The Globe and Mail - 30.07.2019

B2| REPORTONBUSINESS OTHEGLOBEANDMAIL | TUESDAY,JULY30,

miners still can’t control project costs.

“That perception continues, and [news]

like Turquoise Hill’s just reinforces it,”

said Glenn Ives, chair of Deloitte and

head of the firm’s North American met-

als and mining practice.

Miners have a history with cost over-

runs, particularly with megaprojects.

Famous examples of developments

with runaway costs include Barrick Gold

Corp.’s Pascua-Lama project in the

Andes, where total spending jumped to

$8-billion from $1.5-billion – and then

the project was put on hold. Anglo

American PLC’s Minas-Rio iron ore pro-

ject in Brazil also took four years longer

to build than expected and cost twice its

original budget.

A 2015 study by Export Development

Canada, which helps finance a number

of mining projects in riskier regions,

found that between 1994 and 2015

mining projects had an average cost

overrun of 37 per cent.

Megaprojects that cost $2-

billion or more to build

had an average cost over-

run above 60 per cent.

For many years, the

runaway spending was

masked by rising metals

prices. Once the supercy-

cle crashed, however, many miners’ bal-

ance sheets were left loaded with debt.

Between 2015 and 2018, the industry fo-

cused on paying down debt and selling

assets. Miners also slashed their annual

spending in order to boost free cash

flow, with capital expenditures plum-

meting in 2017 by roughly two-thirds

from their peak of US$80-billion across

the industry in 2012, according to a

study by Deloitte.

With their balance sheets now in or-

der, the sector is on much better footing.

Mining executives have also promised

that they’ve learned from their past

blunders.

“Many mistakes were made in the

haste to bring new supply on line as

soon as possible,” some of the world’s

largest miners acknowledged in a joint

study by consultancy Spencer Stuart

Soaring construction costs at one of the
world’s most promising copper projects
have hit the mining industry, creating
uncertainty about how much the sector
has truly changed.
Canada’sTurquoise Hill Resources
Ltd., which owns two-thirds of the Oyu
Tolgoi (OT) project in Mongolia, unex-
pectedly announced this month that an
underground expansion of its mine will
take much longer, and will cost much
more, than originally planned.
Already expected to cost US$5.3-bil-
lion, the OT expansion will now require
up to an additional US$1.9-billion in
capital spending to complete. Sustain-
able production from the project has al-
so been delayed by 16 to 30 months
from original estimates, to between
May, 2022, and June, 2023.
On a conference call, Turquoise Hill
attributed the woes to geotechnical is-
sues and ground conditions. “We must
stop and pause and take the appropri-
ate action, and that’s what we’re doing,”
chief executive Ulf Quellmann said.
Global giant Rio Tinto PLC owns 51
per cent of Turquoise Hill and operates
the OT project, having acquired the con-
trolling stake from Canadian mining
financier Robert Friedland. Turquoise
Hill used to be called Ivanhoe Mines Ltd.
Political risk and heavy capital re-
quirements have weighed on Turquoise
Hill’s shares for years. That pressure on-
ly compounded after the soaring costs
and major delay were announced on Ju-
ly 15, sending the stock plummeting an-
other 46 per cent since.
Turquoise Hill now has a market val-
ue worth $1.5-billion, down from $13.3-
billion at the height of the commodity
supercycle in 2011.
The update has bolstered fears that

and the Center for Copper and Mining

Studies (CESCO) in 2018. “Ore bodies

must be adequately understood and

tested, engineering advanced and host

communities fully consulted and sup-

portive before projects are approved.”

The hope is that this new discipline

will bring generalist investors – or those

that do not specialize in metals and

mining – back to the sector. At the start

of 2011, the materials subindex account-

ed for 22 per cent of the S&P/TSX’s total

value. Today, it makes up just 11 per

cent.

OT’s problems, though, serve as a set-

back. Turquoise Hill declined to com-

ment for this story.

The timing is particularly bad be-

cause many miners must start explor-

ing and developing again in order to re-

place depleting assets. “At some point, a

new capex [capital expenditure] boom

is going to come along to plug a supply

shortfall,” Simon Red-

mond, the commodities

head at rating agency S&P

Global, told Deloitte for its

study last year.

The irony is that OT is

needed to provide new

copper supply. It is a mas-

sive project, and by 2027 it

is expected to be the world’s third-large-

st copper mine. Crucially, it is also pro-

jected to have some of the world’s low-

est-cost production once it is up and

running.

However, its expansion requires

block caving, which is an extremely

technical type of underground develop-

ment. The complexity has led to extra

costs and a major delay – conjuring up

memories of all the sector’s construc-

tion problems over the past decade.

Mr. Ives of Deloitte says he hopes in-

vestors ultimately see OT as an outlier,

because it is “a very difficult project in a

very difficult location,” he said. “This is

a fantastic deposit, it’s just a hellishly

difficult place to operate.”

