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Continued disruptions may push iron ore price above US$100/t, Bernstein says

Metals & Mining

Global Mining Industry Outlook - What Are the Expectations?

Metals & Mining

2018 Mining Industry Outlook - What Are The Expectations?

Metals & Mining

Mining Perspectives Panel Discussion

Cost Competiveness Of European Mines

Continued disruptions may push iron ore price above US$100/t, Bernstein says

The recent tailings dam disaster at the Corrego do Feijao iron ore mine in Brazil, Vale SA's second similar disaster in just over three years, resulted in the commodity's price increasing due to supply pressures.

Iron ore 62% CFR China surged to over US$90/t following the court-ordered suspension of Vale's Brucutu mine, which has an annual capacity of 30 million tonnes. The company plans to decommission all of its dams built using the upstream method, expected to result in the loss of about 40 Mt/y of product.

Corrego do Feijao and Brucutu are satellite mines related to the Paraopeba and Minas Centrais operations, respectively, in the southeastern state of Minas Gerais.

Analysts at Bernstein Research believe that market events such as Vale's production cuts could push prices above US$100/t.

"We think that there currently exists structural tightness in the market, which will turn into deficit in years to come," the analysts wrote in a Feb. 5 note.

Bernstein said it disagreed with bearish long-term forecasts for the metal, which are based on beliefs of spare capacity and weak demand in the system, and said the price surge after the disaster is proof that the contrary is true.

"If there were, in fact, significant spare capacity in the iron ore market, such a response ought to have been impossible. The price elasticity of iron ore seems incompatible with the notion of an oversupplied iron ore market," the team said.

In its weekly report on iron ore shipments, Bernstein said it expects Vale's shipments in the first quarter to fall to 76.3 Mt or lower, compared to an estimated 97.2 Mt shipped in the fourth quarter of 2018.

The overall estimate for iron ore shipments in the first quarter is 276.2 Mt, a 13.2% drop on a quarterly basis and a 6.5% decrease on an annual basis, according to the Feb. 7 note.

UBS said Feb. 5 that it expects a US$10/t difference in the iron ore price to impact Rio Tinto's free cash flow by 30%, or US$1.9 billion, BHP Group's by 16%, or US$1.6 billion, and Anglo American PLC's by 12%, or US$300 million.

Rio Tinto can increase iron ore production by about 4% to 350 Mt in 2019, while BHP can add about 3% to its 2019 output for a total of 283 Mt, according to the UBS analysts.

Despite the increase in iron ore prices, UBS downgraded Anglo American to "sell" from "neutral" while retaining a target price of 1,800 British pence on the stock.

"In our opinion, Anglo is the least attractive of the U.K. diversified miners," UBS wrote Feb. 8, citing lower shareholder returns than its peers, average volume growth and unfavorable expectations for its key commodities.

The UBS analysts instead prefer Rio Tinto, BHP and South32 Ltd. on valuation and more attractive returns.

Prices of iron ore and metallurgical coal are expected to moderate over the next 12 months as supply normalizes, according to the note, while palladium prices will fall in the long term and platinum prices will continue to stay depressed as diesel vehicles lose market share.

"Anglo's value is not compelling, its commodity basket is set to fall and stock specific catalysts are likely to disappoint," UBS wrote.

Watch: Global Mining Industry Outlook - What Are the Expectations?

Nov. 12 2018 — In less than 12 minutes, hear experts from S&P Global Ratings,

J.P. Morgan Asset Management, BMO and Altus Strategies discuss their views on the global mining industry outlook at the Mining Perspectives Panel Discussion 2018, held at London in October.

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Watch: 2018 Mining Industry Outlook - What Are The Expectations?


Mining Hot Spots, Growth, and Risk

Demand, Supply, and Mining Costs

Exploration Budgets and Trends

Investment Strategies

S&P Global Market Intelligence recently hosted a panel discussion in London to discuss the mining outlook for 2018. Our panelists include experts from S&P Global Ratings, Anglo American Plc, Bernstein Investment Research, and Management and Investec Asset Management. 

Watch the full video

Topics Covered:

  • Mining Hot Spots, Growth and Risk
    Where are the hot spots in 2018? Which countries are becoming riskier for mining? What will be the impact of politics on corporate strategies, growth, and risk?

  • Demand, Supply and Mining Costs
    How will changes in industrial production impact metals demand? What are the forecasts for new mined supply? What are the trends in mined ore grades and operating costs? Which major metal will have the greatest shortfall in supply?

