Voisey's Bay Mine and Mill Environmental Assessment Panel Report

3.1 Project Need and Timing

In its guidelines, the Panel directed the proponent to justify the need for the Project. VBNC responded in the EIS and hearings by describing what it saw as a growing market for nickel, the weak state of the provincial and regional economies, and the economic viability and potential of the Project. VBNC stated that it wished to develop the project "to meet Inco's strategy of developing low-cost nickel deposits and remaining as the world's leading producer of nickel."

For many presenters, the question of need was most closely tied to timing. In other words, does the project need to start immediately, or can it be delayed by a number of years? Some people suggested that delaying the project could make the project more economically viable, which would in turn enhance local benefits and ensure high enough returns to adequately cover the costs of environmental protection and reclamation. A second argument made in favour of delay was that it would reduce potential adverse social impacts by giving Aboriginal people and communities time to prepare. Aspects of viability are addressed in this chapter. Aspects of readiness are addressed in chapters 15, 16 and 17.

The Panel believes that the exact definition of "need" for a new mining venture is somewhat problematic. It considers the following factors possible components of project justification:

• the global economy's need for new nickel and for the benefits that nickel products provide (copper and cobalt are seen as by-products and secondary to this discussion);
• the need to build and maintain low-cost reserves for the Canadian nickel industry in order to support both the industrial needs of VBNC's parent company, Inco, and continued Canadian economic activity; and
• the requirement for regional economic development based on producing primary metal.

Some presenters urged the Panel to look not only at the demand side (world nickel markets) but also at the supply side when reviewing the requirement for new nickel. They wanted to ensure that nickel reserves were conserved for the use of future generations and to reduce the overall environmental impacts related to the extraction, use and disposal of materials.

3.1.1 Materials Consumption and Environmental Consequences

Nickel is a non-renewable resource. However, the main argument that the Panel heard in favour of slowing the extraction of this finite commodity related not to a fear that the world would run out of nickel but to a concern that global ecosystems cannot afford the environmental consequences of the current throughput of industrial materials, let alone an expansion.

An ecological economist speaking on behalf of the Innu Nation argued that the Western world probably needs to reduce the total throughput of materials by 75 percent. This would, he said, reduce the accumulating levels of environmental stress and degradation that result from all phases of materials use, while accommodating the basic needs of less developed countries. While not arguing to cancel the Voisey's Bay Project, he did suggest that delaying its start and reducing its scale would contribute significantly to environmentally responsible supply management. He argued that the Project can only be justified by a societal need for goods and services based on the "virgin" metals produced by the Project. Then he provided a list of factors to be considered, based on existing and potential mines, existing and projected consumption, potential substitution of other metals for nickel and recycling rates.

The Innu Nation also argued that high grade deposits, not just low grade deposits, should be left for future generations and that excess supply is a disincentive to developing more efficient product uses.

Natural Resources Canada (NRCan) told the Panel that approximately one third of the nickel used in stainless steel is recycled metal. It was NRCan's position that metals are not destroyed but are "placed in inventory on surface." The Panel observes that this would tend to support the argument that high grade deposits should be mined first. An expert, appearing on behalf of the Innu Nation, agreed with this premise to a certain extent by arguing that, since low grade deposits are energy and pollutant intensive, and since extractive technology will change, it may make sense to exploit high grade deposits first, thus causing less environmental damage and building up the recycling inventory.

The Panel agrees that conservation of materials, including nickel, is an important objective. During the hearings, the Panel heard about the high levels of recycling achieved in the nickel industry. It is also aware that Inco is developing new uses for nickel that should increase the value of the product without necessarily increasing the amount used. The Panel does not believe, however, that an environmental assessment of one project can satisfactorily address issues of global nickel use and conservation. The Panel suspects that nickel not supplied by VBNC would quickly be supplied by another producer. This might cause more environmental damage and provide fewer benefits than the VBNC Project, particularly if mining occurred without the constraints imposed on a Canadian project.

The Innu Nation also discussed the rate at which a finite resource such as nickel should be extracted from the ground to ensure durable and equitable benefits. The following sections address production rates and resource stewardship.

3.1.2 World Nickel Markets

The main fact VBNC used to justify the need for the Project is that the nickel market has grown by a compounded 4 percent since 1963. Other participants pointed out that the annual compound growth rate is overestimated because the growth rate was 6.5 percent from 1960-73 but only 1 percent from 1973-96. They also observed that the growth rate is bound to drop as the market increases in size.

