The long held wisdom that “bigger is better” has taken a well-deserved beating since the credit crisis destroyed some of the world’s largest financial institutions in its wake.
With large-scale project financing options limited or non-existent in today’s marketplace, many players in the global mining industry have been forced to review their growth strategies and focus on less capital intensive options.
Perhaps not since the turn of the 19th century has the appeal of “small” become so attractive. Indeed, today’s examples encompass a broad range of industries including power generation (wind turbines, small hydro, solar etc.) and small mining operations that provide feedstock to portable or centrally-located process plants and refineries.
In Canada’s most westerly province, British Columbia, many companies are choosing to avoid the permitting problems (and expense) associated with building tailings containment areas for their mines. Instead, they are designing their processing plants to yield a product that can be shipped off the property without producing potentially toxic waste that requires storage on site. Banks Island Gold and Pretium Resources are two examples of companies following this practice.
Not being major enterprises with large industrial footprints, long permitting periods, and high capital costs, these businesses can also be expanded incrementally from ongoing cash flows, substantially reducing the risk to investors. Given the abysmal performance of large scale gold producers such as Barrick, Kinross and others, it’s hard to imagine these smaller scale producers being more risky than their larger cousins.
Today, these larger companies are scaling back, selling marginal operations, and closing down others that simply aren’t profitable. It will be interesting to see what sort of growth profile these companies aim for in the future when gold prices turn around and head inexorably higher. Will they make the same mistakes they did in the past? (Let’s hope they at least skip a generation before inflicting any more punishment on their shareholders).
In the past, major companies have generally been reluctant to consider small scale, staged development of mineral deposits which is obviously less risky. In gold’s case, some of that reluctance no doubt relates to the belief by analysts that any operation producing less than 100,000 ounces won’t get adequate market recognition.
However, as we’ve seen during the global financial crisis, analysts sometimes have a habit of just being plain wrong. Unfortunately, many of the dumb project development decisions made by large mining companies (including Barrick’s Pascua-Lama mine in Chile) have been more market driven – not to mention poorly conceived – than anything else.
For a major company producing say around six million ounces gold per year, analysts (and by default, the market) thinks in terms of several hundred thousand ounces per year as having a material impact on their bottom line. However, the disastrous cost overruns associated with achieving higher output rates has, for the most part, produced the opposite impact from what was intended.
Nonetheless in any future escalating commodity price environment (and I’m really speaking gold here) the appeal of modest-sized mining operations developed by well managed independents is certain to increase, especially where possibilities exist for multi-sourced production that will boost consolidated output to even more attractive levels. This has been a feature of China’s mining industry for generations and has made the country the largest gold producer in the world.
Physical gold output — even on a small scale basis — provides an important bit of price leverage to companies in the marketplace and in the case of a successfully run enterprise the ability to attract financing for future production growth. The future might not be bigger, but it could well be a lot better.