Mining Investment 101 – it requires massive amounts of water
My sources tell me a second desalination plant is on the cards although I have to admit I failed to find out who the developer and operator will be. As the wind blows, more information came drifting over the ether, telling me the mines that signed the deal with Areva for more water, are paying through their necks for this privilege, and will continue to do so until a second, more efficient desalination plant is operational.
The way it is explained to me suggests there is a major design flaw with the Areva plant, or is it the Erongo plant? Nobody seems to know for sure, not even those who claim they own it. Nevertheless, the designers of the Wlotzka desalination plant did not reckon with the high level of particles and organic material in the cold, nutrient-rich Benguela upwelling. This clogs the intake and a special pre-filtering system is required to make the water compatible with the further process. From an operational point of view, this means the Wlotzka plant can not function optimally, even if Areva wanted it to. Basically the current output is more or less what can be expected from the plant until such time as the design flaw can be fixed and a pre-filtering system installed. But this small seemingly insignificant modification requires an additional investment of around N$200 million, an amount Areva does not want to spend without first securing a better uptake of its clear but pricey water. And if I understand the complexity of the deal correct, it is exactly for this modification and consequent operational improvement that the mines are going to foot the bill.
Talk of a second desalination plant has been around for the better part of ten years. Even before Areva actually started construction of their impressive facility, there was much confusion over which plant and whose plant. I remember asking a Namwater engineer to please explain to me exactly who is planning what, and from that discussion I gleaned that, at that point, not even the Namwater top brass were sure whether they will participate or not.
Areva’s investment in the Wlotzka plant may have been premature but at that point when the decision was taken, the uranium price was soaring so the plant was given the green light. Then uranium went for a dive from which it has yet to recover and Areva’s dreams of millions of cubic metres of water for their own mine, evaporated. It was at that point, after announcing the suspension of their mining plans, that they frantically started scouting for a partner for their expensive water.
But water is like electricity and oil. If you run a modern economy, you simply have to have it. Then, after a while and after events have overtaken the previous scene, and mine operators find themselves in a corner, you basically pay what is charged without squabbling. Of course, this implies that you as the mining investor is serious about continuing your operations, hoping for an improvement in the price of the commodity that you mine.
In gold mining, one finds the so-called border mine phenomenon. This was a very typical feature of gold mines, particularly in South Africa and Australia, during the eighties when the gold price fluctuated beyond any logical parametres that project managers and venture capital could foresee. When the gold price was above a certain level, all these moth-balled mines will be restarted. When it dropped below a certain level, the operations stopped, labour was sent home, and the fiscus got nothing.
Does this not sound alarmingly similar to events in the uranium industry over the past four years? I foresee a possible scenario where uranium mines simply can not continue to operate at a loss. In our case it will not only be due to the gyrations of the uranium price, but also to escalating overheads of which the cost of water may be the most important.
It has to be kept in mind that not all mineral deposits were created equally. Some have higher yields than others, some are very rich, while many are downright unmineable despite being very extensive. (Think the Haib copper project in the South). But even with the richest deposits, there are cost ceilings which the mine owners can not ignore. Commodity price is one, yield is another, labour is the third as we are seeing in South Africa, overheads also rank among the top five, and finally, the cost of logistics can make or break a mine.
With many countries in Africa vying for the same investors to entice them into the extractive sector, I believe we need to keep a close watch on the overall cost structure, especially where it originates in statutory obligations. What is the use of all the uranium in the desert if a lack of water forces a mine to shut down?