- By Region
Will miners keep their promises?
After years of failing to meet production targets, the most hotly debated topic at industry gatherings – from last week’s Cesco week to the Global Commodities Summit this week – is whether a wave of planned copper projects over the next two to three years will see the light of day.
The mining industry’s answer seems to be no.
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But the response might be somewhat disingenuous. At Cesco week in Santiago, a typical presentation ran as follows: Slides 1-5. A catalogue of the problems with building new projects on time and on budget.
Slides 6-8. Our company’s three big projects that will add several hundred thousand tonnes of new production in the next five years.
As one senior trader put it: “The miners are all lying.”
The critical question for both the copper price outlook and the profitability of the mining industry is which scenario will prove wrong.
If the planned new supply is all delivered – consultancy Wood Mackenzie is forecasting more supply growth in 2013 and 2014 than in 1998-2011 put together – the copper market could swing into surplus at some point in the next 18 months, pushing prices towards marginal production costs of $5,000-$6,000 a tonne (from $8,000 now).
If not, copper prices may remain high, and even reach new peaks, but share prices would most likely be subdued as companies fail to meet their targets.
The consensus at Cesco week, from within the mining industry and beyond, was that much of the supply would not arrive on time.
The problems facing the industry are numerous. A shortage of engineers and contractors, particularly over the next 18-24 months when a large chunk of capital expenditure is supposed to kick in, is already causing problems, miners say. Engineering companies are sending their “C team” to jobs which might once have merited the “A team”, with the consequence that teething problems at new projects are becoming more common.
Regulation is becoming tougher and more costly to meet. In northern Chile, for example, no project is likely to be approved using fresh water, meaning new mines must desalinate water and pump it from the sea to the desert – a process that can add 20-30 per cent to operating costs.
The costs of power and labour are also rising rapidly, meaning that new projects require higher copper prices to break even. For example, Codelco, the world’s largest copper miner, told the conference that its power costs had more than tripled in the past decade from 4 cents to more than 12 cents per kilowatt hour.
And as miners venture into less stable countries, political interference and nationalism is becoming a concern. In the wake of Argentina’s nationalisation of YPF, many mining executives with projects near the resource-rich Chilean-Argentine border are nervously examining on which side of the borderline their deposit lies.
Finally, the deleveraging in the European banking sector has knocked the availability of project finance, throwing another hurdle in the path of new mine development (though this is largely a problem for small and midsized miners rather than the majors).
Put it all together and the outlook for the industry appears grim. It is hard to see how telling investors that the industry cannot be trusted to deliver on its promises will persuade them otherwise.