The nickel consumption graph shown in Figure 2 shows that there was almost no growth between 1984-92 and renewed high growth in the past few years. This corresponds to the primary nickel demand described in the Additional Information, which states that demand has recently increased by approximately 50,000 tonnes per year, from 769,000 tonnes in 1993 to 1,004,000 tonnes in 1997. The annual consumption increase is therefore quite variable, depending on the period chosen.

Looking at projected consumption growth without relying on historical growth projections seems to be difficult. An NRCan expert said that production figures are considered more accurate than consumption figures because actual consumption is difficult to measure accurately. For instance, the consumption of nickel in stainless steel is tracked to the point of steel production, as opposed to final consumption. However, VBNC noted that demand for nickel in superalloys grew at the rate of 8 percent per annum between 1993 and 1997. This suggests the emergence of a market not reflected in past consumption data. This market may partially support the strong growth seen in recent years.

Annual per capita consumption figures from NRCan show a world demand of 1.9 kg, with very high consumption in steel producing countries such as Taiwan, South Korea and Japan. Consumption in less developed populous regions is low. For example, China consumes 0.6 kg, India 0.7 kg, Africa 0.4 kg and Eastern Europe 0.6 kg. However, consumption in those regions is increasing rapidly.

The other important market force is supply. With the exception of Raglan, most of the new capacity outlined by both the Innu Nation and NRCan will come from nickel laterites. These deposits require extracting metals from oxide ores using leaching processes similar to those that have proven successful in low grade copper and gold ores. The largest of these new projects is Murrin Murrin in Australia, which, if its second stage expansion occurs, would be the same size as Voisey's Bay. However, NRCan indicated that both recovery rates and financing for this project were uncertain. Both Inco and Falconbridge have also announced pilot projects to extract lateritic ores in New Caledonia, and Cuba also has large lateritic reserves.

Another important source of supply is Russia. That country has the world's largest sulphide reserves at Norilsk and exports large quantities of stainless steel scrap from dismantled military infrastructure.

Innu Nation experts based their analysis on the assumption that the project would add to existing productive capacity. The Panel notes, however, that Inco has already announced that it will reduce high cost production in its Ontario and Manitoba divisions, as discussed in more detail later in this document. Other sulphide based producers around the world are experiencing difficulties at present prices. Botswana production, for example, is very heavily subsidized at present prices and nickel concentrates have been imported to keep the smelting operation viable.

The Panel concludes that there is a high degree of uncertainty in projections of market growth. For example, the period required for growth to absorb the projected capacity of Voisey's Bay during Ovoid production ranges from about 3 to 17 years, depending on the assumptions used. Per capita consumption figures suggest both that growth potential is high and that it is tied significantly to emerging economies. The present slump in nickel prices with the slowing of the Asian economies also supports that conclusion.

On the supply side, the Panel recognizes the uncertainty of the supply of recycled stainless steel coming from the former Soviet republics. In addition, the supply of lateritic nickel may be significant but the cost efficiency of the related extraction process is uncertain.

Figure 2 - Global Consumption of Nickel

3.1.3 Importance to the Canadian Economy

The Panel does not consider the review to be a proper forum for discussing the importance of the Project to the economic viability of Inco. However, the Panel acknowledges the contribution of the nickel industry to the Canadian economy. Inco is the largest producer in the Canadian nickel sector, which had net export earnings of $1.6 billion in 1997. Inco accounts for over 70 percent of the capacity of the three Canadian smelters and over 80 percent of the capacity of the three Canadian refineries. Most of the concentrates for the three Canadian smelters are produced locally in Thompson and Sudbury, while Falconbridge augments its smelter feed from the Raglan mine in northern Quebec. The two Sudbury smelters have undergone major capital upgrades and have potential for significant future operating life.

The supply of cost-effective Canadian concentrates is being threatened. In Sudbury, Inco's near-surface reserves are low grade; the higher grade material is located at depths below 2000 m. Falconbridge is short of reserves in Sudbury and is relying on Raglan and other exploration properties to augment its supply. There is exploration potential in Labrador (the Kiglapaits and Donner Resources sites), a significant exploration program in northeastern Quebec near Sept-Iles and a recently announced discovery in northern Quebec. At present, there are no known offshore sulphide deposits that can supply significant quantities of concentrates to Canadian smelters, and there are no known major commitments to look for such deposits. Therefore, Canada must manage and develop its supply.

