Taking lessons from Mount Milligan

Placer Dome’s $266-million writedown of its Mount Milligan project in British Columbia was unequivocal acknowledgment that it had made a mistake. The company simply paid too much for a project that didn’t live up to expectations.

Lower than expected gold grades, a slump in metal prices and higher than estimated capital costs are what convinced the company to put Mount Milligan on the shelf for now, perhaps to be mined in the future when metal prices improve.

To the company’s credit, it recognized that strong action was the only effective remedy. By taking the writedown, it showed faith in its balance sheet and confidence that its financial statements give a clear picture of the company’s assets and liabilities, unmuddied by assets of questionable value.

But Mount Milligan is a high profile project, and the repercussions of this decision will be felt on other large-tonnage copper-gold porphyries, the so-called “look-alikes.”

The failure of Mount Milligan to pan out may also cause Placer Dome and other seniors to reassess their strategies. It’s not a knock against Canada’s mining potential so much as an opportunity for companies working here to reassess the approach they take toward growth.

If this had been a Placer Dome grassroots exploration project, the outcome would have been different. A property that is not economic would not have proceeded this far and certainly not at this cost.

The acquisition gamble that didn’t pay off is confirmation that participation in grassroots exploration may give a company a better return. How far would a $266-million exploration budget have gone?

Placer Dome’s recent success at the Pipeline deposit in Nevada is an example of how a senior company’s exploration work can pay off. Just seven miles from its 60% owned Gold Acres mine, Placer and its partners in the project have outlined a deposit hosting 11.3 million tons grading 0.24 oz. gold per ton. That success takes some of the sting out of the Mount Milligan failure. Vancouver mining analyst Andrew Muir points out that Mount Milligan “will have a sobering effect” on companies looking at future acquisitions. “They might not be so easily stampeded into an outright purchase, but more inclined to fund development through option agreements or share financings.” And that would not be a bad thing for the junior mining industry. Some specific companies might miss a deal now that Mount Milligan has come up short, and juniors may have to expect less upfront costs. But for the industry as a whole, this may have unexpected benefits. Placer Dome’s error makes clear to senior companies the benefit of spreading risk by backing a wide variety of projects through a number of junior companies. In short, it indicates that a healthy junior mining sector is better for the entire mining industry.

Mount Milligan has now joined a fairly long list of known copper-gold porphyries in British Columbia that are on the shelf because they are uneconomic today. But Mount Milligan is in the past. If it has lessons to teach about dealing with the hard reality of mining in today’s globally competitive atmosphere, those lessons had better be learned quickly.