TURQUOISE HILL RESOURCES (TRQ)

CLOSE: 73¢, DOWN 2¢

TurquoiseHill’scostwoes

stokemining-sectorconcerns

Mongolianproject’ssoaring

pricetagandmajordelays

reinforceinvestorwariness

TIMKILADZE

TurquoiseHill

attributedthewoes

togeotechnical

issues and ground

conditions.

MONTREALQuebec’s securities regulator

was cleared of conflict of interest allega-

tions Monday after an independent

audit in connection with the body’s

investigation ofSNC-Lavalin Group Inc.

Mario Bilodeau, appointed by the

province in April, says a probe by the

Autorité des marchés financiers into

SNC-Lavalin executives was “adequate”

and that his “conclusions invalidate the

allegations of public wrongdoing.”

The audit was launched after allega-

tions in a Quebec newspaper – which

cited two anonymous former employ-

ees of the financial watchdog – that

their colleagues had “closed their eyes”

to parts of the probe.

Dubbed Project Falcon, the regu-

lator’s investigation examined financial

documents and transactions carried out

by some SNC-Lavalin managers, in-

cluding Michael Novak, spouse of for-

mer Quebec Liberal justice minister

Kathleen Weil, between 2011 and 2012

after suspicions of “possible accounting

malpractice and insider trading,” Mr.

Bilodeau said.

The watchdog’s senior director of

investigations, Frédéric Pérodeau, was

named in the allegations.

Media reports say the lawyer by

training had provided counsel to SNC-

Lavalin between 2010 and 2012, and

later oversaw the probe into his previ-

ous employer.

A total of 32 people were interviewed

as part of Mr. Bilodeau’s audit, which

concluded Mr. Pérodeau was not in a

conflict of interest and that “the Au-

thority can be proud of the way all the

professionals have accomplished their

tasks and respected their duties.”

THECANADIANPRESS

AUDITOFQUEBECSECURITIES

WATCHDOGCLEARSITOF

WRONGDOINGINSNCPROBE

ther regulatory green lights later this

year.

Authorities across the globe banned

the Boeing aircraft from their skies last

spring after two crashes – in Indonesia in

October, 2018, and Ethiopia in March –

killed all 346 passengers aboard, includ-

ing 18 Canadians.

WestJet says it found replacement air-

craft for about 700 of the 1,000-plus 737

Max departures scheduled in June, the

final month of the second quarter.

WestJet Airlines Ltd.chief executive Ed
Sims says the grounding of the Boeing
737 Max is having a “substantial nega-
tive impact” on the airline, even as the
company reported robust earnings in its
first full quarter without the fuel-effi-
cient jetliner and on the cusp of its ac-
quisition byOnex Corp.
In a phone interview, Mr. Sims said
the grounding – now expected to contin-
ue at least through November – has
forced WestJet to increase spending on
fuel and cut its routes.
Mr. Sims declined to quantify the fi-
nancial hit, saying he is in discussions
with Boeing about the “substantial loss”
of WestJet’s 13 Max 8s, which comprise
about 10 per cent of the carrier’s seat ca-
pacity. WestJet nonetheless beat analy-
sts’ expectations with a 380 per cent
profit increase year over year to US$44.3-
million last quarter, as a boost in passen-
gers bumped up revenue 11 per cent to
US$1.21-billion.
Analyst Cameron Doerksen of Na-
tional Bank of Canada said in an investor
note the grounding will hinder capacity
growth and raise expenses for Canadian
airlines, but that lower jet fuel costs and
a stronger Canadian dollar may help to
offset those headwinds.
On Friday, Alberta’s superior court ap-
proved the US$3.5-billion deal between
WestJet and Onex Corp., which expects
to complete the buyout following fur-

Mr. Sims said a sale of regional carrier

Encore or budget offshoot Swoop are

not on WestJet’s agenda at the moment,

and that no layoffs of its 14,000 employ-

ees will stem from the buyout.

THECANADIANPRESS

WESTJET(WJA)

CLOSE:$30.73,UP3¢

ONEX(ONEX)

CLOSE:$80.37,DOWN40¢

WestJetCEOsaysBoeing737Maxgrounding

a‘substantialloss’aheadofbuyoutbyOnex

CALGARY

WestJetBoeing737Maxaircraftremaingroundedattheairline’sfacilitiesinCalgaryin

May.CEOEdSimssaysthegrounding,expectedtolastuntilNovember,hasforced

WestJettoboostspendingonfuelandcutroutes.JEFFMCINTOSH/THECANADIANPRESS

Nutrien Ltd.missed estimates for

quarterly earnings and cut its full-year

adjusted profit forecast on Monday, as

the fertilizer maker struggles with

recent floods in the U.S. Midwest that

delayed planting as well as a pro-

longed trade war.

Record floods devastated a wide

swath of the U.S. farm belt – including

Iowa, Nebraska, South Dakota – in

March delaying spring planting season.

“U.S. weather in the first half was so

severe it nearly eliminated global

demand growth for crop inputs,” chief

executive Chuck Magro said in a state-

ment.

