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.

I had the good fortune of being able to spend a few hours at the Prospectors & Developers Association of Canada (PDAC) Convention in Toronto on Monday before flying back home to Calgary. If you’ve ever been to PDAC you know a few hours is definitely not enough time to do justice to one of the world’s premier mineral exploration and mining conventions. However, I was able to stroll through the whole place and at least have a look at all the exhibitors. One booth jumped out at me as being  unique in that it was promoting the company’s palladium-copper project. I may have missed any others, but that was the only booth I saw with that combination. That was enough to make it the one booth I stopped at to have a quick chat about what was going on and I’m glad I did.

The company with this somewhat unique asset is Generation Mining Limited (TSX: GENM | OTCQB: GENMF) (Gen Mining), who’s focus is the development of the Marathon Project, a large platinum group metal mineral deposit in Northwestern Ontario. The Marathon property covers a land package of approximately 22,000 hectares, or 220 square kilometres. It contains reserves of 2,342 million oz Pd, 532 million lbs Cu, and 756 million oz Pt which are listed as minerals considered critical for the sustainable economic success of Canada and its allies, as set out in the Canadian Minerals and Metals Plan. Generation Mining owns a 100% interest in the Marathon Project which is literally surrounded by gold mines with Barrick Gold’s Hemlo mine the closest, just a few miles due East.

Source: Generation Mining Corporate Presentation

The other reason I was intrigued by this company is that the world’s largest producer of palladium is Russia’s Norilsk Nickel which contributes to Russia’s total annual palladium output of 76,000 kilograms making it the second largest producing country in the world. South Africa is the country with the most palladium production at 80,000 kilograms/annum but after Russia comes Canada at a distant #3 with 17,000 kilograms and the U.S. at 14,000 kilograms. I’m reasonably confident that sanctions on Russia, its Oligarchs and its companies are likely to be with us for a while, making for a potentially large hole in the supply of this particular metal.

The good news, at least for North American consumers of palladium, is that Generation Mining is well on its way to being a producer, with mine construction expected to begin in 2023. A March, 2021 Feasibility Study for the Marathon Project estimated that at US$1,725/oz palladium, and US$3.20/lb copper, Marathon’s Net Present Value (at 6% discount rate) is approximately C$1.07 billion with a payback of 2.3 years and an IRR of 30%. Up front capital costs were estimated at C$665 million, net of equipment financing and pre-completion operating costs and revenues. The mine would produce an estimated 245,000 palladium equivalent ounces per year over a 13-year mine life at an all-in sustaining cost (AISC) of US$809 per palladium-equivalent ounce.

Since the Feasibility Study, the Company has been working on financing and approvals in order to achieve its goal of starting construction in 2023. In December, 2021 Generation Mining announced it had secured a C$240 million streaming deal with Wheaton Precious Metals Corp. (TSX: WPM | NYSE: WPM). Wheaton will pay Generation Mining C$40 million on an early deposit basis prior to construction to be used for development of the Marathon Project, with the remainder payable in four staged installments during construction, subject to various customary conditions being satisfied. The first C$20 million was received on March 31, 2022. The Company provided an update on June 8, 2022 on Phase II of project financing. Phase II involves the access to medium term financing with the initial stage being a request for proposal (RFP) process for the balance of the project financing. The RFP process has resulted in strong initial non-binding expressions of interest with the total potential committed capital being well in excess of US$1 billion among several interested parties. It is estimated that the project can carry approximately US$400 million in senior debt based on the Company’s Feasibility Study. Additionally, Export Development Canada (EDC) has provided an expression of interest to provide potential project financing of up to US$200 million.

In May of this year, Generation Mining announced it had completed the Public Hearings conducted by the Joint Review Panel  on the Environmental Impact Statement of the Marathon Palladium-Copper Project. The Project requires environmental assessment approvals from both federal and provincial governments. The Panel will complete and publicly release a recommendation report within 90 days. Once the report is published, the federal and provincial Ministers will make the final approval decision on the Project’s environmental assessment within 120 days.

The next few months could be transformational for Generation Mining as it looks to make the move from explorer to producer. The streaming deal and possible debt financing could make the project capital requirements relatively non-dilutive for equity shareholders, and with a market cap of just under C$110 million and a C$1 billion NPV project that could add 25% to Canada’s overall palladium production, this could make for some pretty good leverage if the market re-rates this company to something similar to its peers.