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Iron ore continues to have a very strong average industry margin of US $49/ton (52% of average price0in 2014, enabling continued large cash generation in this high volume business. This enables iron ore majors Rio Tin..

18 Sep 2013

SINGAPORE/EDINBURGH/HOUSTON (Commodity Online): Mining industry is going through tough times on fall in commodity prices which has put pressure on their margins but iron ore and zinc miners will perform best on average while copper, metallurgical coal and gold will be most challenged, according to a new report by Wood Mackenzie.

Iron ore continues to have a very strong average industry margin of US $49/ton (52% of average price0in 2014, enabling continued large cash generation in this high volume business. This enables iron ore majors Rio Tinto, BHP Billiton and Vale to push ahead with their expansion on low cost of operations.

It is also in stark contrast to coal and bauxite, both of which have average margins of less than 25% in 2013 - the outlook is particularly bleak for export thermal coal with an average margin of only 19% in 2014.

Mr Steve Hulton, Principal Mining Analyst for Wood Mackenzie, says, "The sectors that fare the worst, with biggest average falls in margins from 2012 to 2014 are copper, export metallurgical coal and gold. Nickel has the lowest average industry margin of only 13% of price in 2013. This rises slightly in 2014, but it is still the worst of all commodities studied. As such, the nickel industry is under severe pressure. In 2012, one-third of industry production generated negative margins after taking into account total cash and sustaining capex costs."

The zinc mining sector has a very high average margin as a percentage of the metal price due to the large contribution of by-product credits like copper, lead, silver and gold, which offset operating costs. While remaining relatively high, the average zinc margin is expected to decrease to 83% in 2014, even with a rising zinc price, due to the lower value of by-product revenue in this polymetallic sector.

For the copper and gold industries, lower prices will continue to put pressure on overall operational cash-flow. In Wood Mackenzie's analysis, average industry margins in 2014 fall to 39% for copper and 44% for gold, down from 49% and 50% respectively from 2012. In export met coal, margins in 2014 are only 25% of average price, down from 30% in 2012.
"Mr Hulton explains the importance of this analysis to producers, "Operating costs in the mining industry have risen rapidly over recent years, but now that prices have dropped there is a renewed focus from mining companies on reducing costs and trying to protect margins."

"To compare overall operating margins, we examine total cash cost plus sustaining capital. For producers to accurately assess cash margins at the mine level, just examining the basic C1 operating cost can be misleading. Total cash cost plus sustaining capital is a better full cash cost measure. This comprises the C1 operating cash cost plus indirect cash costs such as royalties & levies, and the cash spend on capital required to sustain production." The industry standard C1™ cost is the direct cash cost of mining, processing and offsite realisation costs, including any by-product credits. It is primarily used to compare the relative underlying cost efficiency of production between mines.

Mr Hulton concludes, "Individual mining companies will be variously affected depending on their exposure to the different commodities, and where their particular mines sit on the respective industry cost/margin curves. As price takers, there are limited tunes the producers can play and one of them will be to slow down on capital spend, and prioritise the commodities that have the best returns."


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