Despite the fact that consumers are starting to see faint glimmers of hope that inflation might finally be peaking and starting to hopefully roll over, the same can not be said for everybody. In the case of the mining community, where projects are developed over the span of years and decades, not days or weeks, the curses of the supply chain and inflation are continuing to rear their ugly heads.

There has been a spate of announcements suggesting that economics for these projects remain robust but costs are growing materially, or in one case, the company has put off the final investment decision until the second half of 2024. This is not encouraging when one thinks about how quickly governments around the world want to expedite the green economy and transition away from fossil fuels, given we are talking about the mines that will supply the resources to undertake this task.

Generation Mining’s Marathon project’s CAPEX just went up by 25%

The first example is Generation Mining Limited (TSX: GENM | OTCQB: GENMF), which is developing the Marathon Project, a large undeveloped palladium-copper deposit in Northwestern Ontario. The Company released its initial Feasibility Study (“FS”) in 2021, but keep in mind a lot has to happen between an FS and the start of construction, of which environmental assessments, permitting, and financing, are some fairly large and time-consuming components. Correspondingly, now that Generation Mining has received its environmental assessment approvals and recently announced an indicative offtake term sheet, it’s time to get serious about financing. Naturally, the Company needs to review how much financing they will need to move forward, so a revised FS was undertaken.

Despite management’s positive spin, the news wasn’t pretty. At the end of March, Generation Mining announced a 25% (C$224 million) increase to the initial construction CAPEX reported in the 2021 FS. Albeit, approximately 19% or C$43 million was due to scope changes, which is reasonable, but 71% (C$160 million) was due to cost escalation, and the final 10% (C$22 million) was a result of increased contingency. That’s a big chunk of change, although it is unlikely to slow the project down as the economics remain solid and global demand for copper seems to be bullish in the long run. As well, the project is touted as being one of the lowest CO2 equivalent intensity mines in the world, which is a factor I’m sure will continue to become more important as time goes on.

Trilogy Metals announces updated Feasibility with CAPEX up 40%

Example number two is a similar story, Trilogy Metals Inc. (TSX: TMQ | NYSE American: TMQ) is advancing exploration and development at the Upper Kobuk Mineral Projects, high-grade copper-zinc-lead-gold-silver-cobalt properties in Northwest Alaska. Very similar to Generation Mining, in mid-February Trilogy announced an updated FS for its Arctic Project. But if you thought the Generation Mining results were exorbitant, wait until you see what happened to Trilogy. Granted it’s not exactly apples to apples given the original Trilogy FS was a year older (2020) and there are somewhat different commodities in a different geographic jurisdiction but…

You know it’s going to be a big number but I personally find it hard to conceive. The updated FS for Trilogy Metals’ Artic Project has gone from US$1.22 billion to US$1.72 billion or a 40% increase. On top of that, annual payable metals production is down from the 2020 FS, implying that little to none of the surge in CAPEX was due to scope creep. Sure there was more than a doubling in mine closure and reclamation expenditures (US$205.4 million to US$428.4 million), which could be regulatory changes or any number of uncontrollable issues. But that still leaves US$271 million seemingly attributable merely to things getting more expensive.

This should be a bit of a wake-up call to investors everywhere who are banking on the optimism of “friend-shoring” natural resources. There are a lot of highly valued junior mining companies with a pre-feasibility study or possibly even less than that, who might be in for quite a reality check if/when the project starts to get serious.

Newmont delays Yanacocha Sulfides Project

All this might explain the simplicity of my third example. Newmont Corporation (TSX: NGT | NYSE: NEM) decided it wasn’t even going to go there with its Yanacocha Sulfides project in Peru. Last September the Company announced it will delay the investment decision for the project to the second half of 2024. As part of the press release Newmont stated that evolving market conditions, including the continued war in Ukraine, record inflation rates, the rising prices for commodities and raw materials, prolonged supply chain disruptions, and competitive labor markets were part of its decision-making process. Unless I’m missing something, I would have to say that “war in Ukraine” is more of an acknowledgment than anything else, because I’m not sure how that impacts a mine in Peru. I would also think the rising price for commodities would be a good thing but maybe they intended it in a different way. Nevertheless, you see the recurring theme of inflation and supply chain in there, so I’ve included it in my synopsis.

Final thoughts

What’s my point? I alluded to it earlier but I will expand on it. First off, I think there might be a little too much optimism baked into a lot of the junior explorers at present. Yes, General Motors (NYSE: GM), Tesla (NASDAQ: TSLA), Ford (NYSE: F) et al are signing deals left, right, and center with numerous companies, and that’s a very bullish thing. But what if GM and Tesla are smart enough to sign deals that have the miner get stuck with all the mining cost increases? The examples above show how an initial Feasibility Study may not be overly relevant a couple of years down the road. So that begs the question “What are the REAL economics of a project?”

