Speech by Norman B. Keevil, Chairman, Teck Cominco Limited at the Mineral Exploration Roundup 2008 in Vancouver, January 29, 2008

It’s an honour to be asked to address Roundup on its 25th anniversary. Roundup has evolved a lot in those 25 years, from a relatively small conference with 350 attendees to its current status as one of the most important mining exploration conferences in the world, with over 6,000 participants this year.

And the world industry has changed a lot too. In fact, it has changed a lot in just the last 5 years.

It was just five years ago when I was asked to address Roundup on the subject of “Mining In The Next 20 Years”, — an attempt at predicting the future which I had to admit is a mug’s game at the best of times. Even the best professional economists can’t always get it right. They say economists have successfully predicted ten of the last five recessions.

I think we geologists balance them out. As natural optimists, we’ve less successfully predicted ten of the last five recoveries.

Anyway, I gambled on half a dozen or so predictions five years ago – got one right, one very wrong, and the jury is out on the rest.

Most of us, when we try to see the future, tend to project the present and past trends forward, – which is both easiest and logical, – but it doesn’t always work. Stuff happens.

We all remember a year ago, when the world was awash with liquidity. Financing was a piece of cake. Private equity deals, or leveraged buyouts by a new name, were all the rage. I don’t recall too many
people predicting that “the end was nigh”.

Banks and other financial institutions were competing to generate returns far beyond what their historic, low risk, lending businesses had made.

Chasing fees, they developed new pieces of paper (these were called “instruments” to give them a better cachet) which packaged together various debts in a form that was so confusing that nobody could
understand them. But people bought them; they even sold them to each other!

To a miner, it was reminiscent of the penny stock market, with banks playing the role of both the promoter and the proverbial, gullible shoeshine boy.

And then the bubble burst, starting with the sub-prime mess and spreading all through the financial system. Real estate “values” in the US have fallen to the point where a recession is almost certain.

The liquidity of a year ago disappeared and was replaced with a serious credit crunch. The buyout game turned into musical chairs, with the last man standing wondering if he was holding the bag.

Stuff happens.

None of us knows where it will lead, or for how long, – but meanwhile the real world out there continues to evolve.

25 years ago, when Roundup started, a “large” haul truck was one that carried 100 tons. Today, we have trucks hauling up to 380 tons, with bigger ones on the drawing boards.

25 years ago the early, pioneer oil sands projects in Alberta were struggling with draglines, having just converted over from bucket wheels; now they have all converted to the more effective “truck and shovel” method, and are continuing to look for innovative new ways to mine in what is still an emerging industry.

25 years ago the largest SAG mills were capable of drawing 12,500 horsepower; today, we are pushing 30,000 hp at mines like Antamina, Collahausi and Los Pelambres.

The biggest flotation cell then was about 30 cubic metres in volume; today we see flotation cells as large as 250 cubic metres.

But, bragging rights like “Mine’s bigger than yours” aside, big can be a mixed blessing. Higher productivity has to be balanced off against higher capital cost and availability.

While a very large SAG mill may be more cost-efficient, when it’s working, some of us still think that two medium sized SAG mills operating in parallel make more sense, because if one goes down the operation can keep going on the other, – and isn’t at risk of shutting down entirely.

And, with a smaller number of suppliers for the larger pieces of equipment, whether they be mill parts or tires, delivery times can be a real problem. The shortage of tires has been a serious issue for many mines recently, as we try to push production to satisfy high demand.

So while the technology is probably always going to be there for more scaling up to bigger equipment, one has to wonder whether continuing to get bigger will always be better?

What about the hardware in exploration?

50 years ago we saw a wave of discoveries that resulted from the new Airborne EM system, which was actually developed by Inco.

It enabled us to perform regional surveys to scan huge areas for buried conductors at low cost from the air.

In fact, as Inco found out, and as we learned in Teck with our own system a few years later, the real costs in this kind of exploration were the ground follow-up ones. No single company could afford to test all the anomalies an AEM system could find in a given year, – so the systems soon were put into contracting companies and became available to the industry at large.

Regardless, they led to a wave of discoveries, – particularly in eastern Canada where the combination of geology and cover are particularly suitable to Airborne EM. Some of the best known examples include the Bathurst Camp in New Brunswick, Mattagami and, most important, Kidd Creek.

