Betting at the Copper Casino

[Editor's note: Every day this week we're featuring reports from Christopher Pollon's quest to follow a pound of B.C. copper from cradle to grave -- and back again. Today's story investigates the role of Vancouver's mining district. To get a sense of the scope of the project, see this interactive map and introductory story.]

VANCOUVER, B.C. -- British Columbia copper ends up in smartphones, in the cars we drive, in our plumbing and electrical systems, as well as in our scrap yards and landfills. But to understand how it gets there, you need to visit a nondescript office tower on Pender Street in Vancouver's financial district. Or perhaps more aptly put, Vancouver's mining district.

If mining capital were mineral ore, Vancouver would be the mother lode of all mother lodes. More publicly-traded mining companies are headquartered here (and in Toronto) than anywhere else on earth: 60 per cent of all mining corporations on the planet are found in Canada. Their collective market value in 2012 approached half a trillion dollars: an estimated $449 billion. (See sidebar.)

Many in the mining industry view this global cluster as proof that we are the unrivalled masters of mining on the planet. This has some basis, but the reality is a lot more complex.

"The single largest reason for the concentration of head offices here," says Alan Young, former executive director of the watchdog group Environmental Mining Council of B.C., "is that stock exchanges like the TSX Venture Exchange or TSX [Toronto Stock Exchange] have been developed to promote venture capital that mid-level and small exploration companies require to exist." (The Toronto Stock Exchange lists larger, more established companies; the TSX Venture, in fact based in Calgary, is for smaller, higher-risk resource companies looking to raise money.)

In 2012, 70 per cent of all the money raised in the world by senior and junior mining companies was transacted through these two exchanges -- nearly $11 billion. That essential financing activity has spawned a critical mass of investors, analysts, technical experts, promoters and other associated human infrastructure in Vancouver and Toronto. (Among them the three mining analysts who joined me on my visit to Copper Mountain.

"The result has been the birth of global mining finance centres that are largely self-perpetuating," says Young.

Outpost of empire

High above Pender Street, I am ushered into a tiny, undecorated boardroom, where Hiroyuki Tarumi, general manager of Tokyo-based Mitsubishi Materials Corporation's Vancouver office, awaits. He is a squat, powerfully-built man with a resonating baritone voice like Mr. Sulu from the original Star Trek. His posting to Vancouver is just the latest of many, including stints in Tokyo, Manhattan, and Pretoria, South Africa.

The modesty of both this office and Tarumi is misleading: this is an outpost of empire. Mitsubishi Materials Corporation's net sales last year alone exceeded US$17 billion. Much of that came thanks to its control of numerous links along the global copper value chain that stretches from hard-rock mines in places like Copper Mountain, to the production of cars, high speed rail lines and smartphones.

The Materials Group, according to its 2012 annual report, "focuses on the supply of basic materials indispensible to the world." Those include cement, electronic components and, above all, copper. The company's smelters in Japan and Indonesia require a stable and constant supply of copper concentrate. To secure it, MMC's tentacles reach into many copper-producing nations: Chile, Peru, Indonesia, and Canada's biggest copper-producing province, British Columbia.

In B.C., MMC owns stakes in Copper Mountain and the Huckleberry copper mine, and has ongoing purchase contracts with Canada's biggest copper mine, the Teck-owned Highland Valley Copper near Kamloops.

Why is Mitsubishi Materials here?

In a global sense, Tarumi tells me, British Columbia is a copper backwater: we produce less than five per cent of global supply. Last year a single mine in Chile produced more than all of B.C. combined. That country produces about 30 per cent of all global copper, followed by China, Peru, the U.S. and Australia; Canada ranks eighth. Our copper deposits are neither the world's largest nor purest.

So why is Tarumi here in Vancouver? Other advantages make B.C. an attractive place to invest, I learn. (See sidebar: B.C. Copper Report Card.)

While a shipload of copper concentrate from Chile, for example, can take two months to arrive in Japan, from B.C. it takes two weeks. Tarumi adds that copper concentrates from some parts of the world include impurities like mercury that make it harder and more costly to refine. B.C.'s copper is among the "cleanest" of all the copper concentrate.

Canada's biggest advantage is stability. "In B.C., the political risk is great!" enthuses Tarumi, meaning that it's almost non-existent -- a major consideration when it comes to investing in a copper mine.

Political risk means different things to different people. For mine owners and investors, Canada is among the most stable jurisdictions to do business in, with a well-entrenched rule of law. Compared to some other mineral-rich places, there is virtually no fear of armed insurrection, as there might be in the Democratic Republic of the Congo; or government expropriation, as has happened in Bolivia and Venezuela. There's little chance the government will demand new royalty terms late in the construction of a multi-billion dollar mine, as Mongolia's did.

That last risk isn't entirely non-existent in Canada: we're not immune to the desire for more direct benefits from resource extraction -- what miners warily refer to as "resource nationalism."

Last year, for example, Quebec announced a new royalties regime that charges active miners a one per cent royalty on "total output value" (according to a formula that allows the mine to write off some operating costs) of its production below $80 million, but quadruples the rate to four per cent for each dollar earned over this threshold. Other new measures would increase the amount of cash that companies must set aside for mine restoration, and improve the transparency of company operations in Quebec.

Mexico has also recently slapped a new 7.5 per cent quasi-royalty (rising to eight per cent for gold, silver and platinum extraction) on miners there -- a country where Canadian companies account for three-quarters of the international mining presence).

But such "resource nationalism" has a downside, says Stefan Ioannou, a mining analyst at Haywood Securities in Toronto: countries that seek windfalls from mining during the good times can end up shooting themselves in the foot.

"Mining is a very cyclical business," he says. "When the metal prices fall back down, those [new] taxes can take a marginally economic mine and make it uneconomic very quickly."

Massive lodes, massive risks

In B.C.'s case, Ioannou says, many promising deposits of low-grade copper in the northwest -- Schaft Creek, Galore Creek, KSM and others -- are vulnerable to changing economics.

Each is routinely referred to as a "world class" deposit because of the gargantuan amount of copper in the ground. But like the metal under Copper Mountain, it's in such low concentrations that enormous amounts of rock must be broken and crushed to produce enough to be worth the effort. The price tag to build and equip such mines is equally monstrous.

As a result, such low-grade-ore operations are, in the language of the mining business, closely "leveraged" to copper prices: small downward fluctuations in the global copper price can savage the bottom line, while upward spurts boost profits correspondingly.

Sinking the necessary billions into such a project is like ultra-high-stakes casino gambling. Many in B.C. still remember the 2007 Galore Creek fiasco: plans to mine this huge northwest B.C. copper-gold-silver deposit got the green light to go ahead, only to collapse when construction cost estimates surpassed $5 billion.

Sitting in Mitsubishi's Vancouver outpost, it's not clear whether Hiroyuki Tarumi knows this recent chapter of local mining history. I ask if Mitsubishi Materials is interested in copper from this cluster of northwest deposits -- soon to receive cheap BC Hydro grid power from a new BC Hydro transmission line.

There is a long pause before he answers. "Mitsubishi sees the potential of B.C.'s copper resources," he says. "That's why I'm here."