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Rise in copper mine operating costs is attributed to doubling of energy costs due to enhanced prices, higher labour, services and technical costs, not to speak of the increased energy intensity.

10 Feb 2014

Commodity Online
It is surprising to note that while the marginal operating costs of producing nickel, aluminium and zinc have remained more or less stable at 0%, 8% and 17% respectively for miners, the cost incurred by copper mines have jumped by 87% since the advent of financial crisis in 2008. This is according to a report from Barclays that arrived on Saturday citing research firm Wood Mackenzie.

But companies like Southern Copper are betting big on opportunities out there as they expect growth in developed economies to pick up when the days progress into years. As the Southern Copper CFO Raul Jacob would say, developed economies invariably become the biggest consumers of copper although indirectly.

The rise in copper mine operating costs is largely attributed to doubling of energy costs due to enhanced prices, higher labour, services and technical costs, not to speak of the increased energy intensity gnawing at the margins. This should be read in the context of flat-to-falling prices across the globe for copper.

This means “that copper miner margins have been squeezed, threatening decision making and the ability to invest in future supply,” Barclays noted in the report.

“Although mining companies’ decisions to invest in new supply should in theory be based on long-term potential returns and not by short-term fluctuations in revenue streams, in reality this is often not the case, especially for junior miners,” the report added.

According to Wood Mackenzie, the 2014 copper production per ton would cost $6955.

But where there are rules, there are exceptions; where there are risks, there are opportunities.

Southern Copper, a copper mining company with mines in Mexico and Peru is planning to invest $2.3 billion in capacity augmentation in 2014 which would also turn out to be 35% higher than 2013 fund outlays at $1.7 billion for the same purpose.

"Our growth program to develop the full production potential of Southern Copper is in full steam," Chief Financial Officer Raul Jacob said to the Wall Street Journal. "We have enough funds to support our growth program with cash as well as cash from operations," he added.

The company expects to invest $1.6 bn in 2015, $900 mn in 2016 and another $500 million in 2017 which means 2014 would see the peaking of investments by the company.

Obviously, Southern Copper is not the only company vying for the profit pie from long term expansion plans.

The world’s biggest copper producer, Chile based Codelco had way back in May 2013 unveiled plans to invest $27 billion in capacity addition. The amount is touted as the largest in Codelcos’ history. 

The company, as per reports arrived in October 2013, was also keen to invest in overseas ventures in Brazil, Ecuador and Columbia. 

Meanwhile, Freeport McMoRan Copper and Gold Inc, the second largest producer of copper in the world was seen potentially investing $275 million in exploration and research activities in 2013 , according to its 2012 annual report, the latest in such series available. 

Goldman Sachs in January forecast global copper prices to average around $7,500 a tonne in 2017 subsequent to a recovery in 2016.

Also, in the near term, Barclays is forecasting a “slowdown in Chinese copper demand growth this year (2014) to below trend of 7.5% from 12% in 2013, with the target 10% increase in power grid spending likely to offset softness elsewhere.”

(Story image courtesy of Gualberto107/freedigitalphotos.net)

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