Cost competitiveness key issue for Canadian miners: EY

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(Toronto, 4 March 2013) Cost competitiveness and project execution are among the most significant challenges facing Canadian miners in 2013, the legacy of rapid expansion and higher exchange rates, says EY.

Speaking at the 2013 Prospectors and Developers Association of Canada (PDAC) international convention, EY Global Mining and Metals leader, Mike Elliott, says a number of recent large high profile impairments reported by miners underlines the cost challenge for the sector.

“The mining sector has been very production-focused for most of the past decade and quite quickly that has changed where cost is now a much greater restraint and this is requiring a re-think in project execution,” he says.

Producing countries like Canada that experienced the impact of the rapid expansion and higher exchange rates are now dealing with a higher cost legacy. As a result, cost competitiveness and tighter discipline around project execution and operational effectiveness have become a key issue.

The causes of cost inflation in the sector — the fastest mover on EY’s 2012/2013 top ten risk list for mining and metals — are numerous and include:

Increasing project complexity driving operating costs higher.

  • Increases in uncontrollable costs due to factors like resource nationalism.
  • Falling grades increasing cost per unit of production.
  • Projects increasingly in remote locations.
  • Supply-side pressures exacerbating operating and capital costs.
  • Cost inflation compounded by strong currencies of producer nations.

Elliott says while Canadian miners had some cost advantages compared to similar producing nations such as Australia, every project has to be more cost competitive because it is the marginal projects that will be shut down first.

“In a lower price environment, those that manage costs best will be better able to protect margins — and the companies that achieve sustainable, long term improvements in productivity and capital project execution will be best positioned to take advantage of opportunities when new capital investment returns,” he says.

EY’s Canadian Mining and Metals leader Bruce Sprague adds that while sustained higher gold prices had blunted the urgency for gold producers to attack higher costs, they had not escaped shareholder pressure to return more cash to shareholders.

“The volatility created by the global economic roller-coaster during 2012 has created greater risk aversion by shareholders who have demanded more scrutiny over allocation of capital, including increasing pressure on mining companies to deliver committed projects more efficiently and to return more cash to shareholders,” Sprague says.

“We’ve seen gold producers respond to this by increasing payout ratios and indexing dividends to the gold price.”

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