Difficulties facing the province’s mining industry are “medium-term”
- 29 Jul 2016
- The StarPhoenix
- ALEX MACPHERSON
Mining drags on Sask. economy
Schools, health, jobs hit by weak resource sector
We don’t think that any changes in the royalty structure would be a good idea given where we’re at in the marketplace
Extremely weak commodity prices continue to ravage Saskatchewan’s mining companies, leading to drastically reduced revenues, production shutdowns and layoffs — as well as broader effects throughout the provincial economy.
“It affects us all because we live in a commodity economy,” said Brooke Dobni, a professor of strategy at the University of Saskatchewan’s Edwards School of Business.
“We’ve done very well, but what allows you to do well can also come back to bite you, and a lot of our provincial coffers, our provincial income, is from (resource) royalties,” he added.
That means public institutions, from universities and colleges to hospitals and schools, can expect cutbacks as the provincial government struggles to do more with less money, he said.
Earlier this month, the provincial government reported a $675-million budget deficit. Finance Minister Kevin Doherty attributed the sharp shift in its projection to significant declines in oil and potash prices, on which the government collects royalties.
“That’s what can throw you from a $106-million surplus to a $675-million deficit in one year,” Doherty told the Regina LeaderPost on July 21.
Dobni said while people employed by the major mining companies are directly affected by the companies’ decisions, weakness in the resource sector will force virtually everyone in the province to “live with less.”
Saskatchewan is home to one of the world’s largest potash companies — Potash Corp. of Saskatchewan — and several others, including Mosaic Co. and Agrium Inc., have significant operations in the province.
Dobni said those companies — which collectively employ thousands — have been feeling and responding to the effects of extremely weak prices for more than a year in the only way they can: cutting costs. “The price of a tonne of potash has dropped threefold, almost, and of course their costs haven’t gone down. Wages stay the same or go up. The cost of doing business stays the same or goes up. That’s what we’re seeing here, is a real cash flow problem.”
In October 2015, “current market conditions” led Mosaic to cut 46 jobs at its Colonsay mine southeast of Saskatoon. Earlier this month, the Plymouth, Minn.-based company implemented a five-month production halt at the mine and laid off 330 workers.
PotashCorp has also felt the effects of weak fertilizer prices, which have fallen from about US$900 per tonne in 2008 to less than US$300 today and are projected by the government to average just over US$200 this year.
In January, the Saskatoon company announced plans to reduce its production costs by permanently closing its Picadilly, N.B., mine. A month later, the fertilizer giant implemented temporary production halts at its Allan and Lanigan mines.
On Thursday, PotashCorp cut its annual profit forecast by about a third, slashed its dividend by 60 per cent and reported second quarter earnings of US$121 million, a 71 per cent plunge from $417 million it earned in the same period last year.
Last month, Canpotex Ltd. — the international marketing arm of PotashCorp, Mosaic and Agrium — said “economic and commercial considerations” led it to abandon plans to build a $775 million export terminal at Prince Rupert in B.C.
BHP Billiton Inc., which is building an enormous potash mine east of Saskatoon, cut 76 administrative jobs in late December. It plans to bring the yet-to-be-approved Janzen project into production after 2020.
Recent potash production cuts are not expected to cut into the province’s bottom line, as its 201617 budget royalty projections have “quite a bit of caution” built into them, Finance Minister Bill Boyd said earlier this month.
However, prices — which most expect to improve eventually — led the government to slow its planned review of the potash royalty regime, under which the government collects money for each tonne of fertilizer extracted in the province.
“The royalty review will continue to go forward, but we’re certainly slowing it down right now. We don’t think that any changes in the royalty structure would be a good idea given where we’re at in the marketplace,” Boyd said.
The province’s uranium industry, which Cameco dominates, is also struggling amid an oversupplied market, which has yet to recover from the 2011 Fukushima Daiichi nuclear disaster, which caused prices to plummet by about 60 per cent.
In April, Cameco Corp. made the decision to permanently close its Rabbit Lake uranium mine and concentrate on its other production facilities, which are cheaper to operate. The strategic move resulted in the loss of about 500 jobs.
On Thursday, the Saskatoonbased nuclear fuel company reported a $137 million second quarter loss, which it attributed to weak prices and a $124 million impairment charge. By comparison, Cameco made $88 million in the same period last year.
“We’re about five and a half years into a really soft market, and we’ve had to learn to live with that,” Cameco president and CEO Tim Gitzel said in an interview. “That has a ripple effect into the secondary and tertiary industries, but we’re a resilient lot here in Saskatchewan. We know that there can be real good times — and there have been real good times — and then we know there’s not so good times.”
While mine closures are devastating for the people who experience them, they represent a small fraction of the roughly 10,000 jobs gained and lost in Saskatchewan each month, according to statistician and Sask Trends Monitor publisher Doug Elliott.
What’s more important for the provincial economy are the “spinoff effects” from major companies cutting spending, which affect the hundreds of smaller firms that support the mining industry, Elliott said. He doesn’t believe resource prices will recover anytime soon.
Dobni takes a similar view, adding that while people in Saskatchewan are generally optimistic, the difficulties facing the province’s mining industry are “mediumterm.”