When stars line up

More commentators are saying out loud what was only safe to whisper a year ago: that commodity markets seem to have turned the corner, and that renewed economic growth may sustain a bull market for several years.

That’s welcome news on its face; but there’s more, because when metal prices were in a long slump, one of the few signs of hope for the mining industry was the lack of good development projects. Prices may have been down, we reasoned, but a shortage had to happen sometime — and when it did, it would happen to the big companies first.

There have been a few recent indications that the long-foreseen need for resources is at last catching up with the largest mining companies. Barrick Gold, for example, has reached a production decision on the Tulawaka gold deposit in Tanzania. Tulawaka will make a substantial open pit mine but has a resource below a million ounces — and large gold producers had spent the 1990s telling the world that only million-ounce deposits were big enough for big miners.

There are synergies to be found, no doubt, between Tulawaka and Barrick’s nearby Bulyanhulu mine, but in developing Tulawaka, Barrick is recognizing that a made-in-the-boardroom economic criterion doesn’t always fit the situation on the ground. We’d venture to predict that other large companies may realize the same thing.

Barrick has also remade itself as an explorer, pumping up the exploration budget and putting a bigger proportion of it on early-stage projects. The knock that Barrick was a buyer and not a finder of resources was never entirely fair — it was Barrick that discovered Alto Chicama, for a start — but now it’s untenable.

Newmont Mining, too, has shown a renewed interest in the top end of the project pipeline, making deals with several junior explorers. Notably, the agreements they have reached with juniors in their Nevada backyard include offtake clauses obviously meant to secure mill feed for Carlin.

Merely for Newmont to have made these deals shows that the junior companies are regaining some of their power; that Newmont places itself as the buyer of first resort for any ore that comes out of them shows that both parties can hammer out a deal that benefits both sides. (And do we see the hand of the Franco-Nevada crowd in the way the deals are structured?)

At first glance, then, the takeover of Ashanti Goldfields may look as though AngloGold is still back in 2001 looking to “consolidation” as the saviour of the gold industry. That neglects the strategic importance of Ashanti’s widespread exploration interests, which may mean as much to AngloGold as Ashanti’s producing assets.

If in the gold business we see the Big Three shifting their strategies to maintain the growth of exploration and development projects into paying mines, what we may be seeing on the base metals side is a willingness to share the market with smaller producers.

The nickel business may be the clearest illustration: the FNX Mining and Dynatec joint venture in the Sudbury camp is not just a deal with Inco; it is evidently a significant part of Inco’s own strategy. In the present tight market, smaller companies get a significant reward out of selling concentrate to the bigger ones, but the big companies limit some of their risk by looking to outside sources for feed.

The same logic has brought Rio Narcea Gold Mines and a host of Australian companies into the nickel industry as well, with measurable benefits to their shareholders — while at the same time downstream nickel producers keep the smelters running at capacity.

The big base metal producers may also be rediscovering exploration, if Rio Tinto’s discovery of the Resolution copper deposit in Arizona is any indication. Bigger exploration budgets lead, however imperfectly, to discoveries. Some of those go on to production, but there is a more subtle benefit; when large companies find deposits and then decide they are too small to develop, a window of opportunity opens for smaller operators to come in.

Taken together, these trends are good for the whole industry, from juniors to the biggest of the big. And if a bull market is under way in commodities, the stars are at last lining up for a business that has had a tough time.