In a speech on the state of the global mining industry, Ian Delaney, chairman of Sherritt International (S-T), stated in blunt terms that the world has entered an era of resource scarcity, in which most large-scale, high-grade deposits have already been identified by advanced technology, resulting in fewer and fewer major discoveries in recent years.
“It is necessary to understand that the global natural resource pool is declining,” he said. “We pretty much learned where everything was by the mid-1980s, and, to the extent there are unknowns, current geological models are quite accurate in their ability to know where to look.”
Delaney was speaking to attendees of a day-long conference organized by students enrolled in the JD/MBA program at York University’s Osgoode Hall Law School and Schulich School of Business, on Feb. 8 in downtown Toronto.
Delaney conceded there had been notable exceptions on the greenfield discovery front, such as the Lula oil field off the coast of Brazil, and “lottery tickets” like the Voisey’s Bay nickel deposit in Labrador. Nevertheless, the soon-to-be-retired chairman maintains that these kinds of finds are rare, while cheap, easy-access mineral deposits are being depleted.
The direct consequence, according to Delaney, is that mining companies are increasingly being forced to develop projects in high risk regions of the world where property rights are frequently called into question, political instability and wars are more likely to develop, and newly installed governments are less likely to fulfill contracts agreed upon by previous regimes.
Sherritt has had troubles of its own in this regard. While developing the $6.5-billion Ambatovy nickel-cobalt mine in eastern Madagascar — a joint-venture between Sherritt (40%), Sumitomo (SMFG-N)(27.5%), Korea Resources (27.5%) and SNC-Lavalin (SNC-T)(5%) —the national government was overthrown in a coup, after which the consortium was asked to renegotiate the deal.
According to Delaney, the issue was only resolved because of the already substantial foreign aid provided by the Japanese and Korean governments.
Delaney described Ambatovy as a classic example of “modern, large-scale resource investment”, in that the deposit is situated in the developing world; it is being financed by global syndicates with global equity partners; the consumers are in the Far East; and there is local collateral investment. He said the mine would produce around 5% of global nickel and is the largest Canadian investment in Africa.
Since 1991, Sherritt has been best-known as a partner of the Cuban government, a relationship that has caused Delaney to be banned from the United States. Delaney maintains a personal correspondence with former Cuban President Fidel Castro, and praised the country’s healthcare and education systems, which help make it, in Delaney’s eyes, one of the easiest developing countries in the world to do business.
He noted that Sherritt is Cuba’s largest foreign investor, and described Sherritt’s Moa mine there as exploiting one of the world’s largest economic nickel-cobalt deposits. In addition, the company holds an interest in Energas, which generates power for the nation’s electrical grid, and explores for and produces oil and gas.
Delaney emphasized an increasingly widespread global shift towards resource nationalism, with higher expectations from governments and citizens for more revenue sharing with mining companies. He described this income splitting as an “economic rent” a mining company pays to a host jurisdiction, which in most cases, he said, is 45-55%.
At the same time, Delaney pointed out that some countries are becoming more aggressive in their attempts to secure resources, referencing China’s string of resource investments across Africa.
“The fear of resource constraint by established and emerging manufacturing nations in the Far East is palpable to anyone who has been involved in global negotiations over natural resources,” he said. “It’s difficult to convey to an audience in Canada the degree of real war that’s going on in the resource basins of the world … It is war in the bluntest sense, and they are driven.”
Delaney explained that that the main motivation for these countries is to provide a reliable source of raw materials for their manufacturing sectors.
“As long as they can access resources at market prices, they believe they will be able to value-add more than their neighbours,” he said. “They’re not looking for a special price. They’re looking for absolute access.”
Here at home in Canada, Delaney said he is “ashamed and appalled” by the ongoing “dysfunctional” relationship between the federal government and the First Nations. He blamed both the government for not being radical enough in its approach, and First Nations for not “expanding their thinking.” Delaney warned that the future development of Canadian natural resources would be negatively impacted should First Nations’ grievances remain unresolved.
Despite the challenges facing the mining industry, Delaney sounded a note of optimism for the mostly student crowd, stating that economic returns would continue to attract investment to the sector. He added that the Canadian mining industry retains unusually warm relations with countries around the world and lays claim to a leading technological expertise in resource extraction.
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