Mining in Canada is getting more expensive

NovaGold Resources (AMEX:NG) reported earlier today that they are halting construction on their joint-venture Galore Creek gold-silver-copper project with Teck Cominco (NYSE:TCK) due to higher capital costs, an unexpectedly strong Canadian dollar, and uncertain future prices for gold, silver, and copper.

Higher costs have made this world-class deposit "uneconomical" to develop.

Shareholders were not very pleased and proceeded to shave a cool billion dollars off of the company's market capitalization within just a few hours. The share price for much larger Teck Cominco was barely affected by the news.

While there appears to be a fair amount of good old fashioned under-estimating of project development costs by Hatch Group, the mining and engineering consulting firm that prepared the construction estimate last year, the stronger Canadian dollar, surging energy prices, and other rising costs were also major factors in the decision.

If development continued, construction costs were expected to more than double from the original estimate of $2 billion adding more than a year to the schedule. As a result, Teck Cominco has agreed to spend $72 million to explore alternative ways to develop Galore Creek, a mine that was expected to produce 341,000 ounces of gold, 4 million ounces of silver, and 432 million pounds of copper annually for the first five years of production.

This news adds to the recent "perfect storm" thinking for the price of gold as new projects are proving to be barely profitable or uneconomical even at higher metal prices due to other costs that are rising even faster than the price of the metal.

Over time, this will force gold prices much higher than they would otherwise be if more new mine production were to come online adding to supply. Ordinarily, this is the way commodity prices stop rising - when new production meets and then exceeds new demand - but, then again, gold is not an ordinary commodity.

Full Disclosure: Long NG, no position in TCK at time of writing.