Chilean copper mining costs triple during last decade

6 diciembre, 2012
.

03-Dec-2012 La Tercera – News
Since 2002 costs have increased 190% in the mining country, almost twice the world average. Last years’ trend is upwards and it is expected to have a 20% rise this year. As of September Codelco has experienced a 34% cost increment while the BHP copper unit reported a 24% increase in July

A sort of a two-forces combination is impinging upon the local mining industry: one in a positive sense and the other in a negative direction. Together with the windfall the copper price brought, the operators had to learn to live with an increasingly rising production costs scenario. This tendency reached record levels during 2011 where local costs stepped-up 24% almost doubling the world level in accordance with CRU (Commodities Research Unit) figures. As a result, several mining companies costs exceeded the US$2 per pound. The production costs rising factor has been adding up for three consecutive years and the trend continues today. Direct cash cost (C1) – used by world industry to compare different operations and measure projects profitability, including salaries, materials, energy, services provided by third-parties, refining and sales expenditures, and by-products credits – has increased more than 20% average during 2012 in Chile, as reported by analysts and private sector sources.

The increment is a result of a higher demand for supplies, labor, fuel, the power price rise and a lowering mineral grade derived from the aging of the largest deposits in the country, Gustavo Lagos, Professor at the Mining Center of Universidad Católica University , explains. “2012 has been a particularly complicated year as regards to costs and, although the industry mean exceeds a 20% rise, in some cases the increment goes even by far beyond 30%”, Lagos indicates.

Costs upward movement seems to be part of a longer-term trend. From 2002 and until 2011 direct costs in national copper mining activity have increased 190% while the world average is only 89%, the Mining Council has reported. Carlos Urenda, General Manager of the association, singles out that during last five years total costs increased 58% while production dropped 3%.

Energy is the key factor that is currently representing about 20% of production cost. “We are paying extremely high prices for energy, one of highest prices in the world. This is making our mining and other industries that use productive process be less competitive”, the Chief Executive Officer of Copper at Anglo American, John MacKenzie, states. Average cash cost of this mining company operations in Chile moved from US$1.11 per pound in 2010 up to US$1.47 in 2011, the officer says.

In November, the risk-rating Feller Rate company made calculations indicating that between 2002 and 2011 the amount of energy used to produce a metric ton of copper fines increased 31% because of the mineral grade lowering, depth of deposits and labor interruptions. Thus, the report adds that energy represented last year between 15% and 20% of cash cost which could even reach a value “between 35% and 45% of C1 costs by 2020”. “The national mining industry is losing competitiveness against main copper producers. High energy and labor costs and water scarceness are making investment unattractive. This could re-address investment intention to other places where higher value may be generated for investing companies”, Feller Rate notices.

Codelco is the main user of energy in the country: their demand corresponds to 13% of the whole country. An officer from the company explains that during the last five years the state-owned company’s costs have double to reach US$1.56 in September, 34% higher than one year ago. From that cost increment, 30% is for energy. “Costs increase is exposing us to lose competitiveness against other countries whose energy costs have not experienced such an increment like Chile. Higher costs imply more vulnerable operations in periods when copper price is low”, some sources close to the company asserted.

Private companies concern

Because of this, Collahuasi is expanding its energy matrix by “setting contract with a NCRE plant for a percentage of their consumption and exploring geothermal area besides an additional option for photovoltaic energy”, sources from the mining company have indicated.

Edgar Basto, President of Minera Escondida, said in a recent presentation to investors that copper unit in BHP Billiton had a 24% cost increase between July 1, 2011 and June 30, 2012. For that unit, Escondida provides 42% of EBIT while Spence and Cerro Colorado add 19%. In order to set off the costs pressure, BHP is focusing on a savings plan that, amongst other points, includes increasing production and reducing non-essential expenses. However, Basto warned that “challenges will continue being there because the Chilean labor market is very tight, energy costs are high and water cost is rising because of the desalination requirements”.

A high executive familiar with the industry explains that Chile holds higher costs in three key items to decide a new project investment: energy, labor, and maintenance. “On that sense, Chile is losing competitiveness”, he explains.

Urenda insists on the fact that costs increment may make some projects unfeasible. “Costs rising trend cannot be maintained as it is today. The costs estimated for 2012-2020 will make some projects in the large-size mining become non-feasible. Some of these projects represent a third of the additional projected production for that period, i.e. 1.2 million tons per year”, he notices.

Labor issues too

Labor costs are also a matter of concern. “Bonus granted this year in collective bargaining ending agreements at Andina and Los Bronces for CH$15 million and CH$18 million have made costs raise and set an unfavorable precedent for the forthcoming processes”, Lagos states.

Codelco explains that labor cost has strongly increased during last years but “it is also important that salaries increments reflect productivity improvement. If not, competitiveness deteriorates”.

At the same time, qualified labor is representing another high cost for the industry, some sources from Collahuasi indicate. At Escondida, the largest private mining company in the country, contractors are their highest cost item representing 31% of total expenses followed by labor and energy costs with 14% each.

Other variables specific to mining business exist that may explain the costs increment: mineral processing and lowering ore grades. “Deposits aging has increased operational costs because when grades are low more mineral must be worked to obtain the same amount of copper thus implying higher energy, fuels and supplies costs”, Alvaro Merino, Head of Surveys at Sonami, says.

Grade drop has been sudden. In 2002 grade average was 1.13% in local operations while in 2011 it dropped to 0.84%, the Minister of Mining, Hernán de Solminihac, informed. “it is foreseen to continue lowering during the next years which could then make the cost upward trend to maintain for this portion of costs if no new deposits start operations”, he adds.

On this scenario, keeping costs contained is a key task. “Copper price is taken from the international market which, additionally, is a cyclic price. MacKenzie explains that settling in the lower side of the costs curve is the key to withstand and stay in business at the long-term, regardless the prices level”.

English CRU estimates costs will continue climbing. “Costs will maintain their upward trend in 2012 although in a more moderate fashion due to the stabilization and in some cases, lowering, prices of important supplies such as freight, oil and steel”, Senior Consultant, Erik Heimlich, asserts.

Noticias Relacionadas