Costs for mining firms are sliding, a rare bright spot in a downturn that will help soften the impact of a crash in metals prices, but some improved costs, such as labour, will be slow to appear. The same gloomy forces that have hammered commodity prices and shot down stocks have also pushed down the cost of inputs such as oil, key for open pit mines that use fleets of oversized diggers and dump trucks.
The biggest winners will be the major mining groups, such as BHP Billiton and Rio Tinto, which pride themselves on developing low-cost deposits, where the sliding costs will help support margins through lean times.
For some mines teetering on the brink of profitability, the lower costs might prove a lifeline, but may prove scant relief for small firms that run out of cash or have operations at the top of the cost curve.
"The cost picture is an awful lot better," analyst Des Kilalea from RBC Capital Markets told a mining conference in London last week. "The oil price has come down by two thirds. Steel prices have also come down."
During a commodities boom in recent years, mining firms enjoyed sharply higher metals prices, but some of those benefits to the bottom line were erased by surging operating costs.
Analyst Nick Hatch at ING said production costs in the second half of 2008 were expected to level out, largely matching the levels in the first half.
"In 2009, we believe that comparable unit cash costs could fall 10-25 percent year-on-year, with further declines possible in 2010," he said in a research note.
Freeport-McMoRan Copper and Gold Inc said on Dec. 3 it expected net unit cash costs to fall by 25 percent in 2009.
That scale of cost declines would help, but would still be overwhelmed by a collapse in metals prices. Copper has shed nearly two-thirds since hitting a record in July.
GRADUAL MOVE IN LABOUR COSTS?
While oil prices have already plummeted on world markets, other costs will take longer to decline, such as labour, industry players said. "We've had a real shortage of skilled labour, and on the management side as well, it's been spread very, very thinly," said Judith Mosely, managing director of mining finance at Societe Generale.
"And of course a lot of the projects are in somewhat challenging countries where it's not necessarily that easy to attract management."
During the commodities boom, companies bid up the salaries of hard-to-find skilled workers.
"In Toronto, companies were hiring geology students to work as summer geologists and they were making $60-$70,000 for the summer. That's how ridiculous things got," said Keith Spence, president of Canada-based Global Mining Corp.
Labour costs are expected to ease over time as workers are shed from companies that decide not to continue with projects and as demand evaporates from exploration firms that are putting new projects on hold, industry players said.
"I think we will have a clear-out in the market in the next month or two when a lot of juniors will give up, but I think it's too early to say how quickly that will flow through on labour costs," said Michael Loos, a mining engineer with IMC Consulting Corp.
NO WAITING TIMES
Miners building new mines will gain from a sharp decline in rivals seeking equipment after boom times had resulted in waiting times of two to three years for key items such as mills.
"Time is money and the long waiting times are a big risk to manage. That should no longer be an issue," said Spence, who previously worked in mining project finance for banks.
Lower oil prices will give a shot in the arm to open pit mines with trucking fleets, and operations that use diesel to generate power at remote locations. Petroleum is also a raw material for explosives, used for blasting away rock.
Sulphuric acid is a double-edged sword since copper and zinc smelters that produce it as a by-product will lose out as prices fall, but mines that use the solvent extraction and electrowinning (SX-EW) process need 3.0-3.5 tonnes of it to produce each tonne of metal.
Finnish firm Talvivaara, which has just launched a new nickel mine, said last week the fall in sulphuric acid prices was helping its operating costs.
A weakening of exchange rates in many emerging market countries will boost firms, such as South Africa's AngloGold Ashanti, which said last month its fourth quarter cash costs were expected to fall 7-9 percent below the forecast level due to a weaker currency.
Some mining executives have already noticed a change in attitude from contractors, which could afford to treat mining firms with a certain amount of arrogance in the past.
"Up until now, this has been a very, very challenging time to build a project. But I'm happy to say that is changing and the boot is coming back on the other foot," said John Lewins, Managing Director of Platinum Australia Ltd.
The firm has just launched production at its Smokey Hills mine in South Africa and is working on a final feasibility study for its Kalahari project.
