EXPLORATION ’95 — New mining projects growing in size and

Building new mines has never been an inexpensive proposition but today, with costs skyrocketing, it makes one wonder about the return on investment that can be expected from a billion-dollar project.

The capital cost is, of course, not the only factor to be considered when starting up a project; operating costs, for example, also make or break projects, both large and small.

And it can be argued that mines create wealth that goes far beyond the initial investment, providing jobs for individuals and funding (in the form of taxation) for the immediate community and for other levels of government. Still, the capital budgets of some projects are astounding, as the following examples of the cost of mining today affirm:

* In northern Chile, the Collahuasi copper project, with enough reserves to last at least 50 years, could cost as much as US$1 billion;

* Financing for another Chilean copper project, El Abra, is reported to be approaching US$1 billion;

* In Argentina, the cost of bringing the Bajo de la Alumbrera gold-copper project into production is now estimated to be US$758 million; * The capital cost of developing the Lihir gold project in Papua New Guinea is expected to reach US$670 million.

Examples of other “less pricy” projects include:

* Sadiola Hill in the West African nation of Mali, where Anglo American, which has a 38% interest and is arranging the financing, recently gave the green light for the US$250-million gold project;

* Raglan in the Ungava area of northern Quebec, where Falconbridge (TSE) plans to proceed with development of the nickel project at a capital cost of $486 million;

* Louvicourt in the Val d’Or area of northwestern Quebec, where the polymetallic project of Aur Resources (TSE), Teck (TSE) and Novicourt (TSE) recently entered production at a development cost of about $280 million; * Mount Milligan in British Columbia, which has yet to be developed. Placer Dome (TSE) suspended plans for the potentially large, copper-gold project early in 1992 because, according to the company president at the time, the return would be insufficient to justify the $500-600-million capital investment.

“Everything is relative,” John White, managing director of Falconbridge Chile, a 50% owner of Collahuasi, said from his Toronto office. “You have to look at the cost per pound of copper which will be recovered from the orebodies.”

Collahuasi, with an estimated 2 billion tonnes grading 0.9% copper, is costing its owners about US50 cents per tonne (exclusive of operating costs). White said a feasibility study for the project, sitting 45,000 metres above sea level, is due either this month or in April. Envisaged is a 60,000-tonne-per-day, open-pit operation. With the completion of the feasibility study, the partners are expected to begin negotiating the financing. The project could be in commercial production by 1998. Falconbridge’s project partner is Minorco, a member of the Anglo American group of companies. A former third partner, Royal Dutch/Shell Group, recently sold its one-third interest, on an equal basis, to Falconbridge and Minorco. According to analyst Terry Ortslan of BBN James Capel in Montreal, megaprojects work because by increasing the size of your project, you lower your fixed costs.

Borrowing costs have increased, and to make up for the high cost of money, one must increase the size of the project. “The economies of scale have increased dramatically,” he said.

“While the dollar value is getting bigger, so is the project,” Ortslan said. Megaprojects are not unique to the mining sector. “It isn’t just mining,” said Murray Pollitt, chairman of small Canadian gold producer Western Quebec Mines (TSE). “Costs are also higher for new chemical plants and steel mills.” Western Quebec, which is mining the Joubi deposit just outside of Val d’Or, Que., controls River Gold Mines (TSE), which is hoping to place its Eagle River gold project near Wawa, Ont., into production in August. Pollitt estimates that the capital cost of Eagle River, which will produce at an annual rate of 40,000 oz., will be in the $30-million range, not including a mill. (River Gold acquired the project partially developed; a custom-milling operation is planned.)

The partners in the Lihir project — RTZ (NYSE), Vengold (TSE), Niugini Mining and the Papua New Guinea government — are creating a public company, Lihir Gold, to act as operator. RTZ says development will be financed by bank loans and the proceeds of an initial public offering of shares in Lihir Gold. Proven and probable reserves stand at 89.3 million tonnes grading 4.76 grams gold per tonne.

El Abra, in which Cyprus Amax Minerals (NYSE) has a 51% interest, is scheduled to produce cathode copper at an annual rate of 225,000 tonnes, beginning in 1997. Chilean state-owned Codelco is Cyprus’ partner in the venture.

International Musto Explorations (TSE), which chose MIM Holdings of Australia to be its partner at Bajo de la Alumbrera, says the latest capital cost estimate does not include working capital, interest and financing costs. The initial four years of operation at the Argentine project will see annual output of 363 million lb. copper and 546,000 oz. gold. Musto says cash operating costs are estimated to be US27 cents per lb. copper, including gold credits. A payback period of slightly less than 3 years is projected at US95 cents per lb. copper and US$350 per oz. gold.

The Raglan nickel project cost an estimated $375 million four years ago. Current plans call for shipping concentrate by boat to Quebec City, and then by rail to Falconbridge’s treatment facilities at Sudbury, Ont.