Wong told the Investing News Network (INN). “Different commodities may be subject to different market forces, however almost all commodities are subject to global market forces.”
Commodity pricing aside, she went on to explain that there are several valid reasons for a project to shut down.
“There are a variety of reasons that a mining project could come to an end, including but not limited to, changing mineral prices over an extended period of time which renders the project unprofitable, the mineral resource has been exhausted and thus the life of mine has come to an end, or financial hardship of the company.”
Echoing a similar sentiment was Jeff Plate, VP of Marketing and Business Development at Watts, Griffis and McOuat (WGM), who laid out the three most common mistakes his firm sees when a company tries either restarting a mine or getting a new one up and running.
“The three most common mistakes we see are insufficient technical work to de-risk the project and ensure a full understanding of the production and costs of a mine, undercapitalization of the project, a lack of sensitivity analysis which stress tests the mine and its operations under a series of real world conditions, [and] unrealistic expectations or completion schedules for starting or restarting operations.”
The keys to a successful restart
While the task of taking on a historical asset can seem daunting, experts say there are a few fundamental boxes to check off in the process to ensure everything runs smoothly. According to Plate, doing one’s homework on why a mine initially closed is an essential place to start.
“Understanding the elements around the shut down is critical. Has the new project manager and mine operator carried out sufficient work and analysis to understand the past reasons for closure and have all current regulatory, social and permitting requirements been factored into economic models?” he told INN.
“WGM has seen many projects where a fatal flaw analysis is not completed by competent independent professionals in order to save money or speed up the return to production. While this may be appealing to short term financial metrics and to securing investment, it leaves the venture subject to significant risks and repeating the mistakes of the past.”
Clint Donkin, President of Global Asset Operations at Ausenco, had similar input to Plate as he highlighted the importance of a company thoroughly weighing the pros, cons and different working parts surrounding a mine.
“A company really needs to approach it the same way as you would for a new greenfield project, because ultimately, the risks and opportunities are very similar,” Donkin told INN. “They need to determine at the very start if an ongoing operation is feasible and sustainable. I think it’s important that they learn and understand the history, and can demonstrate that the business model [they’ve got] is robust and that the risks are well understood and managed”
Donkin went on to explain that another important factor when rebooting a mine is that a company has strong, experienced leadership on the team running the show. He added that investing in local communities early to obtain their social licence can also be incredibly beneficial for the success of any project.
As Wong mentioned earlier, no commodity is completely safe from the ripple effect of market volatility when there are often several variables that affect pricing. However, that’s not to say there aren’t ways of playing one’s cards strategically when it comes to choosing which mine to acquire — and when one does it.
One benefit to restarting a previously operational mine, according to Donkin, is not only the likelihood of pre-existing infrastructure but also the ability for curious investors to keep an eye on a commodity’s status in the marketplace before heading down the acquisition path.
“The companies, depending on their execution strategy, can bring the operation back online in typically far shorter periods of time than what you typically could for a greenfield project. So the nice thing there is that you could really get your timing right for your re-entry into the market to fully leverage the market conditions and commodity prices.”
Historical examples
As with Donkin’s point about finding the right opportunity to restart a mine, some companies choose to play the waiting game in hopes of a commodity’s pricing making a turn around. Evidence of that can be seen in a large chunk of the nickel space right now, as many companies are starting to acquire past-producing mines or revamp their own prior operations.