The Panel believes there is some justification for concerns that structural change in the nickel market may reduce long-term prices. It is also difficult to assess the sustainability of Russia's present level of exports of primary metal and stainless steel scrap, or the potential success of methods for extracting oxide nickel from laterites. Even with these uncertainties, VBNC is willing to make a major investment based on the Ovoid reserves and believes that, with extraction facilities in place, it can profitably extract a significant portion of the underground resources.

The Panel observes that there is potential for growth in the world nickel market and that new domestic sources will have to be developed just to maintain Canada's existing position. Given that Inco supplies about 20 percent of that market, the Panel assumes that Inco, as part of its internal justification of the project, will assure itself that production from Voisey's Bay is required. In addition, Inco will have to convince financiers that its projections are valid before development proceeds.

3.1.4 Need for Local Economic Development

While it was made quite clear to the Panel that economic development at any cost was not an option, people in Aboriginal communities felt that new economic activity was important to the future, provided the environmental effects, the timing and the level of control were satisfactory. In all of the Inuit communities people expressed interest in the direct and indirect jobs that might accrue from the Project. In the Innu communities, elders and younger people indicated that jobs could provide some benefits, including resources to support important traditional activities.

The Panel acknowledges, however, that some Aboriginal people feel they cannot support the Project under any circumstances, because of its social and environmental consequences, and because they feel that a mining project is not compatible with Aboriginal culture, ways of life and aspirations for the future.

In Nain, the Panel heard from a group of presenters who described a busy local economy, with good prospects in fisheries, small-scale quarrying, tourism and crafts. The presenters felt that the Inuit communities had a range of economic development opportunities and need not depend on large resource extraction developments such as the project.

The business community of Happy Valley-Goose Bay strongly supported the Project as a way to diversify the economy away from dependence on the military presence. In Labrador West, already an experienced mining community, people also strongly supported the Project. Chapter 15 discusses regional economic benefits in more detail.

3.2 Production Rate and Mine Life

Throughout the hearings, the Panel heard concerns about the length of the Project from Aboriginal organizations, the Province and many individuals. VBNC is proposing a 25 year project at Voisey's Bay but presenters were concerned that changing circumstances, such as nickel prices, the economic fortunes of VBNC's parent company or poor results from the underground exploration program, could alter this intention. One of the key factors determining the length of the Project (the mine life) is the rates at which VBNC will extract and process the nickel (the production rates).

3.2.1 Proposed Production Rates

VBNC based its EIS proposal on a mill processing 20,000 tonnes per day (tpd). In the Additional Information, VBNC refined this proposal to show different production rates during start-up, open pit operation and underground operation, as shown below.

Table 1: Production Rates

Project Phase	Tonnes of Ore Processed/Year	Tonnes of Nickel Produced/Year	Annual Operating Period
Start-up (1-3 years)	3.7 million	82,000	6-9 months
Full Open Pit Operation	5.5 million	122,500*	9 months
Underground Operation	7.3 million	75,000	12 months

*This represents the 270 million pounds often quoted as project capacity.

This table clearly shows the effect of the anticipated lower grade of the underground ore, which would require a much higher throughput of ore and a longer operating period to produce the same amount of nickel.

During the open pit stage VBNC would, in effect, be mining and milling nickel at an annual rate equivalent to 15,000 tpd but using a 20,000 tpd mill to accomplish it in nine months. The larger mill capacity therefore permits

• more flexibility in dealing with the severest winter weather;
• a delay of several years before winter shipping may be needed; and
• a gradual increase in throughput as underground material becomes available.

Based on the existing mineral inventory, and assuming a two year start-up period, the open pit reserves of 31.7 million tonnes would be exhausted in 6.5 years. Assuming the projected 118.3 million tonnes of underground resource is found, is converted to ore reserves and can be mined at the 20,000 tpd capacity, the operating life would be extended to a total of approximately 23 years. The latest reported underground resource is some 92.7 million tonnes but VBNC is committed to continuing the exploration program.

