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Miners, Supply, and Cost Pressures

September 6, 2011

“Building new mines is getting costlier, thanks to higher energy and wage bills as well as equipment shortages. Investing in new copper mines is 50% more expensive in real terms than the average since 1985, HSBC estimates. This acts as a brake on new growth projects. Tighter regulation also slows development; Anglo American estimates getting the right permits to set up a new mine in Australia takes three years now, compared with one year back in 2006.

Many analysts and investors, however, are well aware of the industry’s shortcomings already. Commodities consultant Brook Hunt says it discounts planned industry production growth by 25% for brownfield projects, and by 50% for totally new projects. For a key commodity like copper, it also discounts production forecasts by 5% per year to allow for strikes or poor weather.

Even so, it expects more aluminum, nickel, lead and zinc to be mined ion 2012 than will be consumed, with only the markets for lead and zinc falling into deficit thereafter. It expects the copper market to be in balance next year and surplus thereafter and the iron-ore market to approach balance by 2015.”

Source: Wall Street Journal, September 6 2011

Observations:

  • All large miners report increasing costs, but the high commodity prices still help them to retain profit margins. Large projects are typically phased so that development costs can be controlled per phase.
  • In its latest annual results presentation BHP Billiton reported the increase of capital intensity of iron ore production (for BHP mainly in Western Australia). Costs per tonne of capacity currently are around $200, while pre-crisis costs were below $100 per annual tonne.

Implications:

  • The issue of cost pressures will partly solve itself when demand falls and prices decrease: demand for labor and equipment will fall too, enabling cost cutting.
  • The difficulties of capacity increases is more fundamental: new projects have lower grades, are more remote and located in less stable areas politically, leading to both high costs and more effort required to set up a financially stable project.

©2011 | Wilfred Visser | thebusinessofmining.com

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