Miners Concerned with Labor, Facilities, Supplies Costs
“Most of the precious and base metal mining world has been focused on stocks, capital, and reserves. However, if you can’t physically mine and deliver the ore, the business is stopped cold. Labor costs are skyrocketing and all kinds of new and replacement equipment and parts are harder to find. Utility costs are very expensive and becoming more so.”-Traderrog
We had the pleasure of listening to top gold mining executives at a fund manager- analyst conference this week in New York. Miners are struggling to find more experienced talent, equipment, replacement parts and utilities. Fully funded projects are moving slower or are out-right stalled as mandatory components of mining operations become difficult to obtain or are simply not available for now.
Global gold production for 2007 has been forecast as smaller than in 2006 as miners chew through reserves. They are diligently working to complete new mine developments or add additional phasing on existing ones. However, while new ore reserve needs are a constant on-going battle we noticed other problems have recently surfaced. Gold conference executives explained what they are facing today.
Five Ton Tires in Woefully Short Supply
Those monster tires on open pit mining trucks are under-supplied throughout the world as production capacity is way behind field demand. Remember, we are in the early stages of a longer term mining bull market for both base and precious metals. Mines operate with both underground and open pit production. Open pit is usually less costly and if possible is the preferred method of ore extraction. Open pit operations do, however, require several large off-road monster trucks capable of hauling 400 tons of material in one load.
The mining industry is enjoying a veritable boom world-wide and manufacturers of heavy mining equipment are backlogged with orders. Critical machinery or vehicle parts are in tighter supply. Everything is more expensive and those huge tires are most scarce of all. Larger open pit operations use 400 ton trucks with tires weighing 10,000 pounds apiece. They cost $35,000 each and the really bad news is they wear out in six months. Considering production schedules and quotas, miners run the trucks 24/7 except for maintenance down-time. Used tires are being refurbished to continue operations and tires are being moved from one truck to another more than ever in efforts to keep them running.
Since tire suppliers are building product at full capacity, and supplies are way behind needs, mine operators use every creative idea possible to extend tire wear. They regularly smooth truck roads to increase tire life and mine repair departments are sharing tires among active mining operations. Some of these trucks drive themselves with computers having no drivers in the cabs. The entire purpose is to keep trucks moving and productive.
Tire manufacturers are building all they can but must make do with facilities designed years ago when demand was considerably lower. A new tire factory is being built in Brazil but supply managers are expecting a tire shortage for at least another two years. Operators are pillaging tires from unsold, stored equipment in dealer yards and some new mining trucks are being delivered with no tires provided. Expectations call for installing new or used tires when they become available. Also, miners immediately remove tires from trucks in for maintenance re-installing them on other trucks to continue non-stop production. The whole process reminds us of formula race cars making pit stops for fuel and new tires. Rubber prices are up 17% this year in Japan. New mining truck prices are up 25% this year and orders demand payment in the front. Deliveries are now quoted 18 months from date of order.
Skilled Trades and Certain Executives Difficult to Find
We heard this week mining welders in Nevada earn $60 per hour and demand 60 hours of work per week. Further, the quality of their work is slipping. Most all geologists are working, but shortages are difficult and newly minted graduates move up the promotion ladder faster than normal. The previous 20 year dry period in the mining industry eliminated one entire generation of trained geologists. Now the most experienced are in their late 50’s or older and are nearing retirement. Similar problems exist for field engineers and other highly skilled mine workers.
Experienced technical field people are in sharp demand and certain oil sands projects, fully funded are being shelved due to labor shortages. Alberta oil field workers are coming into the region from all over the world. Surprising to us, one executive presenter at the conference mentioned they are using qualified gold mining workers from Peru in Nevada and Africa on their various projects. It seems Peruvians are hard working efficient mining employees.
Most of the world’s largest mining machines are built in Illinois or Wisconsin with several parts suppliers working in the same regions. The other manufacturing location is in Europe. New mining equipment sales exceeded $3 Billion for 2005 and are likely to increase by a substantial amount in 2006-2008. Several analysts indicate the peak for mining industry suppliers is not visible as yet.
China has been buying everything they can find both new and used. Their coal industry alone accounts for large equipment orders. Some super-sized pit shovel orders have been delayed as they cannot get tires for the new pit trucks hauling cut material. One Illinois equipment manufacturer has 550 pieces of very heavy equipment on one major dam project which has been in construction for several years.
While current operating mines are unlikely to close due to these shortages, it does mean new projects are slowed down prior to start-up and those new very large projects requiring exceedingly large capital outlays prior to any returns sit on the shelf for now. Nickel miners and their analysts see no balance between supply and demand for another four years. Nickel has been $35,000 a ton recently and slightly less than that in December, 2006.
Mineweb reported, “The study by the Minerals Industry National Skills Shortage Strategy (NSSS) Working Party, Staffing the Supercycle: Labour Force Outlook in the Mineral Sector, 2005-2015, predicts that Australia’s mining industry will have to find an extra 70,000 workers to meet labor demands.” (Emphasis Editor).