That wave of geophysical discoveries has never been repeated. Recently BHP has perfected airborne gravity, — a major technical advance, – but it may turn out to be more useful as a regional geological mapping tool, like aeromagnetics, than in direct exploration. I’m not aware of any wave of discoveries from it.

Regional geochemistry using various techniques has certainly produced discoveries, the Pogo deposit being a good example, but –although it had potential to open up new camps in the same way as airborne EM did, to my mind it has not been taken full advantage of.

Similarly, remote sensing has led to many targets and potential discoveries, particularly in the arid regions of the high Andes, but has not produced a rash of new discoveries over a short time period comparable to the introduction of airborne EM.

Perhaps one of the biggest advances in exploration has been GPS.

I remember when Iraq invaded Kuwait in 1990, a lot of us wondered how the coalition defense forces could find their way around in thendesert, without maps or roads. Of course it was using GPS, then classified and not well-known.

Now, instead of using pace and compass to try to figure out where we are in the bush, — as we all actually got pretty good at years ago, — we can use GPS to know exactly. Getting lost now requires real talent.

As a result of the many lean years for the industry which led to little new exploration, as well as the lack of new break-through technological advances like airborne EM, a lot of what we are seeing in the exploration and development side now is pecking over deposits or showings that have been known for years. We are all doing this.

Some of this reflects new geological or geophysical insights; some of it reflects changed market conditions. Some, but hopefully not much, may even remind us of the definition of insanity: “Doing the same thing over and over again, and expecting a different result!”

What about metal prices over the period?

This chart shows the price of copper, – considered by most to be the bellwether of metals, – from 1970 through 2002. It’s adjusted for inflation and the figures are all in 2006 US dollars.

One can see various trend lines on it at different times, but the overall trend is down, – reflecting what became widely known as “The 20-year Decline in The Real Price of Metals”.

In fact, it looks more like a 30-year trend to me.

Or, it could be seen as two more severe decline trends, with an uptick in the late 80’s separating them. Regardless, the long, secular decline of metal prices became conventional wisdom, and influenced decisions in the industry for some years.

I must say I always had some difficulty understanding how long this trend could continue, since if it did for much longer it would take copper to zero somewhere around 2015, – which didn’t seem likely. I didn’t think the world was ready for free copper.

There are various explanations for this dismal performance.

In 1980 the ideas of “The Club of Rome” were conventional wisdom, promoting the Malthusian concept that the world was about to run out of resources. We’d seen two “Oil Shocks”, metal prices were high, inflation was high, and resources in the ground were known as “The Great Inflation Hedge”. We were into “A New Era of Resource Scarcity”.

This may actually sound familiar.

By 1983, only three years later as the first Roundup was getting underway, Paul Volcker had successfully clamped down on inflation by letting interest rates go to over 20%, and the Western economies were in deep recession.

As you can see by the graph, this would impact metal prices through 1986.

US copper production had peaked in 1981, but by 1983, 25 years ago, it was down to 60% of stated capacity.

Phelps Dodge, the largest US copper producer, took serious action, closing all sulphide copper production, restructuring its work practices, and starting to convert where possible to its new SX/EW process.

But production was increasing in the planned or revenue-requiring economies. Between 1980 and 1984 Russia increased production by 16% and Chile expanded both El Teniente and Chuquicamata. Mexico tripled output at Cananea and developed La Caridad, – all of which more than offset the cutbacks in the US and contributed to a surplus.

There was a bounce in the late 80’s, but it was like a “Dead Cat Bounce”, and the downtrend resumed through the 90’s.

Partly because of weak prices and partly because of occasionally perverse government policies, exploration funding dried up in some of the more conventional mining countries like Canada.

The “long, secular decline in the real price of metals” became a part of our folklore, and influenced our thinking.

The Bank of Montreal pundit, Don Coxe, has said about our industry. “Those who know it the best, love it the least, – because they have been burned the most.”

We geologists are of course the exception. As born optimists, we’re like the kid in the story who, when locked in a room with a pile of manure, began shoveling away with enthusiasm, – on the premise that “there must be a pony in here somewhere!”

Despite all this the mining industry has managed to hang in there, and in some cases actually do reasonably well. Certainly, many of the surviving mining companies today are larger and stronger than they were 25 years ago.

