“Poor cost management can have huge repercussions in the form of long-term growth and shareholder value, and increases the risk of fraud. It remains a significant risk to those mining and metals companies that still don’t have long lasting operational efficiency measures in place.”Paul Mitchell, Global Mining and Metals Advisory Leader, Ernst & Young
Summary: During the global financial crisis, prudent cost management became the catch-cry for many organizations. Collective corporate memories of this state of affairs are still raw today. Against this background, capital and operating costs have continued to rise through 2010 and into 2011. While operating costs are increasing on the back of higher material prices (e.g., steel, fuel, contractors), supply-side pressures are driving up capital costs.
Cost management is still a great area of concern. This is largely due to the fact that operating costs are on the rise partly due to a scarcity of key inputs, labor, capital equipment and energy. Mining consumables are tied to the price of oil and steel, both of which are expected to increase as world economy improves.
Similarly, transportation costs are increasing while sector specific costs are increasing at a greater rate than normal inflation.
Changing costs of diversified miners - weighted average for Anglo American, BHP Billiton and Rio Tinto
Source: Ernst & Young analysis
|Steps mining and metals companies can take to respond to this risk: |
- Focusing on sustainable cost reduction programs
- Divesting non-core assets
- Reviewing capital tied up in high levels of pre-stripping, advance development and stockpiles
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