  • Exploration Budgets and Trends
    What trends should we expect in 2018? Which metals and regions will have the highest budget expectations?

  • Investment Strategies
    Which investment strategies will make most sense? What is the consensus forecast for metals prices?

S&P Global Market Intelligence - Director of Metals & Mining Research

S&P Global Ratings - Simon Redmond, Director of Corporate Ratings
Anglo American Plc - Peter Schmitz, Head of Commodity Research
Bernstein Investment Research and Management - Paul Gait, Senior Research Analyst
Investec Asset Management - George Cheveley, Portfolio Manager

Watch: Mining Perspectives Panel Discussion

Cost Competiveness Of European Mines

Jan. 25 2017 — S&P Global Market Intelligence recently explored whether mines based in the European Union are cost competitive with other global producers. We examined operating costs of copper, iron ore, and gold mines in 2015. In considering unit costs for operating mines, figures indicate that the EU28’s mining operations are, and can continue to be, competitive compared to mines in other countries around the world.

The only consistently less competitive component of operating costs at EU28 mines is the labour cost. This is a result of high wage rates in the EU28 Member States compared to less developed countries. Labour costs within the EU28 do compare, often favourably, with those in other developed countries such as Australia, Canada, Chile, and the United States.

With the exception of copper in Poland, royalty and tax costs within the EU28 are generally more competitive than other countries. Other cost elements in EU28 mines are also generally similar to the average costs from other regions of the world. Mines operating within the EU28 benefit from being close to and having access to good infrastructure.

Copper: The EU28 account for 4.6% of global production in 2015, from mines in Bulgaria, Cyprus, Finland, Poland, Portugal, Romania, Spain, and Sweden. Of note is KGHM’s Polish operations, which accounted for nearly 50% of copper production from the EU28, and is one of the biggest copper mining complexes in the world. This complex is also the biggest silver producer in the world, mined as a by-product of copper production.

Figure 1 illustrates the operating costs for copper mines in the EU28 and other regions. In terms of costs per unit, Mexico is the most efficient producer, while Papua New Guinea (PNG) is the highest cost producer. The EU28 are located in the upper quartile of the chart and have costs similar to those of Brazil, Canada, and Zambia.

In terms of individual costs, the EU28 indicates higher ‘royalty and production taxes’ costs in comparison to countries with similar total mine costs (Canada, Brazil, and Zambia). EU28 labour costs are similar to those in Canada and Brazil, while its costs associated with ‘reagents’ are lower.

Figure 1 - Costs and production from primary copper mines in 2015

Iron ore: The EU28 account for 1.3% of global iron ore production, mined in three countries within the EU28: Austria, Germany, and Sweden. By far, the most significant contribution comes from Sweden’s LKAB operations, Kiruna and Malmberget, accounting for almost 90% of total EU28 iron ore production.

The EU28, on the right side of the horizontal axis, faces higher operating costs than Canada, but lower than that of the United States. In terms of individual cost components, ‘energy’ and ‘other onsite’ costs are higher in the EU28 than in Canada or the United States.

Figure 2 - Costs and production from iron ore pellet producing mines 2015

Gold: In 2015, The EU28 account for 0.9%  of global production, from operations in Bulgaria, Finland, Greece, Poland, Portugal, Romania, Spain, and Sweden, with over 80% coming from mines in Bulgaria, Finland, and Sweden.

Figure 3 illustrates the relative position of the EU28 gold producers on the global cost curve. The region is located on the extreme right of the horizontal axis, indicating its relatively high operating costs compared to all other countries reviewed.

TCRC & Shipment costs for gold mines within the EU28 are higher than all the other countries in this study as a result of a number of gold mines in the region producing a concentrate that requires smelting and refining, rather than dore.

Dore is a product comprising gold and silver almost entirely and is the most common product of gold mining operations. Refining dore to finished gold and silver incurs only a small refining charge and, because of its low bulk, transport costs are negligible. For these reasons most non-EU countries have very low TCRC & Shipment costs.

Instead of dore, several EU28 mines produce a concentrate. This concentrate typically has gold grades of hundreds of grams per tonne and requires both smelting and refining to produce finished metal. The additional smelting required compared to dore incurs a significant additional cost.

