On the surface, a plan by B.C.’s two biggest mining companies to combine forces to build two mines for the price of one in Chile appears to be a no-brainer.
Goldcorp. Inc. (TSX:G) and Teck Resources (TSX:TCK.B) have development projects in Chile that are 40 kilometres apart – close enough to share infrastructure to reduce capital spending.
A joint venture approach recently announced by the two companies will reduce the capital cost of building two mines to $3.5 billion from $8.4 billion.
But a lot of things had to come together to make the project feasible, not the least of which is market conditions that mean neither project could proceed on its own.
“Those projects aren’t going to get built in this kind of a market, and I think you have to do whatever you can to make the economics better,” said Haywood Securities analyst Kerry Smith. “Can one company spend $4 billion? I don’t think so. That’s why I think, for these big projects, partners make sense because you can spread the risk around.”
Teck and Goldcorp are very different companies: Goldcorp is a pure-play gold miner; Teck is a diversified company focused on coal, copper, zinc and – more recently – oil.
One thing they have in common, though, is that gold prices recently hit a five-year low and copper a six-year low, making the economics challenging for either a gold or copper mine.
Teck and Goldcorp, both headquartered in Vancouver, are also well known to each other, an important factor in successfully creating the joint venture.
The idea might never have even been considered were it not for Goldcorp CEO Chuck Jeannes and Teck CEO Don Lindsay’s friendship. Earlier this year, they spent eight days together in a canoe on the Nahanni River followed by an annual fishing trip.
“It started when Don and I were in a fishing boat together,” Jeannes said. “I couldn’t tell you who brought it up. We both were talking about, ‘Geez, we both need a power line and we both need a road and we both need a [desalination] plant. Does it make sense to do two of them?’”
Added Lindsay, “Sometimes that’s how deals get done. You just like each other and have fun with each other and come up with collaborative ways to get things done.”
Teck’s Relincho copper-molybdenum project originally had a $4.5 billion capital cost; Goldcorp’s El Morro gold-copper project has a $3.9 billion capital cost.
Last year, Goldcorp’s El Morro project hit a setback when Chile’s top court placed a hold on an environmental certificate that had been issued after local indigenous people raised concerns about El Morro. Among their concerns was a tailings pond. But the Teck-
Goldcorp Project Corridor joint venture eliminates El Morro’s tailings pond and a processing plant.
Under the joint venture plan, a single tailings pond and mill will be built at Teck’s Relincho mine site, and, rather than build separate desalination plants, power lines and ports, the two companies will share one of each.
The one additional expense is a 40-kilometre conveyor system needed to move ore from the El Morro mine to the Relincho site.
The joint venture approach not only cuts the capital costs of the two mines in half, but also dramatically shrinks their environmental footprint.
“It’s the kind of thing that, frankly, we should be doing more of and should have in the past been doing more of in our industry,” Jeannes said.
As an example of unnecessary mining industry capital costs, he pointed to two projects in Nevada, where Barrick Gold Corp. (TSX:ABX) and Newmont Mining Corp. (NYSE:NEM) built separate power plants when they could have shared the cost of one.
“Barrick and Newmont each built a 200-megawatt power plant at the same time when they could have built one 400-megawatt power plant and saved hundreds of millions of dollars,” Jeannes said.
“This should be the new model for mine development worldwide,” said Lindsay, who added that he plans to pitch a similar approach to two other companies developing a mine next door to Teck’s Quebrada Blanca project, which is also in Chile.
Mines tend to be developed in clusters in mineralized areas, and Lindsay said it makes little sense for each mine owner to build its own infrastructure if sharing it will shrink the environmental footprint and reduce capital costs.
“Everybody goes and builds their own infrastructure, and we just can’t do that anymore,” Lindsay said. “The world wants reduced footprint, and so we must share infrastructure.”
Under the Project Corridor arrangement, Teck and Goldcorp will be equal owners, and the two companies will share revenue generated from both mines.
The project will operate like a separate company, with three board members from each company sitting on the board of directors, and the chair rotating between the two companies each year.
One reason projects like Project Corridor are relatively uncommon is that not all shareholders want to see their company or mine project tied to the hip – and fortunes or misfortunes – of another.
“The only drawback of something like this is, instead of having 100% control, you now have a partner,” Jeannes said. “You have to take another party’s issues and desires into account.
“The fact that Don Lindsay and I are very good friends, and we’ve known each other for a very long time, and our companies have very similar cultures and values that focus on communities and the environment and doing things right – I don’t anticipate any issues as we go forward.”
Currently, Goldcorp and Teck face the same commodity price challenges. But gold prices are affected by a whole set of economic factors that might not affect commodities like copper. So what happens if the fortune of one company sinks while the other rises?
“It could be that gold goes up and copper goes down, and we want to build the project, have the cash to do it, and they don’t, or vice versa,” Jeannes said, “and so we put provisions into our agreement that allow one party to go forward and buy out the other party.
“We and Teck are fairly well diversified and strong financially, so I don’t anticipate that happening, but there are provisions in there in case that happens.
