GOLD is up — but not enough. As for the resources sector generally, one veteran says there’s never been a more difficult time.
The yellow metal had a nice bump (thanks, Iraq) and closed at $US1315 an ounce. While gold bugs celebrated, there was some sobering news from Virginia-based resources analyst SNL Metals & Mining. Over the past 10 years, the cost of building a mine has blown out from $US560 an ounce of gold production capacity in 2004 to more than $US2300 in 2013. This was based on a study of 192 mines with minimum output of 50,000 ounces commissioned over that period.
Of course, construction costs are not the only factor in project economics (grades are another) and the increase in the gold price since 2004 dulls some of the pain, but nevertheless it is, one, a stark example of the cost inflation in mining about which we have heard so much and, two, reminds one that new projects are expensive things.
As SNL points out, when it became obvious in 2006 that gold’s rise was no seven-day wonder, producers green-lighted more capital-intensive projects; and, chillingly, SNL notes that capital cost intensity will hit an average $US2400 an ounce this year before pulling back. In other words, good drill results are the easy part. It’s making the development economics right that is harder.
Meanwhile, Peter Strachan at StockAnalysis says he has never seen it so tough, with “the vast majority” of ASX-listed resources companies now the “walking dead, just hanging on by their fingernails”. And the mining service companies “are bleeding in a ditch for want of work and cutting their own throats with cut-priced quotes”. Latest figures show minerals exploration spending is about 12 per cent beneath what it was in the GFC depths of despair.
So how do you get a 31.6 per cent share price leap in a day in this climate? Announce that a tech company has taken a slice of you, that’s how. Coking coal play Liberty Resources (LBY) is now 6.4 per cent-owned by Applabs Technology (ALA), which produces “stunning, high-performance apps”. LBY sees substantial opportunities “to expand into new global business opportunities with immediate revenue and profit growth”. Is it just us, or does that have a 1999 dot.com ring to it? But we may be unfair: after all, the Applabs website promises “the team won’t let go of your app without a dynamite launch plan”.
POTASH prices just don’t seem to want to budge. As Roger Bade of London brokerage Whitman Howard notes in his paper on the sector, in spite of Belarus and Russia patching up their differences (the break-up of their cartel having sunk the price of the fertiliser feedstock) the potash price remains depressed at $US270- $US300 a tonne.
While North American producers are reporting demand remaining firm, it is as yet insufficient to offset increased supply from Russia and Belarus.
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