Mine construction in Alaska expected to taper off in 2009

By Patricia Liles
For the Journal

After five years in a row of substantial mining-related construction projects contributing collectively more than $1.7 billion to Alaska's economy, this year's spending on mine development projects will decline significantly.

"The lack of construction activity reflects mostly the commissioning of mines and is not necessarily the product of the economic downturn," said Rich Hughes, development specialist in the state's Office of Economic Development/Minerals, and a co-author of the annually published Alaska Mineral Industry report, which tracks the state's mining activity.

Prior to 2004, annual development spending in Alaska on mine-related projects ranged from a high of $81 million in 2001 down to the decade's low of $34 million in 2002.

The increase to the hundreds of millions in annual development spending by Alaska's mining sector started in 2004, with construction of the Pogo underground gold mine in Interior Alaska. That year, mine development spending was $209 million.

Since then, development spending by Alaska's miners has exceeded $300 million each year, topping out at nearly $500 million in 2006. That's when Coeur d'Alene Mines was building the Kensington underground gold mine in Southeast Alaska and NovaGold Resources began construction of the Rock Creek open pit gold mine near Nome.

In 2008, estimated development spending by Alaska's miners was about $330 million, a slight increase over 2007's $318 million in construction-related spending, according to Hughes.

"I would characterize the level of construction in the industry as very favorable and progressive up to this point," Hughes said. "The successful construction and commissioning of one project or some projects leads to a positive industry image; this in turn leads to further investment in exploration and project development."

But development activity and spending in Alaska's mineral industry will likely decrease substantially in 2009, as no large-scale mine projects are scheduled to begin construction this year.

That lull in mine-related construction in Alaska for 2009 is not directly attributable to the current global economic downturn, Hughes said.

"Actually, the downturn will probably stimulate the gold price and could lead to additional gold project investments for those companies with credit lines or available cash," he said. "The downturn will affect future projects if it continues, but not current ongoing projects, other than Rock Creek."

Operations at Rock Creek gold mine are currently suspended, due to unanticipated operational issues experienced last fall during startup and complications in complying with regulatory requirements. After producing about 2,000 ounces of gold in late 2008, Rock Creek shut down.

A maintenance crew of about 20 workers remain on site. Mine operator NovaGold, meanwhile, is reviewing costs to replace crushing equipment and discusses regulatory oversight issues with state and federal agencies.

Should the company restart operations at Rock Creek, a large piece of crushing equipment will need to be delivered to Nome by barge, with the earliest delivery date in June, according to NovaGold President Rick Van Nieuwenhuyse.

"One of the things we're look at and evaluating is the cost of upgrading the crushing circuit and the feed system at both the front and back end," he said. "We operated the crusher in the summer and hadn't had issues, but we were crushing rock for the dam and laydown area; crushing waste rock, not ore."

The mine's gold-laden ore rock contains more clay, requiring a different type of crusher.

So far, NovaGold has spent about $200 million on construction at Rock Creek, beginning in late 2006.

Another gold mine in Alaska that could include construction-related activity during 2009 is the Kensington underground mine near Juneau. Completion of a tailings storage facility could begin sometime this summer, depending on a U.S. Supreme Court ruling about the disputed tailings facility.

If the court allows Coeur to proceed with the originally permitted tailings storage plan, construction would resume this summer, said company spokesman Tony Ebersole. Gold production could begin in late 2009 or early 2010.

About 40 people remain employed at Kensington, which has been placed on a care and maintenance status. If the mine is allowed to start production, Kensington would employ about 200 people.

So far, Coeur has spent about $238 million on construction of Kensington, Ebersole said. Estimates for the remaining costs related to the tailings storage facility were not available.

Alaska's largest gold producer, Fort Knox, also will continue in 2009 development spending to complete the mine's new valley heap leach facility and pit expansion.

Inclement weather last September caused construction crews to halt work laying protective liner on the bottom of the large bowl constructed for the heap leach gold processing facility.

Final construction of the $103.6 million heap leach is planned to resume this spring, with anticipated gold production to start this fall. The new processing project, combined with a $193 million pit expansion that began last October, will extend the mine life of Fort Knox until early 2018.

Construction activity by Alaska's mining industry in future years may be more impacted than the upcoming cycle by the current global economic meltdown.

"The economic downturn will definitely affect the base metals industry as well as the non-metallic (mining industry) due to lack of funds and low commodity prices," Hughes said. "I think that the downturn is something we will have to live with for a fairly long time. There will be increased inflation, devaluation of the dollar, and investment in gold as a safe haven and simply for a source of exchange."

Alaska's natural resources remain rich in gold, with active exploration projects like Donlin Creek and Pebble in Southwest Alaska, and Livengood and Golden Summit in Interior Alaska.

Donlin Creek, the most advanced in the development pipeline, is expected to start this spring the state and federal regulatory review process seeking construction and operational permits. That permitting process is expected to take two to three years, with the same time required for construction, according to Van Nieuwenhuyse at NovaGold, a 50-50 partner with Barrick Gold at Donlin.

If the two mining companies decide to build the open pit mine at Donlin Creek, construction would require approximately 2,500 employees and contractors on site, Van Nieuwenhuyse said.

Obtaining financing for that large-scale project, and other mining developments in Alaska, will be key to the industry's continued growth.

"I believe that there will be a trend to gold expansion, but this will be thwarted by lack of finances, so growth, although positive, will be slow," Hughes said. "Continued slow economic return will hinder base and non-metal projects; coal should continue about as is, but it, too, will be restricted in growth due to lack of funding. So, the long term is not bright as I see it."