In August, Horizonte Minerals (HZM) told investors there was a significant re-rating potential “as [nickel project] Araguaia transitions to a producer”, and stuck to a Q1 2024 start date for the new mine. Just two months later, it became a very different story.
Management revealed in October that Araguaia had a $160mn (£126mn) funding hole, taking the total build cost to around $700mn. Even with the extra cash, needed to pay for increased civil construction works plus various other cost overruns, the mine would be late to production.
This week, Horizonte’s chief executive, Jeremy Martin, was shown the door after a decade in the job, alongside the company’s chief finance officer (CFO) and interim chair. Shareholders face being wiped out in the new round of financing, and have already seen the shares go from 125p in September to 9p this week.
But it’s not just those trying to build their first mine that have noticed the higher costs. Earlier this year, BHP (BHP) CFO David Lamont described the higher pay at operations ranging from Chile to Australia as “locked in”, with higher productivity the only way to offset the costs.
Allkem (AU:AKE), a £2.6bn lithium company, added $400mn in new costs to three mines in development this year, and said this was due to an “industry-wide inflationary context”, meaning labour and raw material costs, alongside project-specific changes.
But one project, a lithium brine operation in Argentina called Cauchari, saw its operating margin remain stable at 85 per cent despite ongoing costs climbing as the company plugged a higher forecast lithium price into its base case. The net present value of the mine doubled in the time between the previous and new capex estimates, showing the impact of the higher lithium prices the company hopes will come down the line.
The curve of history
As Allkem shows, miners at the very start of the supply chain see higher input costs that are often offset by higher prices. The cost curve for various metals – where the spot price is plotted against industry costs – have climbed across the board.
In September, Bernstein analysts crunched the numbers for copper miners and found the cheapest companies in cost-curve terms (arranged by quartiles) had seen their cash cost almost triple in the past 20 years in the most notable cases.
Bernstein now puts the top of the lowest quartile at around $2,500 a tonne (around $1.13 a pound). This has not been a steady climb since 2003 – the highest costs were observed in 2012, after the Chinese superboom had fully kicked in and sent the industry scrambling for parts and workers. The crash afterwards saw margins tumble as the red metal’s price fell.
Among London’s copper miners, Antofagasta (ANTO) had a first-half cash cost of around $5,470 a tonne, although this was brought down to $3,860 when its byproduct sales were subtracted. Atalaya Mining (ATYM), which suffered from skyrocketing European power prices last year and part of this year, recorded a cash cost of $6,000 a tonne in the first half, down from $6,900 a tonne in the first half of 2022. That compares to under $4,000 a tonne in 2019.
These higher costs do drive up the copper price overall, however, as the price also needs to be higher to bring on new supply.
What inflation?
Atlantic Lithium (ALL) is developing a lithium project in Ghana called Ewoyaa. Management there is well qualified to talk mine costs given the company completed a pre-feasibility study (PFS) in September last year and then a definitive feasibility study in June. The latter is more detailed and the last step before financing.
Atlantic executive chair Neil Herbert said the real shift in costs came in the lead-up to the PFS. “There seems to be more stability in the costs now than you [had] seen," he said. "There was definitely an increase across the board. That seems to have slowed or stopped. We seem to have a lot more stability in terms of our principal capital items and inputs.”
Ewoyaa did see costs climb significantly between the two studies due to a one-third increase in processing capacity at the mine. The forecast capital cost climbed 48 per cent, to $185mn, while the net cash cost per tonne rose a third to $377. The company has also confirmed the government’s take more recently; Ghana has a royalty of 10 per cent and it will hold a stake in the mine, through both an investment in Atlantic and a project-level holding.
The company itself is only funding $38mn of the build cost, as the rest is covered by Piedmont Lithium (US:PLL) and Ghana’s sovereign wealth fund.
Further down the development track is Hochschild Mining (HOC) with its new Mara Rosa mine. It was on a similar timeline to Horizonte but has hit its deadlines so far, with first gold expected early next year and commercial output a few months later. The company has built various mines in the past and Mara Rosa will be one of four in production next year.
Mara Rosa’s economics do suggest an almost anti-inflation story; the company’s group-level average all-in sustaining cost (AISC) has risen from $977 an ounce (oz) in 2017 to almost $1,500 last year. But Mara Rosa is expected to have an AISC over its 10-year life of just $1,000 an oz. “The project is running to schedule and budget, despite the pressures on capital costs that have caused issues in other industry projects presently in development,” said analysts at Peel Hunt. Miners will usually extend mine lives through exploration, with the initial life merely what can be included from the current reserves.
At its largest existing mine, Inmaculada, Hochschild has managed a productivity gain that outweighs operating cost hikes. It has shifted to a more mechanised style of mining underground, which has cut costs by 30 per cent, according to company chief executive Eduardo Landin. “Even though we are increasing the dilution [of gold and silver within the ore] the productivity is much higher, the number of [workers] is much lower,” he added.
It is largely