According to mining analysts at Jefferies energy costs are no longer a supporting but a hindering factor for gold mining companies. Rising tensions following the US-led bombing of Iran and Tehran’s restrictions on shipping in the Strait of Hormuz could cause lasting disruptions in oil markets.
This situation can raise operating costs across the industry.
With cost risk, the question is no longer if it will occur, but when
– wrote the analysts.
According to Jefferies’ calculations, among the North American gold mining companies, the Canadian one G Mining Ventures most exposed to price fluctuations. This is because the company’s entire production comes from the Tocantinzinho open-pit mine in Brazil. It’s in line Endeavour Mining followed by about 85 percent, then a B2Gold 78-83 percent, respectively OceanaGold with an outdoor milking rate of roughly 71 percent. THE Barrick Mining (52-66 percent) and a Kinross Gold (about 55 percent) is also among those affected.
Energy accounts for about 12 percent of the cost structure of the average gold mining company.
In contrast, labor and subcontractors represent 46 percent, and mining consumables and raw materials represent 33 percent. A 10 percent increase in oil prices can increase the average all-in sustaining cost (AISC) by about $10 per ounce. However, the actual impact may differ significantly depending on the composition of the mining assets and the hedging strategy. Companies with diesel price hedging deals or regulated pricing structures may enjoy greater protection in the short term.
In addition to energy prices, the analysis of “secondary” also points to the risk of inflation.
If supply disruptions prove to be permanent, the price of mining aids and consumables may also rise.
Examples of such materials are sodium cyanide, explosives, grinding media, steel, flotation chemicals, and tires. Although post-coronavirus supply chain issues have led many companies to build up significant inventories, these reserves will be depleted over time.
Jefferies expects the performance of gold mining stocks to be more divergent than previously. Winners and losers will increasingly be determined by mine type, cost structure, energy exposure and hedging positions. Although the currently high gold price helps to dampen the cost pressure – for example, the S&P/TSX Global Gold Index has risen by around 14 percent this year – profit margins for some miners may still stagnate or even decrease.
The cover image is an illustration. Cover image source: Getty Images
