Capital inputs account for about half the total costs in mining production – the average for the economy as a whole is 21%. Obviously many of the costs, once incurred, cannot be recovered by sale or transfer of the fixed assets.
Mining is an extremely capital intensive business for two reasons. Firstly mining has a large, up front layout of construction capital called capex – the costs associated with the development and construction of open-pit and underground mines. There are often other company built infrastructure assets like roads, railways, bridges, power generating stations and seaports to facilitate extraction and shipping of ore and concentrate. Secondly there is a continuously rising opex, or operational expenditures. These are the day to day costs of operation; rubber tires, wages, fuel, camp costs for employees etc.
Copper mining has become an especially capital intensive industry – the average capital intensity for a new copper mine in 2000 was between US$4,000-$5,000 to build the capacity to produce a tonne of copper, now capital intensity is north of $10,000/t, on average, for new projects.
Capex costs are escalating because:
- Declining copper ore grades means a much larger relative scale of required mining and milling operations.
- A growing proportion of mining projects are in remote areas of developing economies where there’s little to no existing infrastructure.
The bottom line? It is becoming increasingly expensive to bring new mines, especially new copper mines, on line and run them:
- Antofagasta’s Esperanza Sur project capex went from under US$3 billion to US$3.5 billion.
- Inmet’s Cobre Panama project capex climbed to US$6.2 billion from US$4.8 billion; that’s a capital intensity north of $15,000/t.
- Teck’s Quebrada Blanca’s capex is US$5.6 billion. The amount of money required to build Teck’s new, and very large copper mine in a difficult environment, corresponds to a US$28,000/t capital intensity.
There are several serious concerns in regards to global resource extraction that we need to consider:
- Resource nationalism/Country risk
- A looming skills shortage
- Smaller areas open for exploration
- Competition with Chinese mining investment
- Low hanging fruit, the high quality large deposits have already been found
- Supply bottlenecks for equipment
- Lack of financing options for smaller deposits
- Lack of innovation and technological advancements
- Incredibly difficult and lengthy permitting processes
- Declining open pit production
- Ongoing operational issues
- Environmental group and labor risks
- Natural disasters
- Lower economic attractiveness of new projects *
*Capex and Opex cost inflation have been felt across the entire mining industry for the past several years in what many say is the most severe cost escalation environment in decades.
The International Copper Study Group (ICSG) recently released its 2012 Statistical Yearbook. According to ICSG data the mine capacity utilization rate averaged 81% from 2008-2011 and mine production grew by an average of only 0.9%/yr. The ICSG Yearbook says the low numbers were a result of numerous factors including lower head grades, labor unrest, technical problems, and temporary shutdowns or production cuts.
Consider the Following …
Resource nationalism is increasing – Xstrata Plc’s plans to create a $5.9 billion copper-gold project in the Philippines has been halted because of a mining reform bill.
At least 15 mining projects in Peru (world’s second largest copper producer) have been delayed with their start dates set-back for up to two years because of social unrest, mining investment in the country is expected to fall 33% in 2013 because of the unrest.
Barrick Gold Corp. has lowered its copper production outlook for 2013 due to permitting delays at its Jabal Sayid project in Saudi Arabia.