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Posts Tagged ‘fuel’

Breaking down BHP Billiton’s iron ore production costs

September 29, 2011 2 comments

BHP Billiton organized a site tour of its Western Australia Iron Ore operations this week, providing valuable information about its production costs:

Source: BHP Billiton Site Tour Presentation, September 27 2011

Observations:

  • BHP positions itself in the cost curve around $39/t CIF. Average iron ore price for the year ended June 2011 was $163/t, resulting in a 76% operating margin.

Implications:

  • Combining the data from the two charts above, BHP’s breakdown of total iron ore costs of $39/t CIF China are as follows:
    • US$9.4/t – Contractors
    • US$7.0/t – Secondary taxes & royalties
    • US$4.3/t – Freight, distribution & demurrage
    • US$3.5/t – Depreciation, depletion & amortization
    • US$3.1/t – Fuel & energy
    • US$2.7/t – Raw materials & consumables
    • US$2.7/t – Labor incl. consultants
    • US$0.4/t – Exploration
    • US$5.9/t – Other

©2011 | Wilfred Visser | thebusinessofmining.com

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Freeport confident of copper boom

July 25, 2011 Comments off

“Freeport McMoran, the world’s biggest publicly traded copper producer, has predicted strong markets that could push its cash flow as high as $9bn this year compared with $6.3bn in 2010. The financial strength of Freeport, which declared a special dividend last year to clear excess cash, reflected even higher demand for copper and gold this year than last.

Richard Adkerson, Freeport’s chief executive, said destocking of copper inventories in China was helping to support the copper price. He noted China’s efforts to cool the economy but said: ‘There is a tremendous amount of spending on infrastructure and housing. China has the financial resources to continue to invest in the face of global economic conditions.’”

Source: Financial Times, July 21 2011

Observations:

  • Freeport says it is spending money as aggressively as possible to expand (planning to spend $2.6bln on capex this year), but still this year’s gold production is forecasted to be lower than last year’s output while copper output is increasing marginally.
  • Mr. Adkerson mentions rising input costs, caused by high demand, as the key issue the industry will face over the coming years.

Implications:

  • The industry is facing rising input costs for fuel, power, labour & equipment while average grades of many flagship operations are falling. As a result both mining and processing costs per unit of product increase rapidly, supporting high commodity prices.
  • Mining contractors and equipment manufacturers are faring well as mining companies face resource shortages (Caterpillar announced a 44% increase in profits this week). Miners are forced to pay high prices and book equipment and contracted services months in advance because of global shortages.

©2011 | Wilfred Visser | thebusinessofmining.com

Steel chief predicts miners will lose advantage

May 17, 2010 Comments off

“Quarterly iron ore supply contracts that are set to drive up the price of mass-market products such as cars, are not necessarily permanent, a leading steel industry executive has claimed.

Wolfgang Eder, chief executive of Voestalpine, the Austrian steelmaker, told the Financial Times that miners would start to lose the upper hand in contract negotiations in 18 months. ‘I think the situation will not stay as it is regarding the strength of the mines. It’s never that one party is only strong and the other is only weak. ‘For the time being, there’s no doubt that we have to accept quarterly pricing. [But] in the medium and long run I have some doubts,’ the well-respected industry figure and president of Eurofer, the European steelmaking association, said. …

In the meantime, Eurofer has written to the European Commission demanding an investigation into ‘possible anti-competitive practices’ by large iron ore suppliers. ‘We are sometimes a bit surprised at how similar the pricing of the big miners is,’ Mr Eder said.”

Source: Financial Times, May 16 2010

Observations:

  • After years of pressure by the large mining companies and triggered by Chinese steel makers unwilling to follow benchmark prices the annual pricing system for iron ore has been replaced by a more flexible system.
  • Ore prices in the new system are significantly higher than in previous years, leading to higher prices of steel products.
  • Eder hints at potential cartel-agreements between the large iron ore producers. Some steel makers suspect the miners keep prices high artificially through (illegal) price agreements.

Implications:

  • Eder’s comments will partly be driven by wishful thinking and partly by the knowledge that the best way to make future changes to the new pricing system possible is by keeping all options open.
  • Parallel increases in ore prices can for a large part be explained by variations in mining costs (mainly fuel costs, but also changes in tax system), incurred by al miners. If the miners have nothing to hide, they won’t protest against investigations by governments into price fixing. If they do protest, they will raise suspicion.
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