The Stock Market up. Now which way mining?
By Jack A. Caldwell
Mining columnist
14 October 2008 @ 09:53 am EST
The good news today is that the stock market is up. That is relief to be relished. We hope the trend continues, without pulling up the price of oil.
While the news is enough to get investors bidding up the price of shares, I wonder if the news is enough to reassure company managers that belt-tightening is not necessary. Let us take a look at some of the things I have thought and written about in the past week as the basis for deciding if the time for business caution is past.
I was in Fort McMurray last week, doing some consulting to an oil sands company. In the truck-trips around site and in the bars in the evening I recorded these impressions: There is a "blood-bath" coming. Even in the oil sands. Surely in the boardrooms the question is being asked if project development should continue: finance is hard to come by; oil prices are falling, approaching the break-even point; and share prices are half what they were at the beginning of the year. There are even engineers out there applying for jobs we could not fill just weeks ago.
In answer to the question whether US energy independence will include Canadian oil sands, the cynic notes that the US will never be energy independent unless they include the oil sands. "If they cannot tell the truth on that issue, how can the honestly face the mess they are in now?"
One particularly interesting conversation revolved around the repeated call by Canadian politicians to close down the oil sands operations. Those in discussion with me decried the silliness of these politicians, but still we wondered about the coming conflict between your job and the environment, the real issue at stake in political calls to close the oils sands mines.
McCain raised the issue first. He promises forty new nuclear plants. Building these plants will pit environmentalists against out-of-work engineers and contractors. With California reported broke, who will decide to drill off-shore to prevent more murder suicides? I doubt an honest answer will change the polls, but it would be refreshing. Certainly cries of Drill, Baby, Drill add no light to the questions.
Look at the debate, jobs versus the environment, from Fort McMurray where we drove past more bustling cranes and mud-splattered trucks than I could count. It is strangely not hard to imagine oil dropping below about $60 a barrel, the oil sands plants declared uneconomic, and a minority government forced by the opposition to refuse a bail-out. Wow, now that would be a cause worthy of investment by the US government regardless of who is president.
I raise these issues as companies serving the mining industry that I know, have done the following:
-- Laid off 30
-- Instituted a hiring freeze
-- Reduced use of outside consultants
-- Made plans for more cuts
And individuals in the mining industry have despaired at getting value out of their stock options, keeping their jobs, or seeing salary increases.
It may just be a crisis of confidence as some say. It may just be a case of frozen loans and impossible-to-get finance. But the managers and decision makers in companies that I know and talk to believe that none of that matters. They think it will get worse before it gets better; that it is best to have no excess staff or inventory; that new projects must be shelved; and that a lot of belt-tightening is necessary to get the system in shape again.
This is but one instance of change in the mining scene via the United States to Canada:
" Bluerock Resources Ltd announced a two week shutdown of their US operations while the Company works to ensure adequate working capital to allow for continued development and production at its Uranium Mining Operations."
The Globe and Mail puts it in general terms---and I doubt that todays stock market rise will negate this and the following perspective:
"The metals sector is bracing for a wave of mine shutdowns and development project cancellations amid a deepening crash in commodity prices. Plunging metals prices are forcing executives to reconsider the economic viability of mines as commodity values fall toward the cost of production at many operations."
And ABC Rural reports from Australiaalthough most Australians seem pretty optimistic through the turmoil
"The global slide on international markets is weighing heavily on Australias mining industry. Its already reeling under the weight of the credit crunch and low mineral prices."
By way of disclosure, I am and for most of my working life have been a consultant to the mining industry. On Saturday I sat with fellow workers and we planned on the basis of what happened in the past. We asked what the future holds for consultants to the mining industry. Here are predictions based on what has happened since the last collapse of the industry in 1983.
Those consultants with projects that involve profitable ore bodies and that have to proceed may survive. The best projects are those that involve cleanup in response to regulatory demands.
But we know there is a cycle in these things. As the economy falters, the mines cut consultants. Why not? They need to reduce costs and they can employ out-of-work engineers to do the work at less cost. Meanwhile the consultants cut more and more employees. Some go to work for the mines and some set up their own consulting companies.
Some of the new consultants succeed. They work harder than mine employees, they produce more, or they know more.
The mines meanwhile seek to further reduce costs. So they reduce staff. Laid-off experts set up their own consulting companies and some of these succeed, mainly because they continue to consult to the mines that laid them off but still need their expertise.
As the economy improves, the mines need more help. Reluctant to increase staff, they hire the new, energetic, hard-selling consultants. These good start-ups grow as the economy improves. The failures go into other fields and we can forget about them for the rest of this article.
Then takeover artists gain position and power. They go out and take over more and more of the successful start-up consultants. There is industry consolidation. The big consultants grow and the selling owners take the money and sail away into the sunset.
The mines are now making money again and are happy to engage the big consultants and live with the inevitable inefficiencies.
And then the economy stumbles again and the cycle starts up again.
The lesson learnt from this brief overview of the last 25 years in the history of consultants to the mining industry is that the cycle is about to start again. What you do depends on what you are doing and what is done to you. If you are working for a mine that is likely to be able to keep you employed, sit tight. If you work for a consultant that has long-term, stable contracts with profitable mines, sit tight.
But if your mine or consulting company is wonky, then be ready to be laid off and be ready to either set up your own consulting enterprise or leave the industry. If you set up your own consulting company, recognize that only a small percentage will succeed. And if you succeed, be ready to sell to a bigger company and take the money as soon as you can.
And if you are just a young and ordinary consulting engineer or scientist, sharpen your skills, work harder, expand your circle of "who-you-know," and be ready to move at a moments notice. Good luck with your job, its conflicts with the environment, your consulting skills, and any activity for the mining industry that is subject to swings and cycles. It may yet take some time for the economy to recover regardless of todays stock market rise.
http://www.ibtimes.com/articles/20081014/the-stock-market-up-now-which-w...