Midwestern Workers Hired for Western USA and Canada Projects
In my state of Michigan which been severely wracked by auto industry lay-offs along with their suppliers, mining recruiters have visited multiple times for mass hiring seminars. In their first visit, oil companies hired over 750 skilled trades Michigan workers at $28 per hour to start. This worked successfully and they returned a second time for another 700-800 people. A spokesperson for the companies mentioned they are returning for another hiring wave next spring. Most of these folks are moving to gas and oil projects in Wyoming. One worker remarked he was on his new job and working one week after being hired in Michigan.
We have noticed more women working as geologists for all kinds of mining companies. This makes sense as they are found in more dominant numbers in those colleges and universities teaching in these fields. In our view, high schools have been doing a less effective job in preparing youngsters for higher education. Companies in America are complaining they must teach new hires things they should have learned long ago in either high school or college. As new worker demands rise for the mining industry recruiters are looking everywhere. They are finding good people in Asia, Eastern Europe, and South America as well as from Canada and the United States.
Mining companies are accustomed to great adversity in a very tough business. One of the presenters at the New York Gold Conference mentioned his job is an on-going dilemma of solving one major problem after another. In other corporate arenas, problems crop-up too, but not with the seeming regularity and difficulty seen in mining.
All Costs per Ton Rising Quickly
Collectively, all of these labor, facilities and supplier shocks are creating a higher cost per ton to mine gold and silver as well as other strategic market materials. The lowest price per ton we’ve seen in a large operating gold mine was $80-$85 per ton. For the most part, gold miners are now paying in the vicinity of $185 to $285 per ton with a few paying even more. With gold sales prices rising over $600 an ounce and staying in a prolonged bullish mode, costs are still not a great impediment. However, we have seen these higher expenses hit profitability to a higher degree in 2005-2006 than in 2004. In 2004 and earlier in the gold and silver bull those cost strains had not arrived. Today, these things are serious questions and mining companies must address them or fall behind competitively.
We did see one very bright star presenter at the conference running their mine with a negative gold mining cost per ton as by-product material sales were paying all the bills plus some extra. This is a very unusual and happy event for any mining operator.
Energy costs are serious with rising crude oil, diesel, gasoline, propane and natural gas increases. One big miner is building a brand new $250,000,000 electricity plant to power its mines in Nevada. This new power plant is expected to reduce operations expenses by $25 per ton of material mined. That is impressive cost savings. We think they might be able to offset more of this cost by selling extra power to nearby mining competitors. The same company has shut down or curtailed an African gold mine as drought created low river water levels impeding hydro electricity production. Meanwhile, they must add very expensive power from diesel generators costing five times as much for needed electricity. Nobody ever said mining is an easy business.
A simple mining operation like one we know of in Mexico has almost everything needed to run production right on the property. This silver mine has electric grid lines and roads to the mine site and plenty of water available on their land. Probably best of all, they have little or no overburden to remove and are running this new and very profitable business like a smallish landscaping contractor. There are minimal crews and machines on-site. Material is scooped up, loaded on trucks, and hauled to a nearby crusher. They then truck concentrate to a nearby smelter. This is admittedly about as simple and as good as it gets requiring much less in capital costs to begin and sustain operations. Most of these businesses are not nearly so fortunate. High ore values play a large part in this success story.
We saw a southern Nevada gold mine previously operated in a similar fashion. This one even had rail lines running through their property. For awhile this little mine had been obtaining 50,000 ounces of gold per year with a crew of five using three machines. These little companies will never make the large stock market hit parade but they can show some intriguing numbers on a small scale.
We forecast mining expenses will increase almost exponentially due to labor, fuel and inflation driven costs in supplies, machinery and parts. More than ever prospective gold and silver shareholders should pay close attention to those production costs per ton shown in quarterly and annual reports. These higher operating expenses can hit the bottom line very hard. Examine the company forecasts for cost increases in future years shown by mining budgets. These factors are more important during the next three years versus the last five years.
Higher mining expenses will not close most current mining operations but unless reserve ore quality reasonably matches proposed higher operations budgets, some mines could produce at lower production levels or be closed as being net losers. An example is the gas wells damaged or destroyed by the Katrina Hurricane in the Gulf of Mexico. Those smaller lower producing gas wells were permanently closed as being cost ineffective. Repairs and new money to re-open were not justified to make a decent profit. That storm closed 25% of all wells in the region. They will never re-open unless gas prices move to some incredibly high price in the future.
In our view, gold and silver have a long way to travel both in price and in time. Rising inflation will tighten pro-formas and exploration budgets demanding precious metals miners watch those higher costs like a hawk. Gold and silver traders should pay attention to these increasing operations costs as they directly affect profits and share results. Meanwhile gold and silver mining becomes more expensive creating higher per ounce sales values with these premium and rare commodities. -Traderrog
Roger Wiegand is Editor of Trader Tracks recommending trades for gold, silver and energy markets using futures, commodities, stocks and options.