With nickel reserves running out, Sudbury is an expensive place for Vale to do business - Northern Ontario Business

Vale's Dino Otranto claims it can't be business as usual, not when the Sudbury base metal mining operations he oversees "occupy the highest cost position of any mines on the planet."

With operations at a standstill heading into the fourth week of a strike by Steelworkers Local 6500, Vale's chief operating officer for its North Atlantic Operations and Asian Refineries took to the web on June 17 for a virtual town hall meeting, spelling out the shape the business in the Sudbury basin and the "tough conversations" that need to take place.

The web event was attended by 956 registered attendees for the sessions. Management only addressed a portion of the 115 questions sent in.

"The past is not the recipe to sustain this, moving forward," Otranto said.  "And there is no consultant that's going to come in and give us the silver bullet.

"The 100-year ore bodies are no longer."

While there remains an abundance of untapped ore in the Sudbury basin, Otranto said it's not economic unless they can tackle the cost challenges in front of them.

"This is a problem we need to solve."

Cost of business rising

The company said it's facing declining ore reserves in the Sudbury camp, a high cost of doing business, with the need to reinvest in operations, exploration drilling and development to find, prove up and access new sources of ore.

With ore reserves expected to run out at three mines over the next 10 years, Otranto said: "This is a hurdle that we must solve."

In the town hall discussion, a listener suggested Vale is making billions and employees are only seeking their fair share.

Both Otranto and Gord Gilpin, the company's North Atlantic head of processing, produced a pie chart indicating Vale's worldwide financial performance, its Ontario operations – meaning Sudbury – make up only two per cent of the Brazilian miner's business in 2020, slipping from five per cent in 2016.

"I'm not sure people really understand this message," said Otranto. "Two per cent is where we're at."

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More than 90 per cent of the cash generated by Vale, globally, comes on the back of iron ore sales, followed by copper and then nickel, Otranto said.

"Here in Sudbury, we're only a part of that nickel story," he said, with other company mining operations in Thompson, Man., and Voisey's Bay, Labrador.

Vale's proven and probable mineral reserves in the Sudbury basin have dwindled from more than 100 million tonnes in 2011 to 50 million tonnes in 2020.

Otranto said mining companies operating in the Sudbury basin all face the same challenges. Ore bodies are deeper, are more seismically active, have lower grades, and have less platinum group metals and copper in the mix.

Vale's current operations in Sudbury will make up less than 15 per cent of the total operation looking out over the next 10 years.

Multiple projects now in development

To extend the company's future in Sudbury, there are some bright prospects in the development pipeline, though, said Gilpin.

Already moving forward is the first of four phases of the much talked-about Copper Cliff Mine, the upcoming Victor Mine joint venture with Glencore, plus a few other undisclosed projects that all bode well for the company's future for decades to come.

"Very good stuff," Gilpin said.

But Sudbury is treated as a standalone business unit in Vale's global stable of operations. And, to date, these future mines don't meet the company's economic threshold "to get these projects over the line," he said.

But when it comes to producing nickel in the basin, Otranto said Vale Sudbury is on the "wrong side of the cost curve," meaning the dollars per tonne it costs for the company to produce nickel. 

"Essentially, it drives the viability of the business. It also talks to the potential price that we can get for our product."

In producing a graph, comparing the cost per tonne of Vale's Sudbury operations to  other equivalent nickel operations in Canada and around the world – including their crosstown rival in Glencore – Otranto said: "We are amongst the highest cost in our industry of extracting nickel and selling to the market."

The graph showed Glencore's Sudbury and Raglan, Quebec, operations in the $3-per-tonne range while Vale's Sudbury facilities are close to $15 per tonne.

Another graph showed Sudbury operations among the highest cost operation in the world, across all mineral commodities in hardrock underground operations, removing those countries where labour is cheap.

"And I really urge you to have a look at some of these operations. Again, they're in our backyard. The Kidd Creeks of the world." 

When it comes to seeking investment for the future of Sudbury operations, and the next generation of mines, "banks look at this," Otranto said.

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Otranto called the Copper Cliff Mine a "great ore body" that won't come to production "unless we change, and it's been kicking around for more than 10 years. And that's the reality of what we have."