25 years ago, Teck Corporation had a market cap of about $200 million. Cominco was about $1 billion. Today, the combined Teck Cominco has a market cap of some $15 billion.

25 years ago Noranda had a market cap of $1.5 billion; last year the combined Noranda/Falconbridge was sold for $18 billion, – and Inco went from $2 billion to $18 billion over the same period.

25 years ago the biggest publicly traded mining companies in the world were BHP and Rio Tinto, each at about $4 billion; today both are well over $100 billion, and eyeing each other with baleful glances.

25 years ago Barrick wasn’t even a gleam yet in Bob Smith’s or Peter Munk’s eyes; today it’s traded at $40 billion. I think Bob Friedland was in Tibet or some such place then; today he’s built a couple of pretty serious billion dollar companies.

Today there are 180 mining exploration or development companies listed on the Toronto Stock Exchange with a market cap over $200 million, – which is a welcome breath of fresh air for the industry, – especially given the haste at which existing producers are swallowing each other up.

Looking back at that period of chronic decline in real prices, the overhang of surpluses obscured the fact that there was something else important happening out there, – and that was in China.

I first visited China 29 years ago, just after Deng had begun the move to open the country up to a partially market economy. His saying that “It doesn’t matter if a cat is black or white, so long as it catches mice” would catch on and change that country dramatically.

I saw three cars and thousands of bicycles on the main drag in Beijing. I visited glass factories with rows of ladies assembling toys, and old style steel mills with other ladies standing on top of furnaces, surrounded by flames, trying to keep the fires burning. I also visited the Ministry of Metallurgy, which was responsible for exploration.

That’s right. The Ministry of Metallurgy looked after exploration and development. On the plane out of China I sat beside a man from Anglo American who had spent the week as a guest of the Ministry of Geology, which seemed to be responsible for nothing to do with mining at the time. He soon found out that he was in the wrong place, but couldn’t get loose.

I didn’t have the heart to tell him what he’d missed.

But, ironically, — I was looking then at China as a place to joint venture possible new mines for export to the developed world, – not so much as a potential consumer. I visited 7 times over a couple of years, but stopped when the 1981 recession hit, and the world seemed not to have the desire or need for more new mines, – for a while at least.

Meanwhile, the China I thought I had known was changing. Thinking back to my speech 5 years ago here, one of the things I did get right then was the emerging importance of China as a consumer. This was in fact a “no-brainer”.

All I had to do was show this chart of China’s consumption of copper in 1990, 1995 and 2001, compared with that in the US.

In 1990 consumption was less than 25% of that in the US. By 1995 it had grown to just under 50%. By 2001 China was up to 90% that of the US.

Case closed. Not even a prediction. Just a fact, although it had not yet become widely known and conventional wisdom.

By 2006 the same trend had continued, and China’s consumption was now almost double that of the US.

China’s importance as a consumer seems obvious to all of us now, as does India’s impending contribution.

There was a popular recent book entitled “Three Billion New Capitalists” which pointed out the coming impact of the large populations in China, India, and the Former Soviet Union starting to seek some of the living comforts we’ve become accustomed to in the old “Western World”.

Suddenly, with increasing world consumption, those chronic surpluses having been worked off and a distant memory, the industry lacking a sufficient pipeline of new projects to service this increased demand, and with longer lead times required for permitting even when there are viable new projects available, – it’s no wonder at all that metal prices have shot up.

The long secular decline seems to have ended, and the industry is enjoying the change.

That leads me into one of the predictions I got dead WRONG five years ago.

Looking then at the wave of mergers and acquisitions that had gone on in the previous decade, I noted the disappearance of historic names like ASARCO into Grupo Mexico, AMAX into Cyprus, Cyprus into Phelps Dodge, North into Rio Tinto, Cominco into Teck, Rio Algom into Billiton, Billiton in turn into BHP, and MIM about to go into Xstrata.

WMC appeared about ready to go as well. In Canada we were down to three large non-gold companies, Teck, Noranda/Falconbridge and Inco.

The mantra had been “Size Matters”. I suggested that the urge to get bigger for its own sake was about over, and that future acquisitions would be more about synergies than size.

I showed this slide of the Big Three plus CVRD, and the next eight diversified mining companies.

