TORONTO Rising labor costs, surging oil prices and higher tax rates are eating into profits of precious metals miners and raising the cut-off bar on new projects, making it much more difficult for them to replace reserves and boost production.
High precious metal prices are prompting governments to raise taxes and royalties on miners, industry executives say, while giving little thought to the level of risk and the amount of investment required to develop these mammoth projects.
"Countries want to impose super taxes - well, where are the super profits?" Gold Fields Chief Executive Nick Holland said at the Reuters Global Mining Summit earlier this week.
"If we do want to sustain the gold industry where it is - never mind grow it - we are going to need to spend money. And to spend that money we are going to need to provide returns for shareholders," Holland said, explaining the conundrum facing global mining companies.
Kinross Gold's (K.TO) Fruta del Norte project in Ecuador is a case in point, say some industry executives who see the Andean nation's proposal to claim more than 50 percent of potential profits as tantamount to stealing the asset. Kinross is now working on renegotiating that proposal.
Holland argues that one of the biggest challenges currently facing the industry is setting governments around the world straight about their situation.
Although many miners are reporting record profit margins, it does not mean they are reaping bonanza profits, as capital costs to build projects are running into billions of dollars as labor, energy and material costs surge.
Newmont Mining (NEM.N), the world's No. 2 gold miner, recently shelved its Hope Bay project in the Canadian Arctic and booked a $1.6 billion writedown on it after the economics of the project failed to meet its investment criteria.
"People think we are making bonanza profits in the gold sector, but we are not," said Holland, who argues that capital costs and reserve replacement spending can push all-in production costs to the $1,200 to $1,300 per-ounce range.
Metals price performance in 2012 link.reuters.com/cag37s
For graphic on mining equities link.reuters.com/paq37s
LABOR AND OIL COSTLY
Higher taxes and royalties are not the only cost pressures. A growing shortage in skilled labor, coupled with a spike in energy and material prices is making new mining projects much more challenging and raising costs at existing mines.
The volatility in oil prices has led Barrick Gold (ABX.TO), the world's top gold miner, and some of its smaller rivals to hedge most of their oil needs for the coming year. The recent spike in oil prices has nonetheless got many miners more than a little concerned.
"As the oil spike relates to our cost structure, we've got things under control. But as far as what an oil price rise means to the broader economy, obviously we have some concerns there," Barrick CEO Aaron Regent said.
A rise in oil prices could lead to a global economic slowdown crimping demand for gold, copper and the other metals that Barrick mines.
Agnico-Eagle (AEM.TO), the Canadian gold miner that owns the open-pit Meadowbank gold mine in the Arctic, has also locked in all of its fuel needs for the site in 2012, said CEO Sean Boyd. He said the mine requires 50 million to 60 million liters of diesel a year.
While the climbing fuel prices is a concern, Frank Hanagarne, the chief financial officer of U.S. silver miner Coeur d'Alene (CDE.N), said the escalation in labor costs is his biggest concern with skilled labor at a shortage.
"I've seen it on every level of mining," Hanagarne said. "It is a constant struggle to find underground miners and technical people coming out of colleges."
Boyd said Agnico, which taps miners in Quebec for most of its labor needs at Meadowbank, is facing similar cost pressures on the labor front.
"We've seen this impact us very dramatically over the last two years, especially since we are asking people to go to a remote location, stay for two weeks and rotate out for two weeks - you have to pay a premium for that," Boyd said.
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(Reporting By Ed Stoddard, Clara Ferreira-Marques, Steve James, Julie Gordon and Euan Rocha; Editing by Maureen Bavdek)