Cost control and capital allocation among sector challenges discussed at
Mining and Metals sources and spokespeople available for comment
TORONTO, March 4, 2013 /CNW/ - Cost competitiveness and project
execution are among the most significant challenges facing Canadian
miners in 2013, the legacy of rapid expansion and higher exchange
rates, says Ernst & Young.
Speaking at the 2013 Prospectors and Developers Association of Canada
(PDAC) international convention, Ernst & Young Global Mining and Metals
leader, Mike Elliott, says a number of recent large high profile
impairments reported by miners underlines the cost challenge for the
"The mining sector has been very production-focused for most of the past
decade and quite quickly that has changed where cost is now a much
greater restraint and this is requiring a re-think in project
execution," he says.
Producing countries like Canada that experienced the impact of the rapid
expansion and higher exchange rates are now dealing with a higher cost
legacy. As a result, cost competitiveness and tighter discipline around
project execution and operational effectiveness have become a key
The causes of cost inflation in the sector — the fastest mover on Ernst
& Young's 2012/2013 top ten risk list for mining and metals — are
numerous and include:
Increasing project complexity driving operating costs higher.
Increases in uncontrollable costs due to factors like resource
Falling grades increasing cost per unit of production.
Projects increasingly in remote locations.
Supply-side pressures exacerbating operating and capital costs.
Cost inflation compounded by strong currencies of producer nations.
Elliott says while Canadian miners had some cost advantages compared to
similar producing nations such as Australia, every project has to be
more cost competitive because it is the marginal projects that will be
shut down first.
"In a lower price environment, those that manage costs best will be
better able to protect margins — and the companies that achieve
sustainable, long term improvements in productivity and capital project
execution will be best positioned to take advantage of opportunities
when new capital investment returns," he says.
Ernst & Young's Canadian Mining and Metals leader Bruce Sprague adds
that while sustained higher gold prices had blunted the urgency for
gold producers to attack higher costs, they had not escaped shareholder
pressure to return more cash to shareholders.
"The volatility created by the global economic roller-coaster during
2012 has created greater risk aversion by shareholders who have
demanded more scrutiny over allocation of capital, including increasing
pressure on mining companies to deliver committed projects more
efficiently and to return more cash to shareholders," Sprague says.
"We've seen gold producers respond to this by increasing payout ratios
and indexing dividends to the gold price."
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SOURCE: Ernst & Young
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