VBNC justifies this level of operation in Section 2 of the Additional Information, stating that anything below 15,000 tpd is not economical. Since the capital cost of a 20,000 tpd mill is only about 5 percent greater than the cost of a 15,000 tpd mill, VBNC decided to go with the larger mill now rather than plan for expansion for the lower grade underground resource. Unit operating costs drop steadily as production rates increase, although at 15,000 tpd costs are less than 10 percent higher than are costs at 20,000 tpd.

3.2.2 Optimum Design Production Rate

At the hearings, a number of presenters argued that a lower production rate is feasible and would extend the mine life, which led to a discussion of the optimum design production rate for a new mining operation. The Panel is aware that this area has not been extensively researched, especially for mines whose economic circumstances may differ from the norm, but some literature does exist. It is known, for example, that the capital cost per unit of throughput decreases as the production rate increases. The operating cost per unit also decreases until economies of scale no longer apply. There is, for example, a limit to the amount of additional equipment that can work efficiently in a constrained space, particularly underground.

An expert for the Innu Nation argued that a production level well below 15,000 tpd is still economic. His analysis suggested that a production level of 3,000 tpd would still be marginally profitable. However, the Panel notes that he used high plant recovery rates and capital costs that could be considered low (he used a capital cost below that published for Raglan, although the port and airstrip already existed at that location). The Panel also observes that the Innu Nation analysis showed that profitability drops rapidly at a production rate below 10,000 tpd.

The Panel understands that the most accurate way to calculate the optimum design production rate is by using a series of cash flow analyses in which both operating and capital costs are varied appropriately. Such a calculation goes beyond the scope of environmental assessment (a point that NRCan emphasized during the scoping sessions). Presumably, this type of analysis gave rise to the matrix of possible alternatives provided in the Additional Information.

However, the Panel is aware that some methodologies do exist to provide initial estimates. An NRCan expert discussed one of them - Taylor's equations - at the hearings. Taylor's equations, produced from an analysis of production rates at many mines, suggest that the optimum design production rate for a resource of 150 million tonnes might be approximately 19,000 tpd. The Panel notes that applying these equations to the 32 million tonnes of resource in the Ovoid suggests a production rate of approximately 6,000 tpd for a 15 year operating life. However, the high level of fixed capital costs for the project (the cost of the port and airport, for example) would tend to increase the optimum design production rate.

Another factor limiting the design production rate is the rate at which the ore can be removed. In the Additional Information, VBNC suggested 30,000 tpd as a likely limit of the project's technical capacity. This is based on the Ovoid reserves and would likely be considerably lower for the underground operation. Any decrease in the underground resource that can be economically recovered would likely further reduce the rate at which it could be mined.

Therefore, the volume of the actual final reserve is critical to this analysis. The Panel considers that the best information available is found in VBNC's October 2, 1998 reply to the Panel's question about factors that affect the design and scheduling of the operation. The Panel notes that the resource cited in that analysis is some 25 million tonnes larger than the last-quoted resource but considers that figure within the realm of possibility, given the likely extension of the Eastern Deeps. The other working assumption suggested by the Panel was that the grade of the total underground resource will be similar to the grade of the existing resource. VBNC calculated the amount of resource based on a cut-off grade of 0.7 percent nickel equivalent.

After examining the graphs provided in the reply, and assuming average costs as calculated from an industry report and from internal cost data, the Panel observes that there is an underground resource of approximately 65 million tonnes with a grade of 1.6 percent nickel, which can be mined economically at US $3.00 per pound. How the actual costs of the Voisey's Bay Project would compare to the average used in VBNC's October 2 analysis is unknown. The higher production rate would tend to reduce the unit cost but the additional overhead costs of the remote location could well offset this saving. As discussed above, the Panel believes it would be more difficult to mine this 65 million tonne underground reserve at the design production rate of 20,000 tpd, although the higher grade would somewhat compensate for decreased metal output.

Combining this reduced underground resource with the Ovoid reserves gives a total likely minable resource of some 95 million tonnes. Applying Taylor's equations to this figure would suggest a production rate of approximately 10,000 tpd. The Panel concludes, therefore, that this rate is a reasonable first approximation of a design production rate based on the existing knowledge of the mineral resources at the site. The Panel also notes, however, that the higher capital costs of a mine in an isolated location might require a production level higher than that given by Taylor's equations to justify the additional investment.