Lastly, and this is more of a thought experiment kind of comment, in the grand scheme of things it would appear the world simply doesn’t realize how much new critical minerals projects are going to cost. It seems that old metrics might not be overly relevant anymore. Inflation may have a much larger trickle-down effect than anyone imagined and the price of future EVs might cost a King’s ransom, despite government subsidies.

Like a lot of people around the world, I’m royally pissed off about what is happening in Ukraine. My email inbox exploded yesterday with questions on what this means from a trading perspective, and no one seemed to like my answer, which is — it meant very little to me (but please don’t mistake that for my personal outrage with respect to this issue). Frankly, when all was said and done not a whole lot happened in the market, and depending on how the continued sanction saga goes, we’ll see if it has much impact at all. I targeted a few buying opportunities of anything that got yard-saled, but my guess is that this is a simple speed bump, and the market will have forgotten about it in a week or two.

In my opinion, the bigger market impact will be how it affects the U.S. Federal Reserve actions. The potential for increased commodity inflation (due to sanctions) could slow the economy. A slowing economy is not a great background for gung-ho interest rate increases. So, this conflict/war/assault on humanity may actually temper interest rate increases which could be bullish tech and gold. A perceived less aggressive interest rate path may partially explain the slap upside the head that most North American financials took, although there may also be some ramifications from all the banking sanctions announced. But, by day’s end, all I had done was to buy some Facebook/Meta (NASDAQ: FB) and sell some out of the money covered calls on Cameco Corp. (TSX: CCO | NYSE: CCJ), and that’s it. There was a lot of uranium interest for sure, but we saw bigger intraday moves when everyone was all cranked up by the activity of the Sprott Physical Uranium Trust (TSX: U. UN). Nevertheless, I will often find some way to trade around a 10% single day move in an equity.

Now don’t get me wrong. I’m definitely paying attention to the obvious sectors that may be impacted as one could argue that Russia is a global commodities superstore – you know, oil, natural gas, wheat, corn, palladium, platinum, aluminum, potash and phosphate, to name a few. But let’s be frank, a lot of these commodities will see limited impacts for various reasons.

The current global supply/demand picture for both oil and natural gas, the largest contributor to Russian GDP, is such that no country has enough spare capacity or political will to completely shut off Russian imports. It seems like every speech made by President Biden on this topic always has some reference to keeping U.S. gasoline prices below $4/gallon. And in Germany, they made the symbolic gesture of halting certification for the Nord Stream 2 pipeline but that wasn’t shipping any product yet anyway. There’s still the original Nord Stream pipeline and its total annual capacity of 1.9 trillion cubic feet (55 billion m³) of gas that hasn’t been discussed in any press releases I’ve seen so far. Likely because it’s still winter and Germany isn’t about to let its citizens freeze, and realistically it doesn’t have any other quickly available, viable options. If those united against Mr. Putin actually grow a spine and put a hard stop to all Russian oil and gas purchases, Russia could simply sell most, if not all, of it to China and current Chinese supply will redistribute to other parts of the world. This could certainly create some interim price volatility but it’s highly improbable (in my opinion) that actual Russian oil and/or natural gas production will be cut and thus there will be no dramatic swings in supply.

In fact, I believe China probably has the most sway over how this whole situation unfolds. Mr. Putin obviously doesn’t care about sanctions from the rest of the world given those sanctions were signaled well in advance and it doesn’t appear to have dissuaded him in any way, shape or form. China can likely absorb a lot of the commodities that Russia is currently selling to the rest of the world, should sanctions actually start to have an impact, but I’m pretty sure Mr. Putin isn’t that trusting of his giant neighbor who happens to have an even larger economy and army. But if China decided that enough is enough and threw its weight behind the opposition of the rest of the world then this incursion ends immediately. If China is on board with sanctioning Russia along with everyone else, Russia no longer has an economy to speak of. But I suspect China plays along for a while, at least until they have Chinese troops on the ground in Taiwan, but we can hope that’s not a story for another time.

Ultimately, I have no idea what Mr. Putin’s end game is. Why has he manufactured some alternate reality regarding Ukraine that supposedly required Russia to invade? We may never know. To quote Winston Churchill from 1939 when he defined Russia as “a riddle, wrapped in a mystery, inside an enigma,” it would appear Mr. Putin has taken this description to heart. In the meantime, it might be time to start nibbling away at North American commodity producers and explorers of just about everything because this event has taken security of supply to another level. It should also reshape the perspective of any ESG funds and investors as I’m pretty sure an unwarranted invasion of a neighboring country violates both Social and Governance mandates, and if it doesn’t then it should. With that said, let’s be clear, these are the actions of Mr. Putin and his political and financial supporters and not necessarily the Russian people. Regardless, I’m glad I don’t own any Russian equities or companies with Russian backing right now.