Arctic has great riches, but greater challenges

IQALUIT, Nunavut/BAKER LAKE, Nunavut - At the rim of the Arctic Circle in Canada, gold mining firm Agnico-Eagle is learning how tough it is to operate in a remote region with temptingly large, but frustratingly inaccessible, reserves of oil, gas and minerals.

By (Reuters)

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Published: Wed 31 Aug 2011, 6:36 PM

Last updated: Tue 7 Apr 2015, 7:57 AM

Commentators rarely mention nightmarish logistics, polar bears and steel-snapping cold when they confidently predict that as the Arctic warms up, melting sea ice and shorter winters will open up the expanse to exploration.

But the rosy words obscure the reality of working in an icy wasteland that stretches across Russia, Scandinavia, Alaska and Canada. And rather than making life easier, the warming of the Arctic and the thawing of its permafrost could make operating here even more complicated.

A closer look at the far northern Canadian territory of Nunavut, one of the most promising areas for exploration, reveals challenges so huge that the Arctic may well turn out to be a niche market where big firms with a serious tolerance for risk and adversity develop a handful of major deposits.

For all the talk of a bonanza there is just one mine working in Nunavut today - Agnico-Eagle’s Meadowbank operation, which has cost a total of $1.5 billion so far. The gold mine, literally in the middle of nowhere, is surrounded by dikes that keep a series of shallow lakes at bay. Temperatures plunge to minus 50 degrees centigrade (minus 58 Fahrenheit) in winter, bringing with it the risk of almost instant frostbite and mechanical failures.

Most workers have to be flown in, as long as the often foul weather cooperates. The only land access is a gravel road the company built to Baker Lake, a small town 70 miles (110 km) to the south. The road - which was supposed to cost $275,000 a km to build - came in at $550,000 per km.

It’s no surprise that Agnico-Eagle chief executive Sean Boyd concedes such projects are not for the faint of heart.

“With assets up here in the north, you need big tonnage operations, you can’t have a small footprint given the cost structure,” he said.

Short shipping season

There is virtually no infrastructure in Nunavut, a 810,000 square mile (2 million square km) expanse of rock and ice twice the size of western Europe. Dotted across the territory is a largely unskilled aboriginal Inuit population of just 33,000.

Heavy equipment, spare-parts and diesel fuel all arrive during a short summer shipping window, first by barge and then along that costly road.

“It’s hard to believe we are in the geographic center of Canada, because simple things like parts for an emergency breakdown have to be flown in,” said Agnico-Eagle’s President Ebe Scherkus. “What the last 16 months has taught us is there’s long-term planning and then there’s very long-term planning on a site like this.”

In March, a fire destroyed the kitchen and forced the firm to evacuate over 300 employees and operate the mine with a skeleton crew. A new multimillion dollar kitchen will arrive later this summer.

Such travails help explain why Nunavut was for so long an insignificant player, although there are other problems too.

The harsh climate closes down many exploration sites from October to March. Polar bears prowl and snowstorms slash visibility. There is little or no sunlight for three months a year in the far north and low winter temperatures mean metal starts to snap, oil thickens and helicopters stop flying.

Even in the summer months, the weather can be a challenge for pilots. A First Air Boeing B-737 jet crashed near the Nunavut settlement of Resolute Bay on Aug 20, killing 12 people. Eyewitnesses said the area had been foggy at the time.

And if that was not enough, companies will need to work out how to access their sites in warming weather, and how to cope with the gradual thawing of the permafrost, the frozen layer of soil that sits about two meters under the surface.

“We know how to build on permafrost, we know how to build on non-permafrost. What we don’t know how to do is build on permafrost that will thaw,” said University of Ottawa professor Antoni Lewkowicz, a leading permafrost expert.

Softening permafrost

In parts of the Canadian and U.S. Arctic, buildings are already starting to collapse and roads crumble as the frozen ground warms up.

Yet for all the challenges, high commodity prices are persuading companies to look again at deposits which were once too expensive to exploit and there is something of an exploration boom. Companies spent C$30 million ($30.6 million) on exploration in Nunavut in 1999, a figure that is set to hit C$325 million this year.

Nunavut has significant advantages over its Arctic rivals such as Russia, Alaska and Norway — land tenure is secure, the politics are stable, the territory is vast and has a nicely varied geology.

“It is what we like to call in exploration elephant country,” said Brooke Clements, president of junior mining firm Peregrine Diamonds . “There’s still the potential to find really big world class deposits.”

Yet geological mapping is grossly inadequate and prospecting from scratch so costly that it’s hard know what riches Nunavut may still be hiding.

Peregrine found a promising series of diamond-bearing kimberlite rock formations near Iqaluit after three summers of collecting up to 30 soil samples a day by helicopter, at the cost of C$1,000 per sample.

The federal government, keen to kick-start development, has launched a project to examine 20 relatively small areas deemed to have potential, and then release the data.

“We find a haystack and industry finds the needle,” said Linda Richard, the project coordinator. That said, most of the major deposits now under consideration have been known about for decades.

Along with Peregrine and its joint venture partner BHP Billiton, Xstrata , ArcelorMittal , Areva , Newmont and China’s MMG are variously pursuing gold, diamonds, iron ore, lead, zinc and uranium in Nunavut.

Staggering sums needed to start production

Still, the amount spent on exploration is tiny compared to the staggering sums needed to start production. Newmont has spent $2 billion so far on its Hope Bay gold deposits in western Nunavut and there is no guarantee a mine will ever be built.

Baffinland, owned 70 percent by ArcelorMittal, is proposing to invest C$4.1 billion on a 149 km railway and two ports - not to mention a special fleet of huge ships - to exploit the huge Mary River iron ore deposit on Baffin Island. This is slated to produce 21 million tons of ore a year for 21 years.

The message is clear: Nunavut is not the place for small fry.

“It is inherently the case that operating in the North ... is more expensive and so it’s generally the larger organizations that can take on those green field developments,” said Baffinland president Tom Paddon.

Baffinland’s proposed railway is in an area of relatively cold permafrost, but that could change.

“They certainly have to be taking climate change into consideration ... It’s not a terribly warm place but the potential is that it could become a great deal warmer in the next century,” said Lewkowicz.

“There’s a real economic question, as well as a science and engineering question, associated with building on permafrost that if not going to thaw, is at least going to warm.”

One solution is to drive piles deep into the frozen layers to support roads, buildings and railways. The other is to install a series of costly thermosiphons, giant special coolers that help keep the ground firm.

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