The company also lowered its 2019

potash sales volume forecast to 12.

million tonnes to 13 million tonnes

from 13 million tonnes to 13.4 million

tonnes.

Chinese demand could be delayed

by the tariffs from the Sino-U.S. trade

war, while a below normal monsoon

season is weighing on demand in

India, Nutrien said.

The trade war has also depressed

U.S. farm incomes, leaving growers

less money to spend on seed and

fertilizer.

Weather and lower crop planting hit

North American spring potash de-

mand of which only a proportion is

expected to be made-up in the fall,

the company added.

Nutrien lowered its 2019 adjusted

net earnings forecast to $2.70 to $3 a

share from $2.80 to $3.20 a share and

adjusted core earnings to $4.35-billion

to $4.70-billion from $4.4-billion to

$4.9-billion.

The company, formed by the merg-

er of Agrium Inc. and Potash Corp. of

Saskatchewan in early 2018, said net

income from continuing operations

rose to $858-million, or $1.47 a share,

in the three months ended June 30,

from $741-million or $1.17 cents a

share, a year earlier.

Excluding items, the company

earned $1.58 a share, missing an esti-

mate of $1.60, according to IBES data

from Refinitiv.REUTERS

NUTRIENMISSESPROFITTARGETS,

CUTSFORECASTONTRADEWAR

ANDWEATHERTROUBLES

Blackstone will have had a pro-
portional gain.
Still, Thomson Reuters shares
fell 3 per cent to US$68.30 on the
New York Stock Exchange on
Monday after it confirmed talks
to sell Refinitiv to LSEG in an all-
share deal that would transform
the exchange operator into a
larger provider of financial data.
They had gained sharply on Fri-
day in response to a report about
the talks in the Financial Times.
The parties have since acknowl-
edged they are close to a deal. It
could be announced as early as
this week.
Despite potential gain if the
deal is done, Friday’s price for
Thomson Reuters above US$
was overvalued, Canaccord Ge-
nuity analyst Aravinda Galappat-
thige said. Given a standard 13.5-
times multiple of enterprise val-
ue to earnings before interest,
taxes, depreciation and amortiza-
tion, its Refinitiv interest would

have to be worth US$11.5-billion

to get to the current stock price,

he wrote in a research note.

Meanwhile, a deal faces regula-

tory risk, including antitrust con-

cerns. “And there is uncertainty

associated with the transaction

from a timing, currency and fi-

nancial perspective,” Tim Casey,

analyst at BMO Nesbitt Burns,

said in a note to clients. Mr. Casey

lowered his rating to “market per-

form” from “outperform.”

Thomson Reuters shares are

up about 50 per cent since the

company announced the deal

with Blackstone and its partners,

which include Canada Pension

Plan Investment Board and Sin-

gaporean sovereign wealth fund

GIC Private Ltd. Refinitiv cashed

out of part of its divisions in April

with a US$1.1-billion initial public

offering of its Tradeweb electron-

ic exchange.

Thomson Reuters is more than

65-per-cent owned by Toronto-

based Woodbridge Co. Ltd., the

Thomson family holding compa-

ny that also owns The Globe and

Mail.

The Refinitiv partners would

own 37 per cent of the company

and have 30-per-cent voting con-

trol, LSEG said. Thomson Reuters

would own about 15 per cent. The

combined operation would have

had annual revenue of US$7.4-bil-

lion in 2018.

LSEG shares jumped 15 per

cent in London as investors wel-

comed the acquisition focus on fi-

nancial data after failed attempts

to acquire other exchanges

around the world, including the

Toronto Stock Exchange in 2011

and Deutsche Boerse in 2017. The

latter deal, which was valued at

US$31-million, fell apart after Bri-

tain voted to exit the European

Union.

Rather than expanding trading

capacity, the takeover of Refinitiv

would allow it to capitalize on a

digital transformation taking

place in securities and commod-

ities markets and rising brisk cus-

tomer demand for advanced data

and analytics.

“A successful deal here, subject

to regulatory approval, would

move the LSE into the position of

being a market leader in market

data and financial information

and the revenues that would gen-

erate, enabling it to take on the

likes of Bloomberg, which has a

huge presence in this area and lit-

tle in the way of direct competi-

tion,” said Michael Hewson, chief

market strategist at CMC Markets

in London.

It had already been moving in

that direction, buying Russell In-

vestments, an index provider and

asset management company, for

US$2.7-billion in 2014. Three

years later, it acquired a fixed-in-

come analytics and indexing

business from Citigroup for

US$685-million.

BLACKSTONEGROUP(BX)

CLOSE:US$48.65,

DOWN64USCENTS

THOMSONREUTERS(TRI)

CLOSE:$89.89,DOWN$2.

Refinitiv:TakeoverwouldenableLSEGtocapitalizeonmarkets’digitalshift

FROMB

Despitepotential

gainifthedealis

done,Friday’sprice

forThomsonReuters

aboveUS$

wasovervalued,

CanaccordGenuity

analystAravinda

Galappatthigesaid.