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!
Fool contributor Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of Vale and Sturm, Ruger. Try any of our Foolish newsletter services free for 30 days. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.