Miners struggling with higher costs, lower prices

Mining must become more cost-competitive to remain profitable, and even viable, in today’s world, according to analysis by a mining and metals expert at Ernst & Young. Speaking at the Prospectors and Developers Association of Canada (PDAC) international convention in Toronto, Mike Elliott said that the mining sector has several big cost constraints to deal with after a decade of rapid expansion and what he termed “production-focused” activity, as well as higher exchange rates.

PDAC-mining-prospectors-developers-copper-gold-iron-chromite-EDIWeekly
World’s largest international mining convention, PDAC is on at the convention centre in Toronto this week.

He enumerated several causes of cost inflation in the mining sector. They include the increasing complexity and remoteness of some projects; increases in uncontrollable costs that are the result of resource nationalism; and the stronger currencies in producer nations.

“In a lower price environment, those that manage costs best will be better able to protect margins—and the companies that achieve sustainable, long-term improvements in productivity and capital project execution will be best positioned to take advantage of opportunities when new capital investment returns,” Elliott says.

To underscore the point, a recent survey of mining companies around the world and reported by the Toronto accounting firm Grant Thornton found that nearly half (43 per cent) of these companies had shortages of cash. High costs, declining prices for metals like copper and iron ore, and risk-averse investors are making it harder for miners to leverage the capital they need. The result could be failing companies, more mergers and acquisitions, or both. The global cash crunch caused by high costs and low prices is affecting mining companies of all sizes.

Despite the challenges facing them, however, more than half of mining executives (54 per cent) remain optimistic that they will be able to meet the challenges, according to the Grant Thornton International Mining Report for 2013.

Meanwhile, Canada’s minister responsible for the Federal Economic Development Initiative for Northern Ontario (FedNor), Tony Clement, said at PDAC that the government is committed to development in the so-called Ring of Fire. That development, covering a large area centred in the Kenora district of northwestern Ontario, is potentially the largest mining development the area has ever seen, worth an estimated $30–$50 billion. There are “significant” deposits of nickel and copper, as well as North America’s largest deposit of chromite, the main ingredient in stainless steel.

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