Andy Hoffman

Globe and Mail Update, Friday, Jun. 12, 2009 12:22AM EDT

"At the height of the global financial crisis and commodity price crash last October, Blue Note Mining Inc. (BN.H-X0.005-0.005-50.00%) ran out of options.

Dismal zinc prices forced it to shutter its Caribou mining operations near Bathurst, N.B. The company could only hope to ride out the downturn and restart the zinc mine once the economy and metal prices recovered. But by March, the mine was in the hands of a court-appointed receiver.

“We hung on as long as we could,” Blue Note's chief executive officer, Michael Judson, said from Montreal Thursday.

The Caribou closure was among the first in a slew of Canadian mine shutdowns that has idled massive amounts of metal production across the country and driven the nation's industrial capacity utilization rate to a record low.

So much of the country's manufacturing, automotive and resource production has been mothballed in response to the recession that just 69 per cent of industrial capacity was active in the first quarter. It's the first time the rate has fallen below 70 per cent since Statistics Canada began measuring the economic indicator in 1987.

Yet as signs of global recovery continue to mount, including a nascent rebound in some metals prices that has seen zinc and nickel climb to their highest levels since last fall, Canada's resource industry will likely be slow to respond. Many closed or cancelled projects require many months of lead time – years, in the case of major new oil sands developments – and significant capital before they're operating again.

That means the recovery in the resource sector could be slow, even though prices in some sectors are improving quickly.

Just 55 per cent of Canada's mining capacity is currently in use, as potash, zinc, coal and nickel production has been slashed in response to the commodity price crash. Industry experts say it will take hundreds of millions of dollars to restart shuttered mining operations.

Mr. Judson predicts it will cost $30-million and six months if a new owner wants to restart the Caribou mine.

Economists say the unprecedented amount of slack in the Canadian economy is likely to build even further as a rising Canadian dollar presents more challenges for manufacturers and resource producers.

“The 69.3-per-cent capacity utilization rate may fall further,” Charmaine Buskas, economics strategist at TD Securities, said in a note to clients.

In Sudbury, Ont., once the nickel production capital of the world, major mining operations have ground to a standstill. Xstrata PLC has permanently shut its mines as it develops a new deposit while Vale Inco Ltd. is in the midst of a two-month shutdown of its Sudbury facilities.

Instead of producing 1.8 million tonnes of ore from its Sudbury operations this year, FNX Mining Co. Ltd. expects to produce just 700,000 tonnes – nearly all of it copper and precious metals – as it waits for nickel prices to stabilize.

Because of the nature of its deposits, it would take the company about three months to begin mining nickel again, according to spokesman Dave Constable, a much shorter time period than most other miners.

“You shut down a lot faster than you start up,” Mr. Constable said in an interview.

Canaccord Adams analyst Orest Wowkodaw also said most Canadian mines' reaction to a sustained pickup in metals demand will be delayed by about six months.

“This stuff doesn't just turn on overnight,” he said.

While the mining industry's capacity utilization rate fell by 18.1 per cent in the first quarter from the previous quarter, Canada's oil sector activity actually increased slightly.

With oil prices gaining and producers' ability to quickly stop and start well production in response to demand, the sector's capacity utilization rate was 78.6 per cent in the first quarter, a 0.7-per-cent gain."