Why Miners Keep Expanding, as Prices Collapse – by Paul Kiernan and Rhiannon Hoyle (Wall Street Journal – October 22, 2015)

http://www.wsj.com/

Weaker currencies help many firms cut costs, fueling new projects and adding to a global glut

RIO DE JANEIRO—Even as iron ore prices have collapsed, Brazilian giant Vale SA is building a $16 billion iron-ore operation that it touts as “the biggest project in our history and in international mining.” How? Because its costs are collapsing as well.

From South America to Australia, plunging currencies in mineral-rich nations are helping some companies expand their mines—and contributing to a glut of production that has saturated markets and driven prices down.

The cost of producing many commodities is “dropping like a stone,” said Goldman Sachs’s head of commodities research, Jeff Currie, who describes it as a “negative feedback” loop. The dynamic helps explain why commodity busts can be so long-lived.

The hope for recovery in commodities markets rests with the prospect that producers will run out of money or tire of losses and shut their facilities, bringing supply back into balance with weakened demand.

But for the world’s top miners, which operate mostly outside the U.S., currency declines have dulled the pain of lower commodity prices. Over the last year, the dollar has gained 58% against the Brazilian real, 22% against the South African rand, 21% against the Australian dollar and 16% against the Canadian dollar.

Companies receive U.S. dollars for the gold, iron ore and coal they dig up. But they pay wages, electricity and many other expenses in local currency.

With the sharp drop in the value of the real, Vale is on track to become the lowest-cost producer of iron ore in the world, Credit Suisse said last month. The Brazilian company said Thursday that its net loss widened by 47% to $2.12 billion for the third quarter—the result of a drop in the price of the iron ore it sells and accounting losses triggered by the falling currency.

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