Should new ore zones be discovered at the site, they would extend the life of the operation. However, such zones should not be considered when calculating a preliminary production rate. They would, of course, change the footprint of the project within the claim block. Decisions on the resulting environmental impact would need to be made in conjunction with regulators and stakeholders as part of the ongoing environmental management plan (see Chapter 17).

3.2.3 Ovoid-only Scenario

Many presenters expressed great concern to the Panel about the possibility that the Project could close after depleting the open pit, which was referred to as the Ovoid-only scenario. While VBNC confirmed during the hearings that this was not its intent, participants were concerned that fluctuating nickel prices made the underground expansion somewhat uncertain.

In its October 2 reply to Panel questions on this matter, VBNC stated that, if a structural change in the nickel market resulted in a long-term price of US $1.85 per pound, probably none of the underground resource could be profitably extracted. While VBNC makes it clear that it does not anticipate such low prices over the long term, it is not clear to the Panel if, in fact, any part of the Project would proceed at the lower prices.

In its October 2 reply, VBNC evaluated the biophysical consequences of a greatly reduced underground resource of only 10 million tonnes. It showed that a much smaller underground operation would reduce the Project's footprint by eliminating the need for the North Tailings Basin, and would therefore reduce environmental effects. It described an underground mine of only 2,000 tpd and pointed out that this smaller operation would still employ as many people as the open pit.

In this chapter, the Panel addresses two aspects of this issue: replacement of reserves and the nature of the deposit itself.

Replacement of Reserves

A number of presenters expressed concerns that VBNC would mine the higher grade open pit reserves contained in the Ovoid at a non-sustainable rate to maximize company profits and then cease operations. VBNC has stated its commitment to the underground resources as presently outlined and to ongoing exploration to replace the reserves extracted. It points to its operations in Sudbury and Thompson, which have operated well beyond their initial reserve life and where the company has made considerable investments in new technology to ensure the ongoing viability of both the mineral reserves and the extraction plants.

The Panel believes it is worth noting that the history of many mining companies in Canada, including Inco, shows that the industry prefers to look for reserve replacements close to existing operations. Mining engineers are taught that reserves must be replaced at a rate equal to their depletion if a mining company is to survive and that the most likely place to find a new ore body is adjacent to an existing operation. There are many examples of this philosophy in Canada in places such as Noranda, Sudbury, Flin Flon, Red Lake, Sullivan and Timmins.

Nature of Deposit

As one criterion for applying the precautionary principle, the Panel considered the extent to which an aspect of the project could be considered novel or untried. As a result, it considered whether there were unique circumstances that could increase the risk of the Ovoid-only scenario. The Panel offers the following analysis.

The Panel observes that projects commonly begin with an open pit operation to produce important initial revenues and to delay capital expenditures for the underground operation. Since operating costs for an open pit mine are considerably lower than those for an underground mine, the recovery of lower grade material in the pit is often justifiable and the planned milling capacity is often higher than the capacity a company can attain during the underground phase.

Lower grade material is not present in the Ovoid deposit. In fact, the Ovoid resource has a higher average grade than the more disseminated mineralization underground. The Discovery Hill zone contains a potential low grade and near surface resource. However, in the hearings, VBNC stated that the grade of that material would probably not support an underground operation and that open pit methods might be too expensive because of the disposal costs for the significant volumes of mineralized waste that would be produced.

In a more typical situation, as the mine progresses underground, the grade of the material being mined has to increase to support the increased mining costs. That means the mining plan excludes low grade material as far as possible, although some may have to be extracted as part of the normal underground mining sequence. In fact, an underground operation often has difficulty supplying an adequate volume of ore to meet milling capacity. However, it may produce a volume of metal output similar to that produced by an open pit operation, as underground ore is generally of higher grade. Starting underground mining early has another significant benefit: a company can increase the grade of the mill supply as open pit reserves near depletion and it becomes more difficult to meet production requirements.

The Panel concludes that obvious differences between this deposit and more typical mines do increase the possibility of a "scoop and run" operation, although the Panel does not suggest that this is VBNC's intent. On the other hand, the Panel notes that the higher profitability of the Ovoid operation would allow the project to incur the high fixed development costs of a greenfields site and to recover the investment early in its operating life, even when the short-term product price outlook is not good. The potential underground reserves also have a high grade portion that VBNC will likely be able to recover, as discussed earlier.

