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Inflation and high costs hit Equinox, Ternium amid lower metal prices

Bnamericas Published: Friday, November 04, 2022

Higher costs and inflation during the first half of the year due mainly to the Russia-Ukraine conflict continued to affect the financial results of some of the largest mining and metals companies in Mexico in Q3, amid a fall in prices of metals such as gold, silver, copper and steel.

During quarterly earnings calls on Thursday, executives from Equinox Gold and Ternium said cost pressures have continued into Q4.

Canada’s Equinox posted Q3 earnings from mine operations of US$7.4mn, down from US$45.7mn a year earlier. "Earnings from mine operations were lower in Q3 2022 compared to Q3 2021 due to lower realized gold price per ounce, higher operating costs, supply constraints, and inflationary pressures, particularly from increased prices of oil and other consumables," the company said in its earnings report. 

"Compared to the third quarter of 2021, the decline in the average price of gold... combined with higher costs, compressed our margins," CFO Peter Hardie said during the call.

"On the cost side, examples of the inflationary pressures driving up our consumables costs compared to Q3 last year included in the United States fuel is up 60%; cyanide is up 40%; lime is up 27%. In Mexico, cyanide is up 36%; power and lime were up between 15% and 20%," Hardie added.

“We now expect gold production for the year to be approximately 540,000oz. We’re seeing inflation start to ease, particularly in Brazil, but we also see inflationary cost pressures persisting through Q4 this year,” said CEO Greg Smith.

Equinox, which also has the Aurizona gold project in Maranhão, Brazil, plans to invest US$318mn to expand its Los Filos mine in Mexico by constructing a carbon-in-leach plant (CIL). 

TERNIUM

Ternium, Latin America’s leading flat steel producer, reported Q3 adjusted Ebitda of US$679mn, down from US$1.88bn a year earlier on steel shipments of 3.0Mt, with an adjusted Ebitda margin of 16%, down from 41%. 

“The sequential decrease in adjusted Ebitda in the third quarter was mainly the result of lower fuel prices and higher cost of sales,” said CFO Pablo Brizzio during the company’s earnings call. 

“As we anticipated in last quarter's call, Ebitda margin in the fourth quarter will continue to decline, reaching a level below the company's typical range before reversing this trend in the first quarter of 2023,” he added.

Brizzio said Ternium’s financials would have “a temporary mismatch between prices and costs” in the fourth quarter.

"In the fourth quarter, steel prices under quarterly contracts in Mexico will reset at lower levels than they did in the third quarter, but the cost per ton will not go with that decrease. So it will continue to reflect the gradual flow through the company's inventories of relatively high-cost raw materials, which were purchased during the first half of the year when Russia's invasion of Ukraine disrupted steel markets," he said. 

The CFO estimated that raw materials purchased more recently at lower prices will be reflected in their cost per ton from the first quarter of 2023.

Ternium, which is controlled by Argentine-Italian group Techint, has operating facilities in Mexico, Brazil, Argentina, Colombia, the southern United States and Central America.

In February, the company announced a new investment program of US$1bn for its Pesquería industrial center in Mexico to expand its portfolio of value-added products and meet growing demand for steel for the home appliance and construction sectors.  

SOUTHERN COPPER

Last Friday, Southern Copper’s CFO Raúl Jacob said during the company’s Q3 earnings call that total operating costs and expenses increased by US$197mn or 16.8% compared to 3Q21. “The main cost increments have been in inventory consumption, diesel and fuel, translation difference, repair materials, energy, explosives, and other factors,” he said.

Arizona-based Southern Copper operates mines in Peru and Mexico.

Earlier last month, Jacob told Bloomberg "the perfect storm" suffered in the second quarter from rising costs, lower commodity prices, and falling production had begun to subside.

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