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CRU/CESCO-Copper miners wary of looming cost run-ups
April 9, 2010 / 11:35 AM / in 8 years

CRU/CESCO-Copper miners wary of looming cost run-ups

* Rising energy, personnel and equipment costs a concern

* Mining of lower grade ore to drive unit costs higher

By Euan Rocha and Eduardo Garcia

SANTIAGO, April 9 (Reuters) - The world’s top copper miners were ebullient this year as the price of the bellwether metal has soared in recent months, but many fear that the rising cost of energy, personnel and equipment could begin to eat into profits, as new projects are brought online.

The price of the metal used in construction and power hit $8,010 a tonne earlier this week in London, its highest since August 2008 and less than a $1,000 shy of its all-time high of $8,940 struck in July 2008.

The strong copper price, driven by surging Chinese demand, has led miners to push forward on copper development projects that were mothballed during the global economic downturn.

But some experts at this year’s CRU/CESCO Copper Conference fear that current capital expenditure estimates for new projects are not fully reflective of the rising cost environment that mining companies face.

“I think we are really at the earliest stages of cost escalation,” said Bob Prieto, senior vice president of engineering of construction company Fluor Corp (FLR.N).

“If you look at the inputs used for building out new projects. There are basically three: labor costs, fuel costs and steel costs ... You have different trends running in all three right now, but all the trends are upwards,” said Prieto.

Also, recent jumps in the price of iron ore and metallurgical coal are poised to increase the price of steel -- a key component of a mining company’s cost at the mine construction phase.

Some also argue that costs in the industry are set to jump in coming years as ore grades at new projects are not as good.

“The cost structure of the industry demands higher prices in the medium and long term because the projects in the pipeline to be developed have lower grades and (therefore) higher costs,” said Diego Hernandez, the head of BHP Billiton’s (BHP.AX) BHP.L base metals business.

Furthermore, the recent rebound in metal prices has boosted commodity driven currencies like the Canadian dollar, Australian dollar and Chilean peso, driving up some costs that are denominated in local currency terms.

“The U.S. dollar is in a perpetual decline - the government seems willing to accept a greater degree of inflation than Europe is willing to tolerate. The world will need more commodities and those countries exporting them will see their currencies appreciate against the dollar,” said Lisa Morrison, a economic risk advisor with consultancy group CRU.


Moreover the operating costs of existing mines have begun to rise steadily as well.

“We really drove our costs down last year ... Part of this was driven by lower input costs, lower energy costs, lower steel costs, lower sulphuric acid costs and some of those input costs are rising, so this will have an impact,” said Richard Adkerson, the chief executive of copper major Freeport-McMoRan (FCX.N).

Copper miners that delayed essential maintenance and other activities during the crisis are also now beginning to refocus on these tasks.

“Expenditure that may have postponed when the price was low such as general site maintenance, equipment replacement and other areas where spending can be delayed, will have to be attended to now that copper price has increased,” said Vivienne Haley, an analyst with CRU.

The industry group expects average copper mining costs to rise 8 percent year-on-year to $1.64 per pound in 2010, as fuel prices and other costs increase.

Due to the high copper price, it is once again viable for miners to tap lower grade ores in existing mines and this is expected to push unit costs higher.

The rush to build new mines and expand existing operations has again raised the specter of a shortage of geologists and other skilled labor, a major bottleneck that miners faced at the peak of the 2008 boom.

“I‘m hearing the engineering companies are already flat out and starting to face some problems recruiting in specific areas,” Antofagasta’s (ANTO.L) Chief Executive Marcelo Awad told Reuters. “It’s going to get even worse next year.” (Reporting by Euan Rocha, Eduardo Garcia, Reese Ewing and Alonso Soto; Editing by John Picinich)

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