Greater transport costs are also incurred within the EU28 due to gold concentrate’s greater bulk compared to dore. This discrepancy in mass is due to gold concentrate’s comparatively low gold content. In addition, Chelopech gold mine in Bulgaria, which accounted for approximately one-third of the EU28’s gold production from primary gold mines in 2015, produces a concentrate with high arsenic content that incurs significant additional costs at the smelting stage. As a result, gold mines within the EU28 have high combined TCRC & Shipment costs. 

Figure 3 - Costs and production from primary gold mines 2015

Individual cost components

Labour: Labour costs from the EU28 mining operations are above average. Despite being above average, the EU28 labour costs are comparable to, and often lower than, developed nations such as Australia, Canada, Chile, and the United States. It is important to note that high salaries do not necessarily equate to high labour costs. 

A good example can be seen in iron ore (Figure 2), where the EU28, comprising LKAB’s Swedish mines Kiruna and Malmberget, has a lower labour cost than Australia, the United States, Canada and Chile. This is despite these mines being two of the only underground iron ore mines in the world, which are generally more labour intensive than open pit mines, and Sweden having relatively high wages. The reasonable labour costs here are a result of the mine’s efficient operation, which has been driven by LKAB over a number of years.

The converse of this can be seen in gold (Figure 3), where South Africa has the highest labour cost despite having relatively low wage rates. This is a result of many South African mines exploiting deep, difficult ore bodies using outdated techniques and equipment, which leads to low productivity rates.

Energy costs: In all commodities covered, the energy cost within the EU28 was generally close to the global average and sometimes lower. In general, consumption of both electricity and fuel is dictated by the equipment in use at each mine site rather than its geographical location. Mines operating within the EU28 generally benefit from having access to good infrastructure and therefore are usually able to source their electricity from national grids where electricity prices are reasonable. The countries with the lowest energy costs tend to be those with access to cheap electricity such as Russia, which has access to electricity generated using cheap natural gas, whilst the countries with the highest energy costs are those with poor infrastructure or remote mine sites where diesel generators are commonly used as a source of electricity.

Reagent costs: Reagent costs heavily depend on the type of ore being processed and the processing technique, as these factors dictate what chemicals are needed and how much is required. The price of chemicals does vary by region, but as this cost covers such a variety of products, no clear regional patterns can be distinguished. The reagent cost of mines operating within the EU28 will benefit from the good infrastructure in the region, as this will help reduce transport costs of any chemicals required whilst this same factor has an adverse effect on reagent costs in the countries with poor infrastructure or remote sites.

Other onsite costs: As these costs comprise a variety of components, it is difficult to draw any conclusions from regional figures. It should be noted that the EU28 mines covered in this study have approximately the same average onsite costs as other countries. There appears to be no benefit or detriment of these costs for mines operating within MS.

TCRC & shipment and offsite costs: These offsite costs for mines operating in the EU28 are close to the average cost for other countries covered for all commodities, with the exception of gold (Figure 3). Treatment and refining charges tend to be relatively consistent across the commodities, with facilities that undertake these processes charging the same price irrespective of the product’s origin. The presence of several integrated operations, were the mine is integrated with a smelter/refinery operated by the same company that operates the mine, within the EU28 appears to have had minimal impact, either positively or negatively, on these costs. The main variable is the cost of transporting the mine product to the treatment facility, with the mines in the EU28 benefiting from close proximity to multiple smelting/refining facilities. EU28 mines also benefit from access to good infrastructure, namely roads, rail, and ports. For this reason, countries with poor infrastructure or remote mine sites tend to have higher TCRC & Shipment and offsite costs, as transporting their products to the end customer or smelting/refining facilities is more expensive.

Royalty & production taxes: Costs from royalty and production taxes are below average for all commodities, with the exception of copper, due to state royalty systems that are favourable to mining in most of the EU28 Member States. In particular, Finland and Sweden have no royalties on commodities covered in this study, which leads to zero royalty and production tax costs for iron ore (Figure 2), as both operations covered here are in Sweden.

The relatively high royalty cost in copper (Figure 1) is a result of the mining tax introduced in Poland in 2012, which impacts the biggest copper producer in the EU28, KGHM’s Polish operations. Although this cost can be influenced by fees paid to private landowners or other companies, by far the biggest contributor to this cost is mining royalties and tax policies of individual countries.

As part of its STRADE [1] research project, S&P Global Market Intelligence’s Metals & Mining consulting team is investigating how to translate the EU28’s competitive advantages for mining operations into a strategy to promote mining investments into the region


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