Pension benefits will 'balloon' to $1.2 billion by 20140

Otranto addressed the "hot topic" for Local 6500, namely Vale's current and future pension benefits obligations.

The company's post-retirement benefits obligations, as of Jan. 1, were running at US$868 million. That's scheduled to balloon to nearly $1.2 billion by 2040, growing at a rate, Otranto said, "that is out of our control.

"Think about that in relation to the two per cent (company-wide) that we earn."

Though respectful of the history of the contribution of Sudbury miners, he pleaded with employees to understand how the current structure of how retirement benefits are being administered puts them in a financial bind that negatively impacts the company's ability to source capital to invest in mines that are running out of ore.

"It's for my three boys and your children in this industry. This is a problem we need to solve."

Otranto said addressing the pension liability issue is "but one step to turning around this business."

Additional attention is needed to focus on labour costs, productivity, maintenance, sustaining capital, equipment, seismic risk and other aspects that make mining in Sudbury economically competitive.

"The liability is an important one but it's not going to get us anywhere near what we need to be doing," he said.

Otranto said there are bright spots with Vale's Voisey's Bay operations on the East Coast with the first ore of two brand new mines there. When the business economics are right, Otranto said that drives further investment in drilling.

He mentioned underground development rates at Thompson created such a problem that it threatened the longevity of the mine's life in that community. But teamwork in northern Manitoba over the last 18 months improved the core dollar-per-tonne metric which afforded an opportunity to re-look at the the life of the mine.

"And think about what the means to our communities," Otranto said.

"This is literally about creating the operation for the next generation. And it's somewhat on our shoulders if we can't do that."

Otranto said he's encouraged by what he sees in the development pipeline in Sudbury, Thompson, and Voisey's Bay, but "tough conversations" need to take place to solve these issues.

"I'm in this. We are gonna solve this but we cannot do it with fighting. We gotta get back to the table and we gotta solve these very real problems.

"When we come together and solve them, the future is very bright. And I stand by my words. However, to get to that place, we have to come together to solve this."

Improvements needed to streamline operations

Gilpin said there's much they can learn from their peers in the mining industry but also mentioned there's "untapped potential" from within their ranks to solicit input from the shop floor.

"But, ultimately, it's about dollars per tonne." 

During his remarks, Otranto gave the indication he was dealing with a workforce that was resistant to technological change and new processes.

The company has introduced some improvements through its Vale Production System (VPS), a policy and best practices management model, considered a 'high level' topic with senior management, that Otranto insists will make Sudbury operations safer, produce more tonnes, and keep costs under control.

VPS was needed to keep pace with improvements made by other mining companies, he said.

"We don't have the discipline in our system that our competitors do."

Two years ago, he said, only three per cent of the consumables used underground went through the company's warehouse system. That number has since improved to the high 20s or 30s. "That number should be 100 per cent."

According to Otranto, Vale Sudbury has a $160-million "shadow inventory" being warehoused outside of their operational processes.

"I can speak with authority on this: I came from one of those competitors; those things don't exist elsewhere."

Otranto said he often fields the question whether the introduction of autonomous technologies will equate to job losses. He views technology and innovation as part of the solution to unlock the Sudbury basin's "amazing potential" and a problem-solver that ultimately makes mining safer.

Vale has one of the world's largest LTE (long-term evolution) underground wireless communications in the world, he said proudly.

"We must embrace the technology that's already out there and apply it."

Gilpin added maintenance and sustaining capital costs in Sudbury are high, but aging infrastructure is a given considering Vale's century-old history of operations here. Utilizing new technologies offers an opportunity to keep production costs under control, he said.

In addressing what's next with the labour situation, Otranto vowed not to have a repeat of the lengthy 2009-2010 strike.

"The key is we're not going to be like we were in 2009. We're not going to the media or the war; we're going to stick to our values. We're gonna be open, we're gonna be transparent, we're gonna be respectful, but we need to come back to the table. 

"We're there; we're waiting. We need to solve these very real problems that this business has together. For me, that's the next step. Let's reunite and solve these problems."

Vale's presentation can be accessed here.

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With nickel reserves running out, Sudbury is an expensive place for Vale to do business - Northern Ontario Business
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