3.2.4 Effect of Secondary Processing

The Panel's mandate quite clearly did not include an environmental assessment of any proposed secondary processing facilities in the province. Neither did it require the Panel to consider any environmental effects produced by secondary processing of the concentrates at any destination.

During the hearings, however, the Panel clearly indicated that the final destination of the concentrates could affect the timing, economic viability and socio-economic benefits of the Project, and therefore it was within the Panel's mandate to comment on these issues. The Province confirmed this interpretation by asserting that the Panel should assess how socio-economic benefits might vary based on concentrate destination. The Province provided results of its economic analysis of a Project that included secondary processing facilities but refused to discuss any details of the model that gave rise to these results.

Provincial legislation requires that ore mined in Newfoundland and Labrador be processed in the province, if economically feasible. VBNC is proposing, however, to carry out secondary processing of the nickel concentrate at its smelting facilities in Ontario and Manitoba. This issue was not resolved at the time of the hearings. Therefore, the Panel observes that the final destination of the concentrates for secondary processing is uncertain.

Both Aboriginal groups expressed concern that the need to justify construction of a smelter on the island portion of the province was driving the proposed production rate to 122,500 tonnes of nickel, which they felt was too high and would unnecessarily shorten the life of the Project. They also expressed concern that provincial requirements to establish secondary processing facilities might reduce overall profitability and lead to cost-saving measures at the mine and mill site, which might in turn compromise VBNC's commitments to environmental protection.

Looking first at the argument that factors external to the Project are determining the production rate, the Panel believes there is no question that a significantly reduced production rate could reduce the profitability of new secondary processing facilities. It is less obvious, however, how the justification of those facilities led to proposed capacity of 122,500 tonnes. Based on the proven Ovoid reserves, and assuming the two year start-up phase discussed earlier, VBNC could achieve that capacity for only approximately four years of the mine's projected 23 year operating life. The Panel observes that any new secondary processing facility based on that capacity would require another supply of concentrates, beyond that produced at Voisey's Bay, for most of its operating life. A source of supply would need to be identified early in the planning of such a facility. Given that there is a potential shortage of Canadian concentrates based on existing smelting capacity, and that no obvious offshore source of sulphide concentrates exists, the viability of such a secondary facility is not obvious to the Panel.

On the other hand, it is not clear to the Panel how Inco's existing secondary treatment facilities could process the proposed maximum production of 122,500 tonnes of nickel in concentrates. It appears that the total excess capacity of existing Inco plants, based on NRCan data, is well below that level. When questioned in hearings, VBNC described Inco's excess capacity as "upwards of 200 million pounds," which translates to something below 90,000 tonnes.

The Province believes that a project including a provincially based smelter would still be profitable, although profitability would be reduced. The results of one analysis provided by the Province showed a return on investment of between 11 and 17 percent for a project including a smelter in the province. The Panel notes, however, that this analysis was based on production of 133 million pounds of nickel (rather than 270 million pounds) and reserves of 68.5 million tonnes.

Although neither VBNC nor the Province provided details of its economic models, the Panel observes that any significant increase in capital expenditures with only marginal increases in production revenues will both delay and reduce the revenues flowing to both levels of government through the corporate taxation system. The capital expenditures can be deducted from both federal and provincial corporate income taxes and from the provincial mining tax. In addition, increased capital expenditures would increase the processing allowance available under the provincial mining tax. Regardless of statements made by the Province that governments should not provide subsidies to Inco, the Panel notes that the taxation system effectively subsidizes operations with low profitability and benefits most from those with high profitability. It should be noted, however, that VBNC's models forecast that 78 percent of all taxes flowing to the Province through corporate, mining, income or sales taxes flows through to the federal government under equalization adjustments.

It is unclear to the Panel how increased capital expenditures or reduced profitability - both likely effects of a requirement to build a new smelter - would affect revenues flowing to the Aboriginal groups. VBNC stated that the impact and benefit agreements (IBAs) currently being negotiated contain payments that allow the Aboriginal groups to participate in the profits of the project. In addition, details of the Labrador Inuit Association (LIA) land claims show that 3 percent of the revenues payable to the Province under the mineral tax regime would be payable to LIA. Any reduction in profitability could affect those revenue flows.

