The Real Costly Curve

13 Dec

It would seem like the revolving door at numerous mining companies is indicative of a rising cost curve that is finally catching up with heightened investor expectations.  We have mentioned in the past, the fact that investors are now focusing on measures of profitability such as ROE and ROC amidst a stable to falling price environment.  What is also interesting, is that CAPEX is also coming under the investor microscope with a number of high profile projects being completely eliminated.  The termination of such high growth, high payback projects points out the cost escalation versus payback argument that is going on in almost all mining board rooms.  However, the relevant payback period ,it would seem, now coincides with the degree of investor frustration at ever increasing cost overruns.  Ask Cynthia Carroll, ex CEO of Anglo American about the payback period on the Minas Rio iron ore project in Brazil.  The cost overruns were costly to both Anglo shareholders and Ms. Carroll personally as they cost shareholders $5bln in cost overruns and forced her to think about her “retirement”.  While it is difficult to project what commodity prices will be several years into the future, it is clear that the projected all- in cost per ton of product has not been adequately calculated in a number of high profile projects. These all-in costs would include cost price escalations on construction, escalations on resource taxes, as well as concessions for some reasonable profit margin.  Clearly, organizations such as BHP and others had made such cost projections prior to the inception of these long-lived projects, however one wonders whether they were still banking on ever higher prices to bail out poor forecasting.

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