Vale adapts to meet challenges of increasing production costs, global competition and government regulations

By Frank Giorno

Vale’s mining operations, including its Ontario locations in Sudbury and Port Colborne, are facing challenging times and need to make bold changes if it is to continue being the leader in the nickel mining industry.

“Change isn’t easy and requires support - I can tell you that a key priority for me as leader of our operations is to create a compelling case and vision for change that our employees, business partners and community can understand and endorse,” said Kelly Strong, vice-president of Vale’s Ontario and UK Operations.

Strong made the remarks at a luncheon in Sudbury in mid-April, sponsored by the Greater Sudbury Chamber of Commerce, Canadian Trade-Ex and several other organizations.

Strong was born in Espanola, Ontario. As Vice President of Vale’s Ontario and UK operations, Strong leads all operations in Sudbury and Port Colborne, Ontario.

Production Costs Rise Sharply While Price of Nickel

Remains Stagnant

There are several challenges confronting Vale Inco according to Strong. Top among them are rising costs of production combined with sluggish nickel prices.

At the time of Strong’s speech nickel was selling for $7.19 which appears to be a reasonable price considering that a decade ago nickel sold for $2 to $3 a pound. However, Strong explained that the costs to produce a pound of nickel have risen substantially from what they were a decade ago.

Some of the factors driving production costs up include a 350% increase in the price of crude oil and a 60% increase in the value of the Canadian dollar which is detrimental to companies like Vale that export their nickel. There has also been a 25% increase in the cost of living as measured by the consumer price index.

In addition to rising operational costs Vale also faces increased capital costs as it moves to modernize its aging Sudbury facilities some of which are nearing 100 years old.

Compounding the problem of rising costs is the fact that the days of mining “easy ore” are over. Vale now mines deeper and deeper to find new sources which invariably turn out to be lower grade ores.

Global Competition from

Lower Cost Sources

“These challenges are significant,” Strong said. “But we are also facing challenges from the competitive global landscape - no longer are we simply concerned with the competitor on the other side of town, but also with the competitor on the other side of the world.”

Strong also indicated that the marketing landscape has changed. In the base metals business costly mature sulphide deposits like those in Sudbury are now competing with lower-cost-near surface laterite deposits in China.

“As we speak, Chinese nickel production is at an all time high, as it develops newer and cheaper products,” Strong explained

The increasing cost of producing nickel has also resulted in customers seeking out lower cost alternatives like nickel pig iron - a low grade ferronickel invented in China as a less expensive option to pure nickel in stainless steel production.

At home Strong points to increased costs from environmental guidelines, regulations and restrictions that are becoming more demanding.

“In a mature operation like ours, that means adapting 21st century technologies to 20th century processing plants,” Strong said. “The solutions aren’t easy - they require creativity and significant investments, but they are absolutely necessary to stay in business.”

The changes required for Vale to adjust have already begun with the refinement of Vale Inco’s vision which has evolved from being the largest nickel producer in the world to becoming the best nickel producer.

To do so Vale is taking a close look at operations that are no longer profitable in Sudbury and around the world. Last year Vale decided to suspend operations at their Frood Mine which is part of the Stobie Mine complex.

There has also been a significant restructuring of Vale’s organization. The North American structure has been eliminated in favour of a more focused regional structure within Vale’s corporate office and Ontario operations

“Our key principle in moving forward and making decisions has been to minimize impacts on our people as best we can,” Strong said. “Unfortunately this has meant a reduction in some roles, particularly in support service functions globally and in Sudbury.”

80% of Vale Operational Spending Went to Ontario Vendors

However many of the positions lost with the restructuring will return in some form through purchasing and procurement. In 2012, more than 80% of Vale’s total spend on operations went to vendors located in Ontario -- a significant economic benefit to Sudbury and the rest of the province. During the period 2009 to 2012 Vale spent $2.6 billion on supplies and services from local vendors in Greater Sudbury with almost $1billion.

Totten Mine

Symbol of New Vale Inco

Strong concluded his statements by pointing to positive developments and good news arising from the restructuring. The opening of Vale’s new Totten Mine will require hiring people to fill roles at the new operation. The Totten Mine will be the first new Vale mine in Greater Sudbury in 40 years. Totten has a life span of approximately 20 years and will employ 160 people.

It will cost $760 million and create more than 500 jobs plus drawing on supplies and services from many local companies including those from Sagamok Anishnawbek, a key partner in the project. A new Impact Benefit Agreement was signed with Chief Paul Eshkakogan last year.

“Totten’s new head frame symbolizes a new era of modern mining in Sudbury,” enthused Strong. “We very much look forward to celebrating the opening of this new mine with you next year.”