Rock Solid Year For BC Mining — What’s Next?

The British Columbia mining industry was rock solid in 2008, leading to another year in the trend of record-breaking years for the industry. But while the strength of coal and metals prices over the year ensured the results for 2008 were spectacular, declining prices for most commodities to date in 2009 are painting a different story. What lies ahead for the BC mining industry?

Highs and lows

According to the PricewaterhouseCoopers (PwC) report, The Mining Industry in British Columbia — 2008, aggregate pre-tax earnings for the industry were up 88% to $3.2 billion in 2008, the highest amount in the 41-year history of the annual survey. Returns on shareholders investments in BC’s operating mines also reached unprecedented highs: 98% in 2008, up from 46% the prior year.

The impressive results were primarily driven by increased coal prices that were up 225% to US$261/tonne over the prior year, with coal representing 86% of total product shipments in 2008. However, if you fast-forward to April 2009, the one-year prices announced were in the US$125/tonne range, a significant reduction from prices realized in 2008, but still high compared to historical averages.

BC’s key base metal — copper — was the second largest contributor of mining revenues during 2008, but lost some of its luster. Its contribution to net mining revenue was down by 29% in 2008 to $1.19 billion from $1.66 billion the previous year, and its price dropped to an average of US$1.56/lb in the first quarter of 2009, reflecting weaker global demand. Zinc and zinc concentrates were also down substantially and contributed net mining revenues of $736 million in 2008, a 40% drop from $1.2 billion in 2007.

Total net mining revenue from molybdenum increased 9% to $472 million from $433 million in 2007, but prices for the metal, which is primarily used as a strengthening material in the steel industry, saw a significant price decrease in the last quarter of 2008 and prices remain low in the first quarter of 2009, down 69% to US$8.75/lb.

On a brighter note, however, rising gold prices led to a 13% increase in gold revenues to $231 million in 2008, which continued to strengthen in the first quarter of 2009, averaging $908.71/oz. Silver prices also rose in 2008, pushing revenues from silver up by 10% to $272 million over the previous year.

Views from the top

While we saw records set in 2008, there is currently a mix of uncertainty and cautious optimism within the BC mining industry. According to a PwC poll of 33 CEOs of BC-based mining companies in April 2009, 27% are conserving cash, 39% have implemented either moderate or major spending cuts and 12% are just hanging on. In contrast, about 15% of the respondents reported they are actively seeking acquisitions and looking to grow. Encouragingly too, 83% of CEOs reported that the economic downturn and lower metals prices have had no effect on the expected economic life of their operating mines.

This optimism was somewhat dampened by recurring comments about the perceived lack of clarity and process around settling Aboriginal land claims in BC, resulting in land access issues and a disincentive for investment in the mining sector. Equally, some CEOs felt that more could be done to accelerate and streamline the environmental permitting process, and others were looking for government policies that were more favorable towards natural resources developments.

Whatever the case, all of these issues will need to be resolved to ensure that current and new projects progress to help drive the new generation of mines in BC. The 10-year mining plan implemented by the BC government in 2005 has demonstrated progress to revitalize the provincial economy, as well as government steps, such as “grass-roots” exploration tax credit programs, to encourage investment in the BC mining industry.

Looking ahead

Despite uncertainty about the industry’s future, the financial results of 2008 reaffirm how important the BC mining industry is to the provincial economy. There are a number of significant mining projects at the permitted and permitting stages, mainly in the copper/ gold sector. However, these projects have yet to advance to the development stage. In today’s economic environment, making BC an appealing location for mining, specifically one where projects can be advanced in a reasonable time frame, and attracting the investment needed to sustain BC’s mining industry for the future is more important than ever.

For more information, visit www.pwc.com/ca/miningand www.pwc.com/ca/tax.