There’s a bright side to the gloom over the mining sector.
Amid the felled chief executive officers, shelved projects, tens of billions of dollars that won’t be spent and the barren lines of credit, miners are finding a reason to smile. The very excesses that put them where they are today will help to ease their pain.
To be sure, the mining industry is witnessing a slow sea change, as signs emerge that its worst cost inflation in living memory is abating.
As massive projects have been cancelled, key supplies such as rubber tires, plastic pipes, chemical reagents, rock drills – and even monster trucks – are becoming cheaper, according to mining CEOs. Materials and machinery, they say, are becoming more readily available. Labour costs are flattening out – rather than falling – and it is easier to fill some positions.
“Lead times are coming down. If you want to buy a truck today, they may not have one in the parking lot, but they can build you one right away,” said Gerald Panneton, the CEO of Detour Gold Corp., which last month poured its first gold bar at a mine in Northern Ontario. It’s one of Canada’s largest, built after the global economic crisis erupted in 2008.
Mr. Panneton said the costs of the monster mining trucks, the sort that have wheels the size of small houses, has also come down, to around $7.2-million each from $7.5-million a few months ago. “They are not going to come down to the same level as 2010, but they are coming down. So what we are seeing is maybe the escalation in inflation has stopped and there’s some stability in the cost structure to buy stuff.”
At Agnico-Eagle Mines Ltd., which owns mines in Canada, Mexico and Finland, CEO Sean Boyd said the company came in on budget or better at four of its five mines in the fourth quarter, in part as costs came down for inputs such as chemical reagents.
“I don’t think that has happened in a long, long time,” Mr. Boyd said, recalling recent years where suppliers would boost prices mid-year, making it difficult for miners to draw up reliable annual budgets.
It’s bittersweet relief for the industry, coming as the result of a precipitous drop in demand after miners across the globe cancelled or shelved entire projects and shifted away from a singular focus on production at any cost.
The fallout from the mining industry crisis did not spare Canada, where companies such as Barrick Gold Corp., Kinross Gold Corp. and Teck Resources Ltd. had to react to cost pressures and a hazy outlook for commodity prices.
Barrick and Kinross each replaced their CEOs during the summer as their shares wallowed amid an investor exodus from stocks that failed to reflect gold prices that had more than tripled in a decade. Both companies have now pledged to focus on investor returns rather than growth.
The bleeding started in earnest about a year ago, when the world’s largest miner, BHP Billiton Ltd., announced plans to postpone work on a $20-billion (U.S) expansion of Olympic Dam, an Australian mine that is the world’s the fourth-largest known copper deposit and the largest source of uranium.
BHP Billiton axed the project as it faced its first annual fall in profit in three years, when it also put major project decisions on hold. Olympic Dam would have created 25,000 direct and indirect jobs, and involved the construction of a new town, power station and over 100 kilometres of railway.
Closer to home, Teck, Canada’s largest diversified miner, announced plans in the fall to defer some $1.5-billion in capital spending over the next year in the face of an unpredictable outlook for the economy.
And earlier this month, Brazilian miner Vale SA suspended a $6-billion potash project in Argentina, saying it did not fit with the company’s commitment to capital discipline.
The casualties come after miners raced for years to supply ravenous demand for commodities from China. At the time, from 2003 through 2008, costs were rising fast, but not as fast as the prices of metals being produced, and investors were eagerly throwing money at projects in the rush to get metal to market.
Today that situation has reversed, with cost inflation outpacing demand for commodities, and with debt and equity markets slammed shut to the mining world.
No sector is immune, but those most pinched are the ones that saw prices fall the most, like in the industrial metals such as copper and iron ore. Gold producers might be better off simply because prices for the metal are not down as much.
“Since 2008, what you’ve seen is those raw inputs have appreciated faster than the commodities that they are producing, which creates that pressure and creates that pinch point,” said David Rombough, a partner with audit and advisory firm Ernst & Young.
Mr. Rombough says it may be too early to conclude that cost pressures have eased, even if inflation is not as exaggerated as it was.
In a report earlier this month, Ernst &Young listed cost inflation and project execution as being among the most significant challenges facing Canadian miners in 2013, pointing at high-level impairments at mining majors.
Peter Marrone, CEO of mid-size gold miner Yamana Gold Inc., warned in an interview last month that it might be too early to count on lower costs. “Costs are sticky and it takes time for costs to come down and it often occurs over many quarters,” said Mr. Marrone, whose company operates mines in Argentina, Brazil, Chile and Mexico.
“With the world falling apart in 2008 and projects being cancelled or suspended in 2009, as you may remember we started seeing costs coming down, but it took a period of time.”
A murky outlook for commodity demand coupled with soaring costs have pushed new mine construction off the agenda for many of the world’s largest miners. The fallout has touched most metals and most mining territories and created a confusing mix of high metals prices and vacant capital markets, meaning massive deposits will not be put into production any time soon. On the bright side, miners say costs are starting to show signs of falling and metals prices can only go higher in the medium term as existing deposits are mined out.
Here are some of the casualties of the slowing commodities cycle – and one potential beneficiary.
BHP Billiton PLC
Last May, the Australian miner sent an unmistakable signal that the global commodities supercycle was teetering, saying it would put $80-billion worth of expansion plans on hold for its iron ore, coal, energy and base metals divisions over the next five years on concerns that commodity markets might cool further. In August, it announced its first annual profit loss in three years.
Barrick Gold Corp.
In July of 2012, the world’s largest gold miner said its flagship gold and silver project in the southern Andes mountain range, called Pascua-Lama, would take a year longer to build and cost 60 per cent more than originally budgeted, putting the final price tag at over $8-billion, up from a starting point of as low as $3-billion. It also said it would shelve $4-billion in other planned spending as it turned its focus to investor returns rather than growth for growth’s sake.
Teck Resources Ltd.
Even though it has more than $4-billion in cash on its books, Canada’s largest diversified miner announced plans in October to defer about $1.5-billion in capital spending over the next year on oil, zinc and copper assets in Canada and Chile.
Even as many of the majors pull back, mid-size miners stand to gain as they build mines cheaper and faster – and have them ready for production just at metals supplies are set to tighten. One potential example is First Quantum Minerals, the Vancouver-based miner that just completed the takeover of Inmet Mining and its prized Cobre Panama deposit. First Quantum says it can build the mine for up to $1-billion less than the current estimate of $6.2-billion.
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