Estimates for Alaska's mining industry's spending and production values for 2008 are $3 billion, a 25 percent decrease compared to 2007. State officials expect the decline to continue in 2009, with the total fallout depending on metal prices and the level of continued investment in large scale exploration projects.

Surface processing and infrastructure facilities at Pogo mine have been built around the ridge (center, which holds the high-grade, deeply buried gold deposit at Pogo. Pogo's gold production may increase in value if market prices rise as predicted, contributing positively to Alaska's mining industry value in 2009. Photo/Patricia Liles/For the Journal

"I am still forecasting a $500 million decline in the value of the industry for 2009 compared to 2008, but we'll see," said Rich Hughes, development specialist in the state's Office of Economic Development/Minerals, and a co-author of the state's annual mineral industry report. "The industry seems to be sustaining its current level of activity in what can be best described as a wait-and-see posture."

Zinc, mined at Red Dog in Northwest Alaska and also produced at Greens Creek mine in Southeast, is the largest single economic contributor to the state's mining sector value. In past years, the value of zinc produced in Alaska has contributed more than 60 percent of the industry's total value statewide.

But market prices for zinc, and other industrial metals like lead, continue to remain lower than last year. In early February, zinc was trading in the low 50-cent per pound range, compared to last spring, when prices surged above $1.50 a pound. Lead market prices have experienced a similar type of price freefall in recent months.

Red Dog, which shipped last year 920,000 tonnes of zinc concentrate containing 510,000 tonnes of contained metal, feels the financial impact of each change in zinc price.

The mine's operating profit declined in the third quarter 2008 to $124 million, compared to $390 million reported during the same period in 2007, according to Teck Cominco, the operator of Red Dog. The decline in profit was due to "significantly lower zinc and lead prices," the company said. Year-end financials at Red Dog for 2008 were not available at press time.

"Alaska's production values will drop dramatically in 2009 versus 2008," said Curt Freeman, a consulting geologist based in Fairbanks. "Zinc and lead are both down 50 percent, so with Red Dog accounting for 70 percent of the production value for Alaska, it is not hard to do the math."

He and others see gold mining and exploration as a possible positive contributor to the industry in 2009.

"Interest in base metals, uranium, molybdenum, nickel, cobalt, etc., is near zero. If your project has gold, it might be of interest," Freeman said.

Gold production in Alaska is "holding strong, but costs have increased considerably," Hughes said.

And gold market prices remain the key variable for forecasting that segment of Alaska's mining industry. Last year, gold soared to an all-time high of $1,030 an ounce in March, but then fell to a low of $709 in October.

Those price variations produce large revenue swings for Alaska's major gold producers, including the Fort Knox mine near Fairbanks and the Pogo mine northeast of Delta Junction.

Pogo gold production continued to improve in 2008, setting the underground mine's best quarterly production record of 91,000 ounces in the third quarter, according to operator Teck Cominco. The company reported an average realized gold price of $872 per ounce for the third quarter, producing a $6 million operating profit from Teck's 40 percent share in Pogo.

Gold production at Fort Knox is expected to increase in 2009, with completion of the open pit mine's heap leach facility later this year. The low-cost processing method is expected to start adding additional ounces to the facility's gold production in the third quarter of 2009, according to operator Kinross Gold.

During the third quarter of 2008, Fort Knox produced slightly more than 100,000 ounces of gold, an increase over the 85,000 ounces produced during the third quarter of 2007. The cost of sales for the third quarter was $443 per ounce, compared to $338 reported during the same period in 2007.

"Metal sales for the third quarter were $88.3 million, an increase of 38 percent over the same period last year, primarily due to an increase in the price of gold and higher production," Kinross said in its third quarter report about Fort Knox. "Cost of sales increased by 44 percent, primarily due to more ounces sold during the quarter, higher personnel costs and inflationary pressures which have increased the cost of electricity, diesel fuel and other consumables."

Some forecasters predict another upward swing in gold prices in coming months, with numbers as high as $2,000 per ounce suggested by Citigroup in an internal client note publicly released last December.

"I'm a skeptic when it comes to the gold price shooting to $2,000 per ounce, but, given the (stimulus) bill before the U.S. Congress right now and the likelihood of inflation hitting the U.S. dollar, it is hard to see gold staying below $1,000 per ounce for much longer," Freeman said. "If it goes to $2000 per ounce, it means the U.S. economy will be in freefall and that is something nobody wants to see."

Gold prices have helped companies with projects in Alaska. In early February, gold topped and remained above $900 per ounce, helping prospectors secure funding for summer exploration programs.

"Good projects will get funded, regardless of their commodity," Freeman said. "Things like Pebble, Donlin, Livengood, Niblack, Palmer, etc., will be funded, but the earlier the stage of the project, the less the spending or the more likely that plans will be curtailed."

Dave Szumigala, a mineral geologist for the state's Division of Geological and Geophysical Surveys and co-author of the Alaska Mineral Industry report, anticipates an overall decline in exploration spending in Alaska this year compared to 2008. Last year, prospectors collectively spent about $300 million in Alaska.

"Projects that are going to get funded are gold projects, because gold prices have held steady. Other projects will not get funded unless they have money in the bank," he said.

In recent years, the largest single contributor to Alaska's mineral exploration industry has been Pebble, a copper-gold-molybdenum prospect in Southwest Alaska. Spending plans for 2009 have not yet been finalized, although the budget will not match last year's $140 million spending, said Mike Heatwole, vice president for public affairs at the Pebble Partnership, the consortium formed by AngloAmerican and Northern Dynasty to advance the exploration project.

"Spending in 2008 was a bit of aberration, as it was almost double in terms of what we did in 2007," he said. "That was for a variety of reasons - we wanted to conclude some studies on engineering and environmental data so we can finish our pre-feasibility study on the project."

The anticipated decline in Pebble funding is not reflective of the partners' interest in the project, he added.

"It's more an indication of the significant up tick that 2008 was, and the realities of the global financial situation, commodity prices and capital. There are multiple variables," Heatwole said. "We hope to be able add definition to what 2009 will look like, sooner rather than later."