2022: A year of rising costs for miners in Latin America?

Some of the biggest gold and silver mining companies in Latin America are grappling to keep a lid on costs, as COVID-19 supply chain disruptions spark soaring fuel and consumables prices.

At least six of the region’s major producers have reported cost inflation in the 4-7% range in recent days, citing huge rises in diesel prices along with higher input and freight costs and upward pressure on wages, which many expect to continue at least through the coming year.

“So 2022 is, I think, going to be for the mining industry, a cost escalation story,” said Tom Palmer, CEO of Newmont.

The miner, the top gold producer in Latin America with assets in Mexico, Argentina, the Dominican Republic, Peru and Suriname, is seeing cost inflation upwards of 5% across materials, energy and labor, Palmer told an earnings call.

And the pandemic appears to be a key factor behind the rises.

“While COVID-19 infection rates are declining and vaccination rates are improving near our operations, the knock-on effect from supply chain disruptions and tightening labor markets is creating new complexities to manage,” added Newmont’s COO, Rob Atkinson.

“There is increased pressure on input commodity prices such as steel and diesel in addition to unpredictable freight costs and timing of deliveries.”

INDUSTRY PICTURE

Experiences across the sector appear largely consistent with the 5%-plus inflation cited by Colorado-based Newmont.

“Across the industry, from an operating cost perspective, it [cost inflation] is in the 5-7% range, and I’d say our experience has been consistent,” Jamie Porter, CFO for Alamos Gold, told a conference call.

For Alamos, whose assets include the Mulatos gold mine in Mexico, diesel and steel costs have risen sharply, with costs rising as multi-year contracts expire.

And inflation is expected to continue at least into 2022, according to fellow Canadian Torex Gold, whose El Limón-Guajes gold mine is one of Mexico’s biggest.

“As we look into 2022, early signs are that we are expecting inflationary pressures of between 5% and 6% to flow into our cost base for next year with pressure particularly on cyanide, electricity and diesel costs,” CFO Andrew Snowden said.

Coeur Mining, which has the Palmarejo silver-gold mine in Mexico and assets in the US and Canada, also reported cost rises of around 5% overall, with diesel prices up 35% in the US and 20% in Mexico, CFO Thomas Whelan told a call.

And US-based Coeur does not expect cost pressures to ease significantly in the near future.

“We are not anticipating that pressure to come off in 2022 at all, so we're doing lots of things to do our best to maintain those costs,” Whelan added.

COST CONTROLS

While mining companies are at the mercy of global trading conditions in terms of consumables prices, firms are taking steps to limit the impact on margins.

These include a stronger focus on efficiency, such as Newmont’s Full Potential program, which is being employed to reduce costs at its Peñasquito mine in Mexico and Cerro Negro in Argentina (in picture), Atkinson said.

The company is also looking into ways to maximize the amount of freight put on to ships or in containers to get the best pricing possible, CTO Dean Gehring said, in order to soften the blow of higher and volatile freight costs.

Equinox Gold is also using its status as a larger company to help reduce costs.

The Vancouver-based company is aiming to become a 1Moz/y gold producer, with operations in Mexico, Brazil, the US and Canada.

The firm has seen cost inflation of around 4%, with cyanide, lime and diesel seeing among the highest price rises, while a lack of rainfall in Brazil – where the company relies to a large extent on hydro power – also pushed up energy costs for a period, according to CFO Peter Hardie.

“To help blunt or mitigate the cost escalation that we're seeing now that we're a bigger global company we're putting in place global supply chain measures... to help with economies of scale and reduce costs, and also, of course, to help with the logistics and supply chain disruption that we're seeing that are leading to some of the cost increases,” Hardie said in a conference call.

One company which has managed to keep a lid on rising costs is Yamana Gold.

The Toronto-based firm, which has mines in Argentina, Brazil, Chile and Canada, has seen costs increase by a maximum of US$20/oz gold, or 2%, much lower than many other companies, CEO Daniel Racine said.

This was achieved in part by a decision to increase inventories early in the pandemic.

“We bought some... of the material we need to operate our mines, sooner. So that is why this year that was not highly impacted maybe compared to others,” Racine said.