I suggested that in the mining industry there are only a limited number of quality development opportunities available at any given time, — some large and some not so large, but comined, a small number.

It seemed to me that being too big can actually be a negative, since the bigger a company is, the bigger the new project opportunity it needs to add meaningful value per share. By definition there must be even fewer of these very large opportunities at any point in time..

Chip Goodyear of BHP had acknowledged as much, when he said a few years ago that BHP was too dominant in most metals to grow effectively, so he would concentrate on oil, where they were only number 8 in size, and there were more chances for projects that could make a difference to them.

On the other hand, mid-size companies can take advantage of more modest size opportunities that are still meaningful to them and, by joint venturing with peers, be exposed to the larger ones as well. The end result has to be a bigger spectrum of possibilities available to us. Antamina was a good example of this. It was too large at the time for any one of us, but a very profitable joint venture for Noranda, Rio Algom and ourselves.

I suggested that we, Noranda, Inco, Phelps Dodge and others in this “Goldilocks” size range (as Alan Greenspan would have said) had a real advantage here, because we could take advantage of more of that limited spectrum of opportunities, — both the very large ones through joint ventures, and the smaller ones that may not have been meaningful to the giant companies.

Well, that may have been logical, but it was not the way things actually worked out.

Since sticking my neck out on that prediction, Western Mining has gone, Noranda/Falconbridge has gone, Inco has gone, Phelps Dodge has disappeared, and Placer Dome has been swallowed up. Alcan has been bought by Rio Tinto, which itself is now subject to a bid from BHP, and even Xstrata, one of the most active recent acquirors, has indicated it might be for sale.

In fact, since 1980, of the world’s 16 largest mining companies at the time, after Rio Tinto and BHP, 12 have disappeared. So much for predictions!

Actually, the continued urge to merge, or acquire, probably isn’t surprising, given what Don Coxe had to say. “Those that know it the best, love it the least, since they’ve been burned the most”.

Given the increasingly long lead times to permit and build new mines, any new project decision has to be based on expected prices 5 to 10 years into the future, – not this year or next.

Since the majority of “investors” don’t think long term anymore, and with industry professionals still remembering the long years of secular price decline, it’s a much easier decision to buy existing production and take advantage of good prices right now, – as opposed to taking a chance on the more distant future.

As someone who has helped to build a company over the long term largely through developing a sequence of new mines, that naturally goes against the grain – although I can understand it, – and in fact we even try M&A occasionally!

So in forecasting you win some and you lose some, but let me make one final prediction.

I think it was Engels who said “Capitalism holds within itself the seeds of its own destruction”.

Whatever he meant by that, it is true that entrepreneurial or market economies have a tendency eventually to create overcapacity. We’ve seen it not only in metals but in automobiles, semiconductors, ethanol and many other industries.

A better description is, as David Thompson is fond of saying, “Markets Work”.

The longer markets stay strong, the more inevitable it is that someone will eventually create that overcapacity again.

That may take a while this time because, as I’ve said, we as an industry are short on first tier inventory. There is a lot of exploration going on but we are short on quality discoveries. Once found it takes a long time to permit new mines, and the majors remain more intent on buying each other than on building.

All that is supportive of the latest mantra that prices will be “Stronger for Longer” and, despite having been in the business through enough cycles to be cautious, I do think that “This time it’s different”.
But it, – overcapacity, – will happen eventually.

It may happen on the demand side because of unanticipated events, such as contagion from a deeper than expected US recession, or from some other crisis. — Stuff happens.

But even if demand growth stays as strong as we currently expect, somebody will eventually counter on the supply side.

The Chinese, who are as entrepreneurial as anyone, are currently negotiating to build much-needed rail facilities in the Congo to help get access to its major copper deposits. And they are buying up junior companies with undeveloped prospects in Latin America.

China can be expected to respond to costly shortages, just as Japan did in the 70’s or like any other important consumer. And, as a nation, they will likely have the capacity, motivation and long term thinking to make it happen.

It may take ten years to be effective, – it probably will, – but it will happen, and one or more Chinese mining companies will be out there amongst the world leaders.

Hopefully, there will still be a few Canadian, Australian and American players left standing as well.

Thanks for listening, and good luck.

Check Against Delivery

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