Red Dog churns out record profits

After struggling through several lean years earlier this decade, the Red Dog zinc and lead mine in northwest Alaska is now producing record profits for its operator, Teck Cominco under agreement with the NANA Regional Corporation, an Alaska native-owned corporation.

A high-grade, open pit mine and mill complex located on native-owned land in a climatically harsh region, Red Dog annually processes about 3.0 million tonnes of ore containing zinc, lead and silver. In 2005, the ore had an average grade of 21.7% Zn, 5.6% Pb and recovered byproduct revenues for 1.97 million oz of silver.

Production began at Red Dog in 1989. Two significant expansion projects were completed in 1998 and 2001, which increased production capacity. Current proven and probable reserves provide a 25-year mine life, although significant additional mineralization nearby is known and being explored. The entire deposit lies within a half-mile area.

Red Dog ore is crushed and processed through a three-stage grinding circuit before it reaches the flotation circuit. A preflotation step removes elemental sulphur and organic material. The ore then passes through a sequential lead and zinc flotation circuit. Regrinding is included as part of the flotation process to improve quality. The final lead and zinc concentrates are then filtered and stored for the shipping season. Silver is recovered in both the lead and zinc concentrates.

In 2005, Red Dog produced 568,000 tonnes of zinc in concentrate and 102,000 tonnes of lead in concentrate, a production level similar to recent years. Concentrate is trucked 84 km from the mill to a summer seasonal shipping port facility owned by the Alaska Industrial Development and Export Authority (AIDEA), on the coast of the Chukchi Sea.

Recent increases in zinc and lead prices helped Red Dog post a Cdn$325-million profit in 2005, a 57% increase over 2004, setting a financial record for the world’s largest zinc producer.

This year appears to be shaping up as another banner year at Red Dog, according to financial reports and the new general manager, John Knapp, who recently replaced Rob Scott as head of the workforce. “We’re in a better position financially, that’s certain,” he said, in a telephone interview with CMJ on March 30. “Our revenue is good enough to embark on some capital projects to keep us in a competitive position.”

Zinc prices on the rise

In the first quarter of 2006, Teck Cominco realized a company-wide average zinc price of US$1.02/lb, compared with $0.60/lb during the same period in 2005. “Significantly higher zinc prices and revenues of $25 million [Cdn] from final concentrate pricing resulted in an operating profit of $138 million in the first quarter compared with $43 million in 2005,” the company said about Red Dog in its 2006 first quarter report, released April 24.

Zinc prices have been climbing, after bottoming out in 2002 when Teck Cominco received an average of US$0.35/lb and posted a Cdn$32.6-million loss at Red Dog. According to the company’s 2005 annual report, a one-cent per pound change in zinc prices produces an estimated $10 million impact on Teck Cominco’s after-tax earnings.

Capital and cost-cutting projects

To survive the lean years earlier this decade, Red Dog managers cut costs through a variety of measures, most notably a reduction of about 60 employees. At present, the overall Teck Cominco workforce at Red Dog is 350 employees, according to Knapp, with an additional 100 full-time workers under contract, providing trucking, catering and housekeeping services on-site. About 54% of the Red Dog workforce are NANA shareholders, providing a “much more diverse workforce,” Knapp said, than at his last Teck Cominco position at the Polaris mine in Nunavut.

Capital spending was also sharply reduced at Red Dog in past years, with Cdn$8 million spent in 2003 and about Cdn$15 million spent in 2004. Last year, managers spent about $34 million on capital projects, including a $6-million airport runway paving project at the mine site, according to James Kulas, environmental superintendent at Red Dog. “This was done because Alaska Airlines [the transportation contractor] will be retiring the jets that are capable of landing on a gravel airstrip,” he said.

Red Dog’s water treatment system received several upgrades in 2005, Kulas said, including construction of a third water treatment plant, construction of a pipeline from the mill’s freshwater lake to the treatment plant, and the relocation of a sand filter facility that is used as the final polishing step in water treatment.

