Mining costs may be abating but labour worries persist (National Post – December 12, 2012)

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It might be minimal, but miners appear to finally be feeling some cost relief.

Despite operating in a relatively healthy commodity-price environment, the past couple of years have been mostly miserable for mining executives, as soaring costs have crimped their margins and frustrated investors. Major projects have been called off or deferred because of low projected returns, and CEOs who couldn’t turn things around got fired. By mid-2012, it was clear that investors had lost all patience with under-performing companies.

Even so, the miners are feeling a bit more optimistic as 2013 approaches. While there are few firm numbers to back it up, anecdotal evidence suggests that cost inflation in the mining sector is beginning to slow down and come under control.

As projects got delayed over the past year and companies slashed their capital spending budgets, the incredibly tight markets for inputs such as equipment and consumables began to ease, experts said. They should soften even more over the next two or three years as the pipeline of projects gets thinner due to the deferrals. Many of the largest projects in the world are on hold, including the absolute biggest: BHP Billiton Ltd.’s US$28-billion Olympic Dam expansion in Australia.

There are some signs that input costs are pointing downward. Caterpillar Inc., the world’s biggest maker of mining equipment, warned in October that its order backlog declined by more than US$5-billion in three months, while saying that new orders were declining “significantly.”

“I think we are starting to see those pressures moderating. However, the one we are not seeing moderating is labour. The skill shortage is real,” said Glenn Ives, Americas mining leader at Deloitte. He said the shortage of quality workers is so severe that one major company told him its productivity was 20% to 30%.

But even on the labour side, where inflation has been outrageous and costs tend to be “stickier,” it seems that skilled workers are more available than they used to be. Barrick Gold Corp. was recently able to secure the “A-Team” from engineering firm Fluor Corp. for its giant Pascua-Lama project on the Chile-Argentina border. Pascua has been suffering from out-of-control cost increases, largely because Barrick could not find enough skilled workers and had to rely on less talented people. The fact that top talent was available suggests that, at the very least, the engineering firms are not as busy as they were in 2011.

The next year or two could bring further cost reductions, experts said. Some companies are looking beyond the spending cuts and are gearing up for mine development, having decided that the markets for equipment and other inputs will keep getting softer.

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