Cost inflation has been a constant in the Australian resources sector for a number of years, just as it is across the Australian economy.
With CPI data out this week showing that inflation has reduced to 6.0%, down from the previous measure of 7.0%, economists seem to see things heading in the right direction.
We all know that inflation is made up of a number of components and it impacts people and parts of the economy very differently. Lower income families suffer more with higher rent, food and fuel costs.
For the resources sector, it appears that cost inflation is having a differentiated impact on companies, depending on the size of the company and size of operations.
A number of producers have reported quarterly results in the last week, with the reports telling wildly different commentaries with regards to cost pressures at the operations.
Rio Tinto commented that operating costs seem to have stabilised, something that is borne out in the results. Despite a weaker EBITDA result, this was largely as a result of pressure on revenues due to weaker commodity prices, rather than higher costs.
BHP’s results indicate a slight uptick in costs, with Escondida in Chile and the WA iron ore operations contributing to the rise. However, some analysts think that this may be a short-term issue with the new South Flank iron ore mine, utilising autonomous haul trucks, ramping up to 80Mtpa over the next 12 months.
Pilbara Mines continued to be a cash factory, with its treasury swelling to $3.3 billion after adding another $655 million during the quarter. Its worth noting that the cash balance is higher than its market cap two years ago when it consolidated Pilgangoora through the Altura deal.
Big gold miner, Northern Star Resources, also told analysts on a call this week that costs had stabilised across its operations. Stuart Tonkin, Northern Star’s CEO, said “We are experiencing, and will experience, some higher costs in parts of the business – whether it’s labour or contractors – we’re forecasting probably some uplift in those. But broadly across the board in the basket of our costs we’re anticipating it be sort of flat.”
At the other end of the spectrum, some smaller producers are struggling, with higher costs persisting. Coupled with lower revenue (like the majors), for some companies, this has pushed their operations into the red.
Galena Mining and Toho Zinc are commissioning the Abra base metals mine, with costs rising by 12% during the quarter. Coupled with lower commodity prices, the mine bled nearly $20 million during the quarter, with the cash balance propped up by a $20m capital raising.
Ora Banda Mining, owner of the Davyhurst and Riverina Projects, produced an upbeat quarterly, however costs for the quarter (Cash $3,315/oz, AISC $3,107/oz) were still above the realised price. The cash balance did increase during the quarter, however this was due to $30 million from a placement. OBM sees better times ahead with a forecast drop in costs of 25% for FY24.
It wasn’t all doom and gloom for the smaller producers. Red 5 had a cracking quarter, with higher production, higher revenue and lower costs setting the company up for a good year ahead. The company’s net debt position improved by $44.5 million during the quarter, an impressive feat.
A big measure on the cost outlook will be the planned capital spends over the next 12-24 months. Will companies (and financiers) sit on their hands to see how inflation pans out over time or will they continue to invest in growing production to offset operating cost pressure?
A hat tip must be given to Matty Michael and the team from the Money of Mine podcast for the inspiration for this week’s article.
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Photo by Joshua Hoehne