U.S. and Canadian Mine Costs has Peaked

Mineweb, Apr 10, 2013

According to Cowen Securities, mine capital and operating costs in the US and Canada appear to have peaked last year.

Mine capital and operating costs in the US and Canada look to have peaked last year, says Cowen Securities.

In a new note, titled: Digging down into industry costs, the firm writes that data from the US and Canada demonstrates that costs largely peaked in 2012 and have either stabilized or are in decline.

In the US, the securities firm writes, operating cost inflation is outpacing other countries due to the higher cost of power, grinding media, and reagents.

According to Cowen, mining cost inflation in the US ran at about 6% between 2004 and 2008 before being interrupted by the global financial crisis. But, in 2010, 2011, it recovered to roughly the same level before slowing to around 2.3% in 2012.

That said, Cowen writes, mine operating costs look to have peaked in March-April last year, while mill-operating costs peaked in September 2011.

According to the group’s data, operating costs declined modestly from the peaks, while “capital costs have been stable for both surface and underground operations for most of 2012, with modest peaks appearing towards the end of 2012”.

And, while it says, it is too early to tell if mine capital costs are declining, it says, mill capital costs have been stable for the last 18 months.

In Canada, the situation is slightly more uniform, “Data through November 2012 indicate that both operating and capital costs peaked in February-March 2012 and have been on a downward trend since,” Cowen writes.

Adding, “This could be due to higher capital available for Canadian projects pre-2012 and more projects funded by smaller companies. The drying up of this spending could have occurred much faster in Canada, coupled with a stable CAD/USD, higher labor costs, and higher fuel costs, which could all combine to explain this pattern.”

The implications for gold stocks

In the note, the securities firm differentiates between operating cost (the cost to process one ton of ore) and cash costs (the cost to produce one ounce of gold or silver) because, it says, “operating cost per ton is a more telling indicator of industry inflation vs cash cost per ounce”.

But, it adds, while cash cost fluctuations can be more volatile than operating costs because of factors like declining ore grades, the processing of marginal ore and the counting of royalties and other revenue-linked non-operating costs in the cash-cost number, “going forward, we expect cash costs to stabilize or decline due to lower operating costs, our stable gold price assumption, and renewed industry spending discipline”.

It adds that this spending discipline, brought generally by an increased discipline being imposed on miners by new management is also resulting in a slowdown in materials demand, which is delaying major capital projects.

This, the firm writes, “will put downward pressure on costs across the industry.”

The trend toward lower costs is a positive for gold stocks, says, Cowen, because, it says, these lower costs should translate into better cash cost performance, wider margins, and higher returns for the gold miners.

And, it says, it is likely that “higher-cost miners with the majority of operations in the Americas to benefit most – including Newmont, Yamana, and Kinross.