We review a range of operational cost-cutting strategies and question how long this cycle of deflation can last.
After years of high cost inflation linked to a high price environment, miners are now firmly focused on controlling and reducing costs, particularly in those industries heavily hit by sharp price falls like copper, gold, iron ore and coal. Here we assess the effectiveness of a range of operational cost-cutting strategies:
One response by producers to lower prices is to increase production, helping to drive down the average unit cost of production by delivering more tonnes out of the same fixed cost base. This strategy is often utilised by bulk commodities such as coal and iron ore.
Increasing head grade
Companies with better quality deposits will nearly always be better placed to cope with price downturn and change in grade is possibly the largest structural cost variable that many miners face. In copper, we predict a 15 to 20% decline in average head grade over the next decade which will push average costs higher.
Lowering strip ratio
Like increasing head grade, changing the mine plan to move lower volumes of waste material is possible for some open pit operations. In 2014, average waste to ore ratios were 10% less than the previous year and are forecast to be lower again in 2015. However, it comes at a future cost – either in a reduction in economic reserves or higher stripping rates one or two years in the future.
Reducing labour costs
Labour and contractor services are commonly the largest proportion of operating costs for a mining operation. There is widespread regional variation, depending on the nature of the local economy and workforce but such costs are often around 30 to 40% of a miner's operating budget – a key target area for producers looking to make reductions.
Technology is the cost wild card. Major advancements that will allow a step change in industry cost structures are difficult to predict but there is a clear trend emerging in automation efficiencies that has further to run and could offer more scope for cost reduction in future.
We anticipate that 2015 will be the year of the biggest fuel cost savings as the lower diesel price flows through to operators. However, we expect these savings to slowly evaporate based on the recovery of oil prices – our mine costings assume a US$60/bbl oil price for 2015, before gradual recovery to US$90/bbl in 2018.
Overall, in today's subdued demand and low price environment, mining companies are likely to surprise as to the quantity of cost savings that will be made.
While a repeat of the 10-year trend of reductions of the 1990s seems improbable, we expect that two more years may be the natural limit before factors such as grade, stripping ratios and increased depth/distance combine to push operating costs back on an upward trend.
Cost deflation in the mining industry: how much and how far? [Subscription required]
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