Financial Woes Trim Mining Sector’s Capital Budgets – by Marilyn Scales

Marilyn Scales is a field editor for the Canadian Mining Journal, Canada’s first mining publication. She is one of Canada’s most senior mining commentators.

The global financial crisis looks to be the new reality for most mineral producers. Slumping stock markets, wobbly banks and lack of consumer demand are having an effect on Canadian miners, forcing them to trim their capital spending plans.

Here are a two examples.

Don Lindsay, CEO of Vancouver-based TECK, said the number one priority for his company is debt reduction during these times of weaker metal prices. Cash flow generated from operations will be used for that purpose at the expense of capital, sustaining and exploration budgets. “We haven’t come to a determination on how much that will be cut back but they will be cut back,” he promised. Consideration will also be given to selling certain unnamed assets. Teck recently arranged for a $9.8 billion bridge loan to finance its acquisition of FORDING CANADIAN COAL TRUST, and the company has a 20% share in the FORT HILLS OIL SANDS project where development costs have ballooned by 50% over the original estimate of $14.1 billion made in July 2007.

Calgary’s SUNCOR ENERGY has trimmed its 2009 capital budget 20% to $6 billion from the $7.5 billion spent in 2008. Of the 2009 budget, $3.6 billion will be spent on the Voyageur oil sands growth project. This commitment includes meeting spending and construction timelines for the third and fourth stages of the Firebag in situ operation. The completion date of the planned Voyageur upgrader has been pushed back one year to save money. The remaining $2.4 billion will be spent in the oil sands business ($1.7 billion), natural gas operations ($300 million) and refining ($400 million).

When large, well-managed corporations cut capital spending, smaller miners might do well to heed the call. I predict delays in many projects that cannot be economically completed without another round of higher commodity prices.

Mining industry observers have long been aware that this is a cyclical business. What surprises me is how long the upward cycle lasted (five years) and how fast the situation has been reversed (five weeks).