Why the metal industry is getting harder – by By David Garofalo (Canadian Business Magazine – September 20, 2012)


David Garofalo is the President and CEO of HudBay Minerals Inc.

The recent conflicts at mines in developing nations—the violence erupting in South Africa, Guatemala, Panama and elsewhere this summer—are unsettling and deplorable. Yet they illustrate the new context for mining companies around the world, which often goes unexplored in mainstream coverage.

The new reality of the global mining industry is that most of the large, high-grade mine operations located in favourable jurisdictions are getting long in the tooth. As production at these mines inevitably declines with time, mining companies are forced to look farther afield for new supply. Since all of the near surface high-grade deposits have been discovered, companies are now looking at more geologically challenging deposits, usually with lower-grade ore. Often, this means considering development opportunities in areas that are not only more complex geologically, but also carry more social and political risks.

Among other things, this explains the chronic deficit in copper supply the world has experienced over the past four years. Average copper production grades have fallen dramatically over the past decade. Simply to maintain output, companies have to process much higher tonnages in order to sustain consistent production. Increased demand from developing economies has created a supply crisis—the term is not too strong.

Producers now have to look at deposits located in jurisdictions that have no history of mining, and do not have an established mining code with its attendant regulations, expectations and guarantees. Without that legal infrastructure, companies will find it exceedingly difficult to obtain a social license to operate at the local level. That lack of support can lead to tension, and even violence.

These challenges are why the average lead time to bring a significant deposit to production has now surpassed a decade. So how should Canadian companies in extractive industries mitigate their geopolitical risk?

Hudbay uses three criteria to determine where to deploy capital and manage our risk profile. First, we focus within a fairly narrow geographic zone, in this case, investment-grade countries in the Americas. As a medium-sized producer, we have only so much management capacity to go around; jurisdictions with a poorly developed legal framework and high political risk can quite easily distract management resources away from doing what mining companies do best—building and operating mines.

For the rest of this article, please go to the Canadian Business Magazine website: http://www.canadianbusiness.com/article/98371–why-the-metal-industry-is-getting-harder