Mining Projects in Latin America Face the Brunt of Inflation

MINING FINANCE

Mining Projects in Latin America Face the Brunt of Inflation

Truck at Chuquicamata, world's biggest open pit copper mine, Calama, Chile.

JOHN EDWARD

in a worrying developmenT, mining projecTs across laTin america are stalling in the face of rising inflation and inflating production costs. An article published by Bnamericas stated that escalating inflation has hit mining projects across Latin America and driven costs higher. The extent of the problem can be gleaned from the fact that mining companies are being forced to ‘dig in’ to ensure continued impacts in 2023.

The Russian invasion of Ukraine has only worsened the problem by driving up the prices of natural gas, diesel, and energy. Mining companies have also highlighted that the steep increase in the cost of materials like equipment, tires, reagents, and steel have added to their woes.

Additionally, companies are also facing the brunt of rising labor costs in the aftermath of the Covid-19 pandemic. Inflationary pressures have also led to spikes in shipping and freight costs.

“Cost inflation is definitely occurring across the [mining] industry,” opined Joe Bormann, Fitch Ratings’ head of Latin America corporate ratings. “At a general level, it’s happening to every company out there.”

What is more troubling perhaps is the fear that the situation might not get better any time soon. “As we look ahead, we expect that inflationary pressures and the impacts from a competitive labor market will persist into 2023, resulting in production levels and unit costs that will be similar to this year,” Newmont CEO Tom Palmer stated.

Needless to add, mining projects across Latin America are feeling the heat of the situation. In September 2022, Newmont pushed back a construction decision for the US$2.0bn Yanacocha Sulfides gold-copper project in Peru by two years to 2024.

The decision was taken after a review of the project scope. “As part of its review, Newmont considered the unprecedented and evolving market conditions, including the continued war in Ukraine, record inflation rates, the rising prices for commodities and raw materials, prolonged supply chain disruptions and competitive labor markets,” the company said in a release.

The trend of rising capex estimates can be seen in other projects as well. On the basis of the current cost environment and estimate accuracy, Teck Resources and new JV partner Agnico Eagle Mines said in September that development capex for the San Nicolás copper-zinc project in Mexico could go up to anywhere near the US$1-1.1bn range. This figure is significantly higher than the previously forecast US$842mn.

Elsewhere in Mexico, Torex Gold is expecting higher construction costs for its Media Luna gold-copper project. The project was estimated at US$848mn in a March feasibility study in comparison to the US$496mn in a 2018 PEA. According to Torex, the March estimate is, in part, a reflection of the current inflationary environment. “We want the project to be palatable to the market but we also want it to be credible, realistic, and something we can deliver on,” admitted CEO Jody Kuzenko in July.

Despite this worrying inflationary environment, some companies have managed to keep their project costs in check. For instance, SilverCrest Metals is in the process of ramping up operations at its US$138mn Las Chispas silver-gold mine in Mexico.

The mine started production ahead of schedule and was under budget in July. Similarly, Minera Alamos highlighted low-capex development in its Cerro de Oro PEA earlier in October. The project’s pre-production capital costs were pegged at US$28.1mn for an asset which is expected to produce 58,400oz/y gold over an 8.2-year mine life. The company president Doug Ramshaw had attributed the low capital intensity of the project, in spite of rampant inflationary pressures, to the company’s sound business model in a release.

All isn’t well however. Inflation has been tagged as the key driver in Pan American Silver’s decision to suspend underground operations at its Dolores gold-silver asset in Mexico. The company said in August that the decision came in the backdrop of a shortfall in grades which triggered an analysis for impairment.

Needless to add, mining projects across Latin America are feeling the heat of the situation. In September 2022, Newmont pushed back a construction decision for the US$2.0bn Yanacocha Sulfides gold-copper project in Peru by two years to 2024.

MINING FINANCE

Rising costs have also pushed First Majestic Silver to reduce its spending plans. The company focuses on silver production in Mexico and is pursuing the development of its existing mineral property assets.

First Majestic Silver presently owns and operates the San Dimas Silver/Gold Mine, the Santa Elena Silver/Gold Mine, and the La Encantada Silver Mine.

Rising production costs have further exacerbated the problem. According to Chilean copper commission Cochilco, the higher production costs across the country’s copper assets are linked to global inflation and a reduction in output.

Chile happens to be the world’s top copper mining country. In a worrying development, cash costs of larger producers increased by US$0.183/lb in H1, compared to the same period last year, with 16 smaller operations seeing a much steeper rise, up US$0.542/lb.

These higher costs will eventually be passed on to consumers despite the fact that mining companies are likely to benefit from the strong prices of industrial and precious metals in comparison to historical averages.

Metals prices are increasing partly due to global shortages associated with slow project development, mine disruptions, and growing demand.

It is important here to note that consumption of metals like copper and lithium is expected to increase significantly in the coming years with the increasing push towards renewable energy and electric vehicles.

“With the shortage of metals out there, most of those increases in price are going to be transferred on to the end users,” Bormann added. “Buyers out there are just going to pay for it and at the end of the day they are just going to push [rising costs] onto consumers.”

What Effects Will The Global Energy Crisis Have On Crypto Mining Markets?

Even though the current energy crisis will have a considerable impact on miners, there is still some hope that the present macroeconomic circumstances will favor the crypto business.

There is no denying that the world is currently experiencing an unprecedented energy crisis. This crisis has been exacerbated by the COVID-19 pandemic and the Russian invasion of Ukraine. This has resulted in severe shortages and sharp increases in the price of oil, gas, and electricity in nations around the world – especially in Europe and North America.

Limited gas supplies have drastically increased the cost of necessities like fertilizer. In addition, they have also led to a greater reliance on coal and other natural resources. Europe alone had a 14% increase in coal usage last year and another 17% increase is anticipated by the end of 2022. European gas prices are currently approximately ten times higher than their average level over the previous ten years, hitting a record high of over $335 per megawatt-hour in late August. On a related note, the recently released winter fuel estimate for 2022 from the United States Energy Information Administration predicts a staggering 28% increase in average fuel prices for Americans over the current year, reaching a staggering $931.

With such alarming data available in the public domain, it is important to investigate how this prolonged energy deficit may impact the crypto industry and whether its negative impacts will abate any time soon.

Experts Weigh In On The Subject

The global economy is in bad shape according to Matthijs de Vries, founder and chief technical officer of AllianceBlock – a blockchain company that bridges the gap between decentralized finance and traditional finance. He recently told Cointelegraph that a number of factors – such as the power crisis, an impending recession, surging inflation, and rising geopolitical tensions – are to blame.

He added that, “These problems are connected, particularly in the way that capital enters and exits businesses that have an impact. The capital that flows into and out of the digital asset industry is negatively correlated with the macroeconomic environment. The blockchain’s incentivization processes can only function as long as there is this liquidity. Therefore, if there is a lack of liquidity, miners will have fewer transactions to confirm, lower fees, and fewer incentives.”

De Vries also thinks that rising energy prices may give miners greater motivation to switch to Ethereum 2.0’s validator ecosystem, which uses a proof-of-stake mechanism that is much more energy-efficient.

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