28 December 2009

The fly in the soup clinging to the hair

Writing in the Globe on Christmas Eve, Fabrice Taylor noted the strong performance of Labrador iron ore in the market place, bouyed by increased global demand.

Then he notes the relatively high value of the Canadian dollar against its American counterpart. 

The hair in the soup is the Canadian dollar. Part of the drop in Labrador's financials, mentioned above, is because of volumes and pricing, but a good part is also from foreign exchange. Some pundits see the dollar going to par with the greenback. That's only another nickel or so but it would hurt.

He’s right.

But the exchange rate isn’t the only thing in the soup threatening the fine meal. There’s a fly in the soup, as well, namely the medium to long term cost of operating the mines in western Labrador.

That’s not a labour problem or a dollar problem or a market problem or an ore problem.

It’s an energy problem.

Or more specifically the threat by the provincial government back in 2006 that it would expect the mines in western Labrador to start paying commercial rates for power come 2014. 

And if commercial rates weren’t in the cards, well, the mining companies expect to be paying considerably more than they are currently

Never mind that the companies own two thirds of Twin Falls Power Company, built near Churchill Falls when it was still called Hamilton Falls.  And never mind either that the companies agreed to shutter their power station so BRINCO could push more water through its new plant at Churchill Falls.  In exchange the companies got a block of power for about half a cent a kilowatt hour and anything beyond that for about a quarter of a cent per. 

Either way, the prospect of higher power costs will play a role in the future of Labrador west.  Low cost power will be crucial to sustaining the mines, especially in a high dollar world, so when threats get tossed around companies tend to take notice. 

That threat is till out there.

Plus the threat’s been reinforced by the seizure last Christmas of hydro assets belonging to three companies, one locally owned and the other running a project not connected at all to the paper mill at Grand Falls.  Longstanding agreements were brushed aside by a simple vote in the legislature.  Agreements entered into in good faith and executed in good faith were crushed overnight, forcing at least one of the companies involved to default on loans.  A court case was extinguished without compensation.  Any company with any sort of operation in the province would have been insane not to revisit all their legal options.

And in Labrador west, it would be at all surprising to find out that the companies operating mines there are keeping a wary eye on what happens in St. John’s.  That power contract issue hasn’t been resolved yet and it’s much more a looming crisis than anything connected to the Churchill Falls renewal in 2016 could ever be.

Hair in the soup?

Try a fly.

And a geezly big blue bottle one at that.