Miners racing to bring metal to market are learning that going fast can be expensive.
Whether they produce base metals for construction or precious metals for jewellery, miners are having to contend with rising costs in every facet of the business, from the energy and materials they use to build and maintain mines, to the people and equipment needed to work them and the U.S. dollars to pay for them.
“Costs – capital costs and operating costs – are probably the single biggest issue in the mining industry today,” said Lee Hodgkinson, who heads the mining practice at KPMG in Canada. “There has been a huge cost escalation.”
The reasons for the cost increase are simple: more demand for the goods and services across the resource sector as companies race to get assets into production so they can start taking advantage of a price boom that has been going for more than a decade.
Most mainstream global metals prices are in a so-called super-cycle, having doubled or tripled and then doubled again from lows in the late 1990s and the early 2000s. Copper prices, for example, were about 60 cents a pound at points in 2003 and hit levels above $4 a pound before falling back in recent weeks to about $3.60 a pound.
Gold prices that slipped under $300 an ounce in the late 1990s came close to hitting $2,000 in recent months before retreating to about $1,600 these days.
As prices soared, miners raced to squeeze more from existing mines – and to bring more mines on stream from scratch – creating more competition in the sector for everything from materials to tools and machinery, labour, energy and engineering.
Resource nationalism is also contributing to higher costs amid new or increased royalties and taxes imposed by key mining jurisdictions, from emerging economies to established resource economies.
The cost of skilled labour is also climbing amid a general drought in the industry, forcing mining companies to pay more to attract the right talent to projects, especially those in less developed areas.
When he addressed the issue of cost at the Kinross Gold Corp. annual general meeting last week, chief executive and president Tye Burt pointed at significant increases in capital costs for materials, labour, energy, engineering and equipment.
“This is partly due to a stampede of new capital projects around the world, which has put increased pressure on the cost of construction – especially if you are trying to build quickly,” said Mr. Burt, whose company raised its average estimated cost to produce an ounce of gold this year to as much as $715 an ounce from $600 an ounce in 2011.
“Consider the tires we use on our 793 Cat haul trucks,” he said of the trucks, whose wheels are twice the height of an average man. “In 2009 the spot price for one of those tires was $40,000. Today it is $100,000 and rising.”
Cost issues do not discriminate by the metal produced or the size of the miner.
Late last month Baja Mining Corp. saw its shares plummet after the Vancouver-based development company raised cost estimates on its flagship project by more than 22 per cent.
Baja blamed cost increases of some $246-million at the Boleo copper-cobalt-zinc project in Mexico in part on the same kind of increases being experienced by other mining development projects.
Add to the mix the fact that mining stocks appear to have fallen out of favour with investors, who have stampeded out of the sector this year in favour of sectors perceived to be less risky amid global economic uncertainty.
And concerns are mounting that demand could slow for the commodities that miners are racing to produce as China’s booming economic growth shows signs of slowing and fears escalate amid European debt woes.
The fears were underscored this week when the world’s biggest mining company, BHP Billiton, said in Sydney that it was pausing a five-year, $80-billion (U.S.) expansion plan for its iron ore, coal energy and base metals divisions amid concerns that commodity markets might cool further.
Kinross, Canada’s third-largest gold producer, said in January that it would sequence spending on major development projects, focusing capital and efforts on certain projects, instead of firing on all cylinders across operations.
“The bottom line is that growth is getting more expensive,” Mr. Burt told Kinross Gold shareholders.
Cost controls also follow reduced access to equity capital while risk-averse investors wait for markets to stabilize.
“The market is not open now to do financings,” said Dan Hrushewsky, a mining analyst at NCP Northland Capital Partners, a boutique brokerage in Toronto. “Before, companies were doing up to 100 per cent equity financings that are not available now.”