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Mining Cost Escalation - Impact?

Why Read: This is a good overview of some of the issues facing not just gold miners, but miners generally - all of which, going forward, will impact the share prices of those companies from what they otherwise might be.

Featured Article: A May 9 article speaks to the following issues that are affecting the cost structure of gold (and other) miners:

  • the article reports on a PriceWaterhouseCoopers study that suggests that in 2011 cost inflation experienced by miners generally fell in a range of 10% - 15%, and for gold miners viewed in isolation was somewhat higher - being about 20%;
  • included in those escalated costs are escalated labor costs, as labor demands its share of commodity price increases;
  • increased costs related to shortages in skilled labor (see following);
  • in the case of gold miners, average ore grades have declined by 30% after 1999, meaning that extraction costs per ounce have increased;
  • further in the case of gold miners, for some the processes are becoming more complex and inputs such as acids and reagents are becoming more expensive;
  • environmental costs are continuing to escalate;
  • enhanced safety standards are resulting in increased costs;
  • as corporate social responsibility issues come more to the fore, they add operating costs; and,
  • governments in countries where miners operate are looking to extract more taxes, and are increasing permitting and licensing fees.

Commentary: Aside from these issues, investors and traders should also address at least the following things:

  • the issue of enhanced country risk (which is country specific) which may prove to impact required investment/trading rates of return, as contrasted with directly impacting operating costs;
  • the impact on mining company costs related to implementation of the IFRS accounting standards; and,
  • the flip side of all this, being that in the end escalated costs have to impact operating decisions. At least in theory this in the end will result in reduced supply - which also in theory ought to underpin the price of gold and other resource commodities.

Importantly, with respect to available manpower and skilled labour, you ought to read an article titled Crisis in Mining, written by Richard Mills (Ahead of The Herd Blog - reading time 4 minutes). That article discusses:

  • retirements, emerging market labour demands, and skilled labour (geologists and engineers, for example); and,
  • prospective migration of skilled labour to higher grade projects at the expense of lower grade projects.

Mr. Mills considers this labour issue second only to Country Risk (including Nationalism issues) as largest risk faced by the mining sector.

Should Investors be Discouraged by Cost Inflation
Source: Gold Investing News, Dig Media, Michelle Smith, May 9, 2012
Reading time: 4 minutes, thinking time longer

 

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