The 3 C’s for Mining in 2013: Cost Control, Capital Preservation & Consolidation

Despite relatively robust metal prices, 2012 was an extraordinarily challenging year for the mining industry.
Acquisitions completed under a pressure to grow came back to haunt many of the senior producers as capital and operating costs escalated, while juniors were undone by the flight of capital away from investments that carried even a whiff of risk.

By the end of the year, a number of top CEOS – particularly in the gold sector (Barrick Gold, Kinross) – had lost their jobs and several companies in the junior sector were on life support.

But the mining industry is nothing if not cyclical and 2013 could turn out to be a turnaround year if metal prices cooperate. Some of the trends we’re watching include:

Metal Prices: It’s All About China

China consumes almost 50% of the world’s base metals and has a huge appetite for coking coal and iron ore to feed its steel industry: as goes China, so go metal prices.

In 2012 base metals, such as copper and zinc, held up on low inventories, but the steel-making ingredients lost ground as China cut steel production when growth in the country slowed. Modestly stronger growth in 2013 is expected to maintain strong base metal prices while boosting prices for iron ore and coal.

Meanwhile, there are few fears that gold will reverse its 11-year price run to the US$1600-1800 per oz. level and the yellow metal may even head higher as interest rates remain historically low. Likewise, the silver price is expected to head north on strong investment demand.

Project Generators Under Threat

Investors, especially those of the baby boom generation who see retirement looming, are increasingly risk averse after years of economic uncertainty and anaemic stock markets.

The poor appetite for speculative investment is a threat to the Canadian junior mining sector, which relies on equity financing to explore for new sources of metal supply. Hundreds of these juniors could simply fade out of existence as their ability to pay for ongoing costs such as salaries and exploration permits dwindles.

Others will merge to pool their resources for survival, so expect more consolidation in this sector, such as the recent deal between Riverstone Resources and Blue Gold Mining, both based in Vancouver, that will combine Blue Gold’s strong cash position with Riverstone’s projects in Burkina Faso.

Small is Beautiful Again

Focusing on growth for growth’s sake has been a flawed strategy for many producers. Risky acquisitions made at a premium to the target’s market value (Kinross’s purchase of Red Back Mining, for example) have proved costly and forced billion of dollars of writedowns.

At the same time, capital costs for megaprojects in challenging locations are soaring. Cost estimates for Barrick’s Pascua Lama project on the Peru-Argentina border, for instance, have jumped from $5 bn to $8 bn in the past year.

Shareholders are responding by ousting mining CEOs and demanding a focus on cost control. One way to reduce risk and increase margins is to invest in higher grade projects that do not require massive upfront capital costs, leave a smaller environmental footprint, and can have higher returns. Expect huge, low grade, open pit deposits to fall out of fashion in favour of smaller, higher-grade underground situations.

Can’t Tap the Equity Markets? Try Metal Streaming

An option open to companies struggling to finance high quality development projects is to sell future production in exchange for cash up front.

Several royalty companies have formed in recent years to emulate Franco Nevada Mining, the Granddaddy of the gold royalty companies, which makes money by securing a percentage of production revenues. Silver Wheaton – the world’s largest silver streaming company – is the Franco equivalent in the silver space.

Other firms have emerged to finance smaller projects, such as: Vancouver-based Sandstorm Gold, which recently paid $75 mn for a portion of the platinum, palladium and gold produced from the Serra Pelada project in Brazil; Denver-based Royal Gold, which holds royalties on more than 100 producing, development and exploration stage projects, and newcomer Premier Royalty of Thunder Bay. As long as equity markets remain skittish, expect these companies to flourish on the demand for development capital.

…or Court the Sovereign Wealth Funds

Sovereign wealth funds, and other foreign entities with long term outlooks, will continue to scout for new sources of metal supply worldwide. If share prices in the sector remain depressed, expect more opportunistic deals such as the $3 billion takeover of mid-tier producer Quadra FNX by Polish copper miner KGHM Polsaka Miedz SA.

Smaller off take agreements that provide project financing in exchange for the right to future supply, such as Canada Lithium’s recent deal with commodity trader Marbeni Corporation for the Québec Lithium project, will also continue unabated.

Like this article? Then why not share it. Better yet, subscribe to Firmex and get the latest deal insights delivered straight to your inbox.

Virginia Heffernan

Virginia Heffernan is a former geologist who writes about mineral exploration and mine finance. She draws upon her formal education and visits to projects in North America, Central America, South America, China and Africa to provide unique insights into the sector. Connect with Virginia on LinkedIn or get in touch at