9th January 2014

Vale uncertainty set to end in 2014 – Thompson Citizen Editorial (January 8, 2014)

posted in Northern Ontario/Canada Regional Media, Thompson, Vale |

The Thompson Citizen, which was established in June 1960, covers the City of Thompson and Nickel Belt Region of Northern Manitoba. The city has a population of about 13,500 residents while the regional population is more than 40,000. 

More than three years of uncertainty about the near-term future of Vale’s Manitoba Operations are about to end and that in and of itself is very good news for Thompson residents.

Whether it will be good news or bad news in an objective economic sense remains to be seen, but it will be substantive news, and given the uncertainty that followed the announcement on Nov. 17, 2010 that the smelter and refinery would close in 2015 – followed by even more uncertainty, as the Sword of Damocles hung over Birchtree Mine for 6½ months from Oct. 18, 2012 until last May 6, while the company considered returning it to care and maintenance – and you can perhaps better appreciate why any real and conclusive news out of Vale in relation to Thompson would be welcome at this point.

If you wonder what the effects of more than three years of uncertainty surrounding Thompson’s largest and most important employer have been, try putting your house up for sale right now or look around and see how many new investors have arrived in town since 2010. While houses have sold and investors have come, Thompson has been in something of a state of suspended animation – a city on hold – since that fateful November Wednesday more than three years ago now.

That’s about to change. Expect Peter Poppinga, chief executive officer of Vale Canada and base metals and information technology executive director worldwide for the Brazilian mining giant, to announce within the next several months whether Vale has found a strategic investor to partner with on Thompson (1D). Poppinga joined Vale in 1999 and has been in his current positions since November 2011. He is also the chairman of the board of Vale New Caledonia and PT Vale Indonesia.

Vale is currently testing ore samples in Thompson (1D) about 3,800 to 4,200 feet underground at the north end of the company’s T-3 mine shaft. Vale spent an estimated $18 to $20 million in exploration here last year.

Vale has also begun to dig deeper in a largely untapped section of the deposit extending as much as 6,800 feet underground in some places, with three exploration drills working at the surface, to a depth of 6,500 feet. Vale is sitting on top of a large high-grade nickel ore body with Thompson (1D). It is a larger ore body than both T-1 and Birchtree and will be focus of business here for Vale for the next 10 to 20 years.

Vale has two likely options it can choose to proceed with if it wants to continue exploring and eventually develop Thompson (1D) into a fully functioning mining operation. It can conservatively spend about $350 million in building more ramps and tunnels further underground, with air and ventilation going in over the next few years, and mining starting in 2018 or 2019, or go big and drop another shaft underground in a seven-year project that would cost about $1.2 billion.

The catch is the cash. Vale says it doesn’t have that kind of money to spend on developing Thompson (1D). There has been extended downward pressure on world nickel prices over the last several years due to producer oversupply and weak consumer demand. The ramp-up in production of nickel units from nickel pig iron (NPI) production and the commissioning of conventional capacity have been major factors behind the oversupply. Nickel prices are more than $3 per pound lower right now than Vale would like to see them be to really make a go of Thompson (1D), so the company announced last May 6 that it was looking to “secure a strategic investor” to develop Thompson (1D) with. Nickel prices have dropped from a year ago about $1.50 per pound from just under $8 per pound at this time last year.

Looking for new partners and strategic investors to spread the risk around is a high priority for Vale these days, and not just in Thompson. In Sudbury, the company is about to start formal talks with Glencore Xstrata about the possibility of forming an unincorporated joint venture to combine and operate their nickel mines, mills and smelters there. In Brazil last month, Vale announced it had agreed to form a joint venture with power company Cemig to manage some energy assets and to sell part of its stake in Belo Monte hydroelectric dam in the Amazon forest. Vale will create a company called Aliança Geração de Energia SA jointly with Cemig Geracao e Transmissao SA, a unit of Cemig, with Vale assuming a 55 per cent stake in the new company and Cemig controlling the remainder.

Unless and until Poppinga says otherwise, the so-called “base case” remains that Vale’s Manitoba Operations transition to mining and milling only at some point during 2015. Any change to the plan for a longer term is contingent not only on finding a strategic partner to invest in their Manitoba Operations, but also on the interests of the investor in the continued operation of the smelter and refinery.

Dating back to its historical prospecting roots, Canadian hard rock mining has always been a confounding and complex cyclical business with a good deal of intrigue to boot. Peter Poppinga is reportedly, say several from Thompson who have dealt with him, temperamentally as different from his predecessor Tito Martins, as east is from west.

Meanwhile, site visits by the interested investors took place in Thompson last month. Their identities and countries of origin remain held in close confidence by Vale, as the delicate negotiation dance continues.

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