A 1.5-m height increase to the tailings dam was completed in 2005, with additional work planned for the mine’s tailings impoundment area in 2006. “A wing dam is needed on the main dam and work will begin on a backdam this year,” Kulas said.

The mine has also constructed a plant to produce its own blasting emulsion, a project that became more important after the Sept. 11, 2001, terrorist attack in New York City and Washington, D.C. “Over the last several years, it has become increasingly more difficult to ship our blasting agents,” Kulas said. “We now have a plant on-site that can manufacture emulsion.”

This year’s Cdn$31-million capital spending includes mill upgrades, a new lime-handling system for water treatment needs and the relocation of a bank of cyclones.

In recent years Red Dog has spent considerable resources, including Cdn$16 million, to improve dust control along the haul road and at the storage facilities. “New haul trucks were purchased, a new unloading building and a baghouse for it was built; conveyors, surge bins and other handling systems got improved dust control,” Kulas said. “We also tested a hard surface application on five miles of road, called ‘high float’. It was an oil-based chip seal, but it didn’t stand up to our application.”

That spending will continue in 2006, to include completion of a sand filter facility and a dust control system on the coarse ore stockpile building.

Ongoing dust control monitoring costs including blood lead levels of all employees, as well as air- and water-quality monitoring and fish and vegetation sampling, exceed $1 million annually.

Shale gas exploration continues

This year Red Dog will fund its second year of exploratory drilling for shale gas resources a few kilometres northeast of the mine and mill.

Last summer’s Cdn$3.9-million drill program produced positive results. Two test holes were drilled to a depth of 914 m. Test wells are developed by a process that begins with drilling, geophysical logging, casing and cementing, according to Kulas. Then, the productive intervals are perforated and the host shale containing the gas is fractured. Each test well has a gas separator to measure flow rate.

“We had extensive gas flow from one hole, but had trouble developing the other,” Knapp said. “We got enough gas that we feel confident this is worth pursuing. That’s why we’re back for more. We’ll drill three or four holes [this year], depending on how it plays out.”

The shallow gas resource contained in buried shales was first discovered during mineral exploration drilling at Red Dog, when core samples removed from drilling steel reportedly were popping. Since 1998, data about the gas-prone shales have been collected from those mineral core holes, smaller in diameter than conventional shallow gas drill rigs.

Teck Cominco first applied in 2000 to the state of Alaska for permission to explore and develop the shallow gas resource. The company holds four shallow gas leases, covering about 9,320 ha of land. Drill programs considered in earlier years were delayed due to permitting work and to low zinc prices, according to past mine managers.

The intention in developing the gas resource is to replace some or all of the diesel fuel used at Red Dog to power the mill’s eight generators, each of which can deliver 4.5 MW of electricity. Those power generators consume about 56.7 mill
ion L of diesel fuel annually, or about 147,000 L/day at the mine and 7,570 L/day at the port, according to Kulas. Another 11.3 million L of fuel are used by the mine’s fleet of mobile equipment each year.

Reducing the diesel consumption at Red Dog could help stabilize operating costs.

Recent increases in fuel prices are significantly impacting Red Dog. “In 2001 our diesel fuel cost was US$18.3 million, 15.5% of operating cost,” Kulas said. “In 2005, it was US$28.6 million, 20.3% of operating cost.”

Materials movement

Transportation adds considerably to the cost of production. The annual diesel fuel supply makes up five barge deliveries sent to Red Dog’s port facility during the short ice-free shipping season, which typically begins in early July and continues through October. All of the mine’s heavy supplies and equipment must be delivered during that period, and all of the year’s production must be moved out at the same time, involving the use of lighters to navigate the shallow waters at the port facility.

State and federal agencies are investigating a dredging and construction project to create a deep-water port, which currently has an estimated cost of US$230 million. The project would cut vessel loading times, reduce downtime caused by poor weather conditions, trim operating costs, extend the shipping season, offer shipping opportunities to other potential users and reduce environmental risk created by the existing barge relay.

A draft environmental impact statement analyzing the direct loading facility has been released and a final document is expected later this year.

Patricia Liles is a freelance business writer based in Fairbanks, Alaska, and can be reached at [email protected].

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