I move:
That Seanad Éireann approves the following Order in draft:
State Guarantees Act, 1954 (Amendment of Schedule) Order, 1978.
a copy of which Order in draft was laid before Seanad Éireann on 14 June, 1978.
State Guarantees Act, 1954 (Amendment of Schedule) Order, 1978: Motion.
The purpose of this resolution is to seek the approval of the House for a draft order to guarantee bank borrowing to the extent of £2.3 million by Avoca Mines Limited.
Avoca Mines Limited have operated the Avoca copper mine in County Wicklow since 1971, having purchased the mine in 1969 from the previous operators, St. Patrick's Copper Mines Limited, who went into receivership and closed down the mine in 1962. Copper concentrate and pyrite concentrate are produced at the mine. The copper concentrate is exported and the pyrite concentrate is sold to NET.
The essential factor governing the profitability of the mine is the price of copper. The copper market, like that of other base metals, is broadly cyclical and as the Avoca Mine is a low grade copper mine it is extremely vulnerable to significant financial losses in periods of downturn in the price cycle; a grade of 0.7 per cent copper is being mined there at the present time when mines in Africa with up to 4 per cent grading are finding it extremely difficult to operate on a profitable basis because of the low level of copper prices.
Copper prices in the period from 1972 to mid-1974 were at a level which enabled the Avoca mine to operate on a profitable basis and the company ploughed back these profits into the operation. Copper prices reached a peak of £1,400 per ton in April, 1974 but by the end of 1974 they had dropped to £500 per ton. Since then the high price levels of the 1972-74 period have never been regained, the highest price reached being slightly over £900 for a brief period early in 1977. The price was around £675 a ton in April of this year. It rose by about £100 a ton under the influence of the recent disruptions in Zaire and certain other factors but it has since declined from this level and is now around £720 a ton. It is not possible to gauge with any accuracy what influence the Zaire situation and other recent developments in other copper producing countries will have on copper price movements in the short-term. Commentators seem to agree that a sustained return to the high price levels of the early 1970's is unlikely to emerge before 1982 and some of them predict that this might not occur until the mid-1980's.
The break-even copper price level for the current mainly underground mining operation at Avoca is very substantially in excess of average copper prices in the last few years, and as a result the company has been in a situation of substantial and growing operational loss. The mine's net losses in 1977, including interest on bank overdraft, depreciation and other costs amounted to £1.162 million.
The company, having suffered a serious deterioration in liquidity in 1974, sought State assistance and a loan of £300,000 was provided through Fóir Teoranta. With a view to keeping costs as low as possible during the period of the depressed prices production was cut back and the workforce was halved. In June 1975 the company's bankers expressed concern about Avoca's overdraft and said that they would have to consider foreclosure unless the Government were prepared to guarantee part of the overdraft. The bank requested a guarantee for the shortfall between the liquid assets of the mine and the amount overdrawn by the company, after payment of preferential claims. In July 1975 the Government approved the offer of a guarantee of £170,000 until September 1975 to ensure a continuance of the operation while the possibility of attracting private interest finance to the mine was being investigated. The Government subsequently approved of further increases and extensions of the guarantee. In November 1977 an increase to £1.6 million was granted, but this level of guarantee for the company's bank overdraft facilities will be inadequate shortly.
The efforts to attract private interest investment to the mine culminated in an agreement being reached with Messina (Transvaal) Development Company which provided Messina with an option to take over 85 per cent of the share capital of Avoca Mines Limited if the results of an exploration programme to be carried out at the mine in the meantime were satisfactory. Messina commenced an exploration programme at Avoca in August 1977. Their immediate objective was the identification of an underground orebody of at least three million tons of grade 1 per cent or over which could be mine and milled by the existing facilities at the mine. In December 1977 the company informed the Minister that their geologists had concluded that the chances of finding the large additional tonnage they had hoped for were so remote that they had decided not to do any further work at Avoca and not to exercise the option to acquire the bulk of the share capital of Avoca Mines Limited. The company's decision came as a disappointment but it was not entirely unexpected. Having regard to the sharp deterioration in the outlook for copper at the time and other relevant factors' it had to be accepted that, in commercial terms and apart altogether from the geological conclusions, the basis for further work by Messina was doubtful. Furthermore, a number of other major copper-mining companies had earlier been persuaded to look at Avoca and they too had concluded that there were not sufficiently attractive prospects there to justify involvement on a commercial basis.
Following the withdrawal by Messina the situation of the mine was reviewed by my Department and the Geological Survey Office, in co-operation with the mine management. It was clear that continuation of operations on their present basis could not be expected to be viable other than for a relatively short period in the copper price cycle when prices, would be temporarily high, and any profits realised in that short period would not nearly compensate for the substantial losses which would be accumulated during the much longer periods of lower prices.
