Ladies / gents:

...from page 11 of "Business In Vancouver" - 09 April 2013....thought you might find this interesting...

Mining and Energy

in Share

Bruce Sprague, Canadian mining and metals leader, Ernst & Young: post-recession investor wariness, tight capital markets have increased focus on cost containment

By Jenny Wagler Tue Apr 9, 2013 12:01am PST

Post-2008 global economic uncertainty and softening commodity prices are making cost-control a top concern for Vancouver miners, according to industry experts.

Mike Elliott, global mining and metals leader for Ernst & Young, said cost inflation in the global mining industry isn’t new – but its significance is.

“It’s been around for many years, but it’s not been as naked as it is now.”

Elliott said the mining industry faces price inflation every time commodity prices rise, triggering a rapid uptick in activity – and thus scarcity and rising costs of “inputs” such as truck tires.

But he said it’s when commodity prices drop, as they have in 2012, that those cost pressures become a top concern for miners.

Bruce Sprague, Ernst & Young’s Canadian mining and metals leader, said post-recession investor wariness and tight capital markets have further ratcheted up Canadian miners’ current focus on cost control.

“If ever there was a focus on managing costs, it’s right now in 2013,” he said. “There’s considerable scrutiny as requested by shareholders and other groups on ensuring there’s adequate management of the costs.”

Elliott said that the cost-watching trend is pushing larger mining players globally to sell less profitable assets and cut back their exploration programs.

But he added that explorers, which make up most of Vancouver’s mining sector, are unlikely to reduce exploration.

“The juniors still see [exploration] is the lifeblood of their ability to make that next equity raising.”

He added that capital-starved juniors struggling for survival will cut back exploration – but generally as a last resort.

Elliott said that while shareholders may push for short-term cash gains, companies should be looking for ways to increase operational efficiency and other more sustainable cost-savings options.

Sprague agreed.

He noted, for example, that companies are considering scheduling projects to maximize scheduling efficiency for all contractors.

Elliot added that to drive cost control, mining companies need to look at a corporate culture change.

“We have a whole generation – particularly of mine engineers – operating within the sector that have never really had to experience a time of low prices and hence need for absolute frugality on costs.”

Elliott added that knowledge still exists in the sector – but it’s in corporate executive tiers.

“The real challenge is to tap the knowledge and experience of those more senior people who have been there and done that in the ’80s and ’90s, to be able to readopt the sort of thinking and practical strategies that were being applied back in those years – but in the current environment.”

He said that that’s not easy move for companies. “Those [executives] are somewhat disconnected now from the day-to-day decision making.”

[..."sidebar" article on same page...]

Costs discourage investors

Mike Elliott, global mining and metals leader for Ernst & Young, said the recent rise in global mining project costs has reduced investor interest in the sector.

“It’s been a universal trend: the significant blowout of capital projects – and the larger and more complex the project, probably the more significant the blowout.”

Elliott added that the trend has also been driven by the high commodity prices that preceded 2012 – and the industry priorities those prices drove. “Mining companies were saying, ‘I want speed first, then specification – does the asset do what it’s supposed to do?’ – and cost came in third. Whereas in the current environment [in 2013], that’s been turned on its head: cost is now the No. 1 concern, then specification, and now schedule comes last of all.”

But Elliot added that the trend toward cost overruns has made global investors more wary of investing in mining.