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This Massive Gold Project Is Doomed

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Perhaps Anglo American saw the writing on the wall. After the Environmental Protection Agency opposed the massive Pebble copper project in Alaska that Anglo owns with Northern Dynasty Minerals (NYSEMKT: NAK  ) , the miner probably reasoned it was foolhardy to put more of its limited capital at risk. This week, it announced the decision to pull out of the project.

As commodity prices have collapsed, Anglo has been hard-pressed to justify how it has been spending its money. While in 2012 it inked a 10-year deal to supply Ternium  (NYSE: TX  )  with iron ore from its Minas Rio project in Brazil, delays and skyrocketing costs are sapping the miner's performance. The project is three years behind schedule and more than $6 billion over budget, and that alone was enough to give shareholders leverage to oust Anglo's former CEO earlier this summer. Her replacement has donned his green eyeshades looking for ways to cut costs.

Developing Pebble would take another $5 billion, and Anglo and Northern Dynasty have already spent about $680 million since 2007 on moving the project to its current stage. But environmental opposition is mounting, with the usual activists and celebrities joining together, along with also others groups you wouldn't expect to weigh in, such as jeweler Tiffany and gun manufacturer Sturm, Ruger.

Pebble sits on Bristol Bay, at the headwaters of a major spawning ground that sees 40 million salmon swim in every year. The EPA spent $2.4 million to fund a study saying the project would wreak catastrophic damage to the area even before the partners had brought the matter to the regulatory agency. Such action suggests there will be a systemic impediment to obtaining the necessary permits, which in this period of depressed commodity prices makes moving forward uneconomical.

Anglo's not alone in pulling back the reins on far-flung expansion projects. Across the industry, companies are either shelving plans, cutting capital expenditures to finance them, or laying off workers. Glencore Xstrata has called for a new "age of austerity for miners," which are rising to the challenge, with BHP Billiton (NYSE: BHP  ) suspending a $30 billion mine expansion in Australia as well as delaying a $14 billion potash expansion in Canada. Rio Tinto (NYSE: RIO  ) sold its nickel Eagle Mine project in Michigan, and Vale (NYSE: VALE  ) has walked away from projects in Argentina and sold assets in Chile.

Despite the hurdles, the lure of Pebble has been a siren song. According to IHS Global Insight, the project would create some 4,700 jobs in Alaska during construction, 2,900 during its 30-year production cycle, and an additional 2,750 through various subsequent development phases. It would create tens of thousands of additional jobs in the lower 48 while producing $2.4 billion annually to the economy and $9 billion in new state and federal tax revenues.

The mine itself has the potential to produce as much as 55 billion pounds of copper, 67 million ounces of gold, and 3.3 billion pounds of molybdenum during its nearly 80-year life. It would have become the world's biggest open-pit mine, but that seems to be in jeopardy as Northern Dynasty doesn't have the financial wherewithal to alone pay for the project.

The miner has said it will soldier on with permitting but will undoubtedly need to find a new partner if it ever hopes to finish the process. While Anglo American will pay a $300 million breakup fee, that's small solace to Northern Dynasty, which lost a third of its market value on the news. 

With environmentalists, industry, and the regulatory apparatus arrayed against it, the Pebble project seems to be one filled only with fool's gold now. Its only hope for salvation is sustained recovery in the price of gold, which would make it a more tenable project to wage battle over.

Gold still glitters
Fortunately, I do think we're on the brink of a new bull run in gold. Whether it's tomorrow or next year, I can't say, but the structural imbalances that have been built into the system suggest it's going to come sooner or later. The Motley Fool's new free report, "The Best Way to Play Gold Right Now," dissects the recent volatility and provides a guide for gold investing. Click here to read the full report today!

Read/Post Comments (6) | Recommend This Article (6)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On September 21, 2013, at 5:38 PM, PeakOilBill wrote:

    If I were in a position of power in the Chinese government, I would be quite interested in that much copper, gold and moly, in a country with the rule of law, where you are nearly certain that your mine will never be seized by anyone. Even if it took another 10 years to move the first rock, it would be worth it. There is no substitute for copper.

  • Report this Comment On September 21, 2013, at 5:40 PM, Dadw5boys wrote:

    Why would the Pebble Mine not even consider starting the mine operations on the back side of the mountain ? Why did the main operations have to be on the river side where Salmon and other game fish run yearly.

    I don't see any reason why they could not operate from the back side if there is really gold there.

  • Report this Comment On September 22, 2013, at 12:13 AM, TutoringServices wrote:

    The only Gold Mining company with enough technical expertise, which is large enough and has enough financial resources to partner in the Pebble Mine venture, is obviously Newmont Mining (NEM) that recently hired a brilliant new CFO ! Look to it !! Sept 21, 2013 @ 9:12 pm PDT.

  • Report this Comment On September 22, 2013, at 2:30 AM, Wh0tsUp wrote:

    For a 30-year receipt of gold and fools, we have a pernament and ever-needing maintenance of pollution pools of dams, fifty stories high, 5 dams, about the richest grandeur of natural evolutionary whiles possible. $500 million current yearly earnings exist in recreational and business salmon fishing. This is a lifesource for all animals and native humans within 100 miles; a conjunction of four major rivers and the largest spawning ground of salmon in the world. If we were to say balance, is it in the copper and metalic greed pouring over an earthin dam busting, reaching five empire state buildings, upon the volcanic debates of Mt. ReDoubt and Mt.Cleveland, already smokin' and burnin', (amid 44 volcanoes in the extended land mass curl) to burst upon the reasoning of profit? No!

  • Report this Comment On September 22, 2013, at 4:36 AM, sockeyemark wrote:

    Northern Dynasty would be far ahead to spend its little capital on a more feasible project. In this day and age, Pebble will meet much resistance from project that endangers such a World Class resource as the Bristol Bay sockeye run. In the long run the Bristol Bay sockeye run far exceeds any short term mine in sustainability and jobs and income.

    It just so happens that the rest of the world agrees that the mine is simply in the wrong place......benefits don't outweigh the risks.....

    Anglo did the right should Northern Dynasty...

  • Report this Comment On September 24, 2013, at 2:30 PM, jrj90620 wrote:

    Maybe,NAK can charge admission,like the Arkansas diamond area,for visitor/vacationers to keep,whatever gold they find.

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