Finally, there is the question of how the concentrate destination would affect the socio-economic benefits flowing to the local, regional and provincial economies. VBNC contends that the bulk of the local benefit will come from jobs and business opportunities under the adjacency principle. It is important to note that about 65 percent of the jobs and income impacts are predicted to occur during the underground stage of the Project, so any effects on profitability that jeopardize this phase would have severe negative impacts.

In looking at the supply of goods and services, VBNC stated that the positive benefits predicted for the Labrador and provincial economies were based on the estimated ability of companies to provide these requirements. The fact remains, however, that since VBNC plans to back-haul supplies on concentrate carriers, the destination port of the concentrates will affect the source of the supplies. Undoubtedly, many supplies will not originate in the province, regardless of concentrate destination. As a result, some special arrangements will be needed so that local suppliers can compete and predicted benefits can be achieved.

The Panel concludes that VBNC's decision to produce 122,500 tonnes of nickel annually was not driven by secondary processing considerations. Decisions about secondary processing could, however, significantly affect the profitability of the Project, which in turn affects the flow of socio-economic benefits to governments and to the people of Labrador.

3.3 Resource Stewardship

Assessing the optimum timing and production rate of the Project and the potential socio-economic effects of varied concentrate destinations is a complex task. The Panel concludes, in light of the dynamic nature of both the reserve base and future nickel markets, that it cannot prescribe production rates for the various stages of the Project. The Panel does, however, offer guidance and makes recommendations as to how these decisions can best be made to maximize benefits to all stakeholders.

As already discussed, the Panel considers a minimum annual design rate of 10,000 tpd to be a reasonable first approximation, based on existing reserves and resources. This is, in fact, VBNC's planned annualized rate during the two to three year start-up period, based on the proposal to operate for approximately six months at a rate of 20,000 tpd. The Panel also accepts the 20,000 tpd planned rate during the underground operation phase, if underground exploration confirms the projected volume and grade of reserves. By allowing VBNC to avoid winter shipping until the uncertainties have been investigated (see Chapter 10), excess milling capacity would also give the company an obvious advantage during the Ovoid phase, especially since the incremental capital cost is not significant. That capacity would also be useful if a lower than expected tonnage of high grade material is mined during the underground phase, or if technical or environmental problems preclude winter shipping.

The Panel's concerns apply mainly to the increased nickel output during the full-scale open pit operating period. The Panel believes that the plan to increase production to 122,500 tonnes for such a short period will create high capital costs for product handling, especially if additional vessels are required to ship concentrate to VBNC's preferred destination. It is also not clear, as discussed earlier, how new smelter capacity could be justified at that rate or how existing smelter capacity could absorb that level of production.

The Panel notes that, in one scenario, VBNC could use existing excess smelting capacity during the start-up phase. The company would then be able to confirm reserves through underground exploration and link the construction of new capacity more closely to the long-term production potential of the Project. Supplying both existing and new secondary processing capacity for a short period of time would allow VBNC to reach the maximum production capacity of the Ovoid. This strategy would both enhance the profitability of the project and ensure more logical stewardship of the mineral resource as reserves and markets become more clearly defined. Under such an approach, VBNC would have to make enforceable commitments to early exploration and to subsequent development of the underground resource if reserve predictions are substantiated.

How would these design and operating decisions best be made? In answer to a panel question, a representative of the Newfoundland and Labrador Department of Mines and Energy stated that the Province does not usually dictate the level of production to a company during the lease application process or at any other time. The Panel concludes, however, that in this case the mining lease should include some assurances or conditions attached to such fundamental issues as the production rate and mine life.

Durable and equitable benefits are only achievable if the project lasts for 25 years. However, the project will last that long only if a significant portion of the underground reserves can be extracted economically. Unrealistic demands on the project, imposed by either VBNC or the Province, could jeopardize a resource that could provide significant benefits to the people of Labrador and the entire province.

Recommendation 2

The Panel recommends that the Province and VBNC negotiate a mining lease that promotes the attainment of durable and equitable social and economic benefits to the people of Labrador and of the Province through resource stewardship. The following conditions should be attached to that lease:

• VBNC must proceed as soon as possible with an underground exploration program and, if reserves are proven, commit to early development to blend underground output with the late stages of open pit production; and
• if initial underground exploration does not confirm current reserve projections, VBNC must extend the life of the open pit by reducing the annual production rate to ensure that the Project can continue to operate for at least 20 to 25 years.