There are geological indications of ore reserves of a size possibly sufficient to support a significant open-pit operation for a reasonable period, but the viability of such a project depends on a number of extremely crucial factors. These include the volume, grade and grade distribution of the ore, the additional capital equipment and other development costs necessary, extraction, haulage, milling and other operating costs and, of course, the difficult question of how copper prices may move during the next ten to 12 years.
Senators need only look at these points to see how many question marks hang over the possible viability of this project. As much evaluation as possible has been done with the limited resources available to my Department, but in order to analyse these questions more fully and offer authoritative opinions on them the Minister has decided to engage a consultant from the mining sector to carry out a comprehensive survey of the situation. The mine management have agreed to assist and co-operate in the consultant's evaluation which will cover prospects generally at the mine and the open-pit possibilities specifically. The Geological Survey. Office will make relevant data, reports and evaluations available and will also generally assist in the consultancy project. The estimated cost of financial support for the mine for the necessary period and the consultancy and associated expenses are included in the sum specified in the resolution before the House.
I want to have this evaluation done properly but I also want it done with the minimum of delay because the present ongoing cost of maintaining the mine for any significant period, without the prospects of a viable longer-term future, is not tolerable. I hope, therefore, that the results of this expert study will be available to the Government well before the end of the year.
The study by the consultants should provide the company and the Government with authoritative and expert advice which will enable firm decisions to be reached on future operations at the mine. It is my hope that a means will emerge to ensure a viable continuing mining operation at Avoca which will enable employment to be maintained at the mine at least at the existing level of 230 men. I do not wish to pre-judge the findings of the expert study. However, in the circumstances which I have set out, especially the fact that over the long history of the mine the grade of ore mined has been predominantly low and that a substantial and sustained rise in copper prices cannot be foreseen for some time, I would not wish to convey to the House a particularly optimistic expectation about the outcome of the consultants work. Their findings will obviously have to give realistic promise of a much more viable operation than is being engaged in at Avoca mine at present because, as I have said, continued underwriting by the State of losses on the current level simply could not be justified.
The present Government—and indeed successive Governments—have gone to very considerable lengths to maintain mining operations at Avoca. The ultimate cost to the State arising out of the failure of St. Patrick's Copper Mines was in the region of £3.2 million. Indeed it may be suggested that the efforts made and the costs assumed by the State over a long number of years are more than would be justified on any economic basis, however defined. The decision to be taken within the next few months will be a difficult one whichever way it goes.
The reason why a resolution and order to formalise the guarantee has not been introduced in the House before now was that in the first instance the extent of the State's future involvement in the company's affairs could not be assessed while the efforts to attract private investment were in progress and more recently until studies by the Geological Survey Office and by the company were completed.
I now recommend that in the circumstances I have outlined the House should pass the resolution before it approving of the draft order which will authorise the Minister for Finance to give a guarantee of £2.3 million under the State Guarantees Act, 1954 in respect of bank borrowing by Avoca Mines Limited.
We on this side of the House realise the difficulty in Avoca Mines. I do not think that there is any base metal that has varied so much in price over the past number of years. We find that it has dropped substantially and for that reason I am sure it is easy to understand why Avoca Mines are able to keep floating without Government aid.
The price of copper has varied tremendously. Early in 1974 it reached as much as £1,400 a ton and by the end of 1975 it had dropped to £500 a ton. This year it is varying in price from £675 to £775 a ton. One thing I cannot understand is that at times copper becomes very scarce on the market but at the same time the price of it does not increase, for what reason I do not know but I often wondered. It does not increase to the extent necessary to justify the operation of the mine. Certainly it is great to see the 230 people being kept there in employment, though the number of people employed has dropped over the past few years.
There is one danger with the open-pit operation. It certainly will reduce the number of people employed if and when it comes, but if it did come as a result of the expert study that is to be carried out, it might be a good thing. It might secure employment even for a smaller number of people than are there at present. We on this side of the House welcome the Bill.
I do not think any questions were raised by Senator Reynolds in his remarks. However, he made the statement that copper prices do not vary when copper itself becomes scarce. As a result of the world shortage in 1971 we had very high prices but, as I said in my remarks and as the Senator agreed, they dropped very considerably in 1974, from over £1,000 per ton down to less than half of that.
I think we are agreed that the Minister for Finance should be allowed to provide the finance which is required by Avoca Mines Limited and that in the meantime the consultancy report should be available to the Government to enable them to make a firm decision. Hopefully the report will be available before the end of the year and a decision will be made very shortly afterwards.
Question put and agreed to.
The Seanad adjourned at 7.45 p.m. until 10.30 a.m. on Thursday, 22 June 1978.