Inflationary pressures prompting miners to take pause

Tuesday, 22 November 2022

The mining industry is grappling with challenges not seen for over a decade.

Lower grade gold miners in particular are finding it hard to maintain economies of scale as they struggle to keep costs in check. Much of the pressure stems from the combination of global inflation, higher foreign exchange costs and labour rate increases. These key factors are creating a strategic quandary for companies juggling profitability with shareholder expectations, with one miner, for example, recently pausing operations entirely in the face of a projected 85% increase in mining costs for FY23.^[1]

The situation is widespread and mining companies nationally are being forced to consider various solutions and courses of action. Questions being asked centre around whether costs can be cut to maintain the status quo and have operations continue, or whether it makes more economic sense to down tools and leave resources in the ground until economic conditions improve.

Treading carefully around such issues is essential. In a sector beset with these inflationary pressures, a single difficult month can wipe out a company’s liquidity buffer and, as a result, has sent the price of gold and other asset values tumbling.

Rigorous streamlining of operations has been the best option for some. Cost control measures adopted by various miners have included renegotiating key contracts, setting more “prudent and conservative guidance”^[2] and simply aiming to make mines better and more profitable through chasing grade over volumes.

Some companies are making the decision to pause operations at lower-grade mining centres and focus on more profitable, higher-grade operations. Earlier this year, a West Australian miner told its investors that operating costs were spiralling so high it was simply “better off leaving the gold in the ground”.^[3] The business model it had followed for the past six years had been rendered unviable by increasing costs and there was now no point in continuing its existing gold operation. It was later revealed that contractor rates had risen by up to 85 per cent, load and haul rates by 68 per cent and further rises of up to 17 per cent were forecast in FY23.

Soaring production costs - triggered by severe shortages of skilled labour plus higher diesel and electricity prices - are also hitting other miners.^[4] In contrast to gold, however, the current record commodity prices being paid to coal miners who sell into the spot market are counteracting the inflated costs in the shorter term.

In such challenging economic conditions, mining companies need to take a broad view to survive. While it is critical to examine every available option to control costs, there is a delicate balance to be found in preserving value for shareholders.