The Problem with Pebble is not PoliticsIn case the link doesn't work...
However vehement the opposition by regulators, NGOs and native groups to Pebble, permitting is not its greatest challenge. Although measured by in-situ metal the resource is gargantuan, the deposit is simply not economic. The ore near surface with a low strip is at 0.6% Cu equiv, which at current metal prices is $40 rock. Opex for an open pit will be a minimum of $25/tonne, so there is not enough margin to be had to earn a high income even at scale. Lower down there is a pod about 250m deep at over 1% Cu. But this is not high enough grade for an underground mine. There is a larger zone to the east grading 1% between 500-1000m depth, which is a good size for a block cave, but not really bonanza grade, and quite deep, so it would not be that profitable. The only way to do it would be to go open cast, and chase the 1% zone at the vertex of the whittle pit, which is more or less what is proposed. But for a green field operation, the deposit is not rich enough to pay back the mountain of capital required to build the mine. The capital was estimated by NDM at USD 5 billion, which is widely thought to be a fairly aggressive assumption, especially in view that former JV partner Anglo had an internal estimate of 11-13 billion in capital. The company has not published a PEA since 2011, when metal prices peaked. I wonder why? In fairness to the company, they used reasonable long-term prices of 2.50 Au, 1050 Cu and 13.50 Mo, the pre-tax NPV was about 15B, so say 8-10B after tax. (But the national instrument stipulates rules for headline metal prices, so this is not voluntary, but compulsory realism.) This is less than double the capital estimated in the study. Copper and gold prices are a bit higher, but so are costs, so not in real terms. Moly is half this price. If I recall correctly, pre-tax IRR was 7.3%. How about after tax? Then if you increased metal prices to spot, and costs commensurably, the economics would be more or less the same. 5 billion is a lot of money, even today. Even so, the capital is likely much greater than this, partly due to inflation, which has roared ahead in mining in spite of the industry recession, and partly due to the fact that PEAs tend to make rather optimistic assumptions. Hence capital is likely into eleven digits. If you take metal prices to the 2011 spot prices of 1400 Au and 4 Cu, as indicated in the PEA, and hold costs equal, or inflate prices to a real equivalent of say 1800 and 5.50, respectively, you still only have a 23% pre-tax IRR, which is probably 15-17% post-tax, on their capital cost. If analysts and Anglo are right, the return will be lower than this, even at fresh all-times high commodity prices. So although enormous, the deposit is marginal. If banks finance the construction, backstopped by equity from NDM or a producer, it would likely only be at the top of the cycle, after metal prices have been high for a sustained period, emboldening the investment. Then by the time it goes into production, the industry could be in recession, cash flow dried up before putting a dent in the enormous debt load. If they built it, it would be a perfect short at the top of the cycle. I doubt anyone will, but who knows. Exploration can always improve a project, but since I don't see any improvement in the resource in the past decade, I presume it is closed off, and they haven't got any ideas how to expand it, other than at depth, below 1000m, which would add no value. Although seniors keep walking away from this project for economic and political reasons, First Quantum is putting fresh money into it. All I can say is, good luck with that. It's definitely not a short today. A megabull market in copper will take this stock far higher. But then it will collapse again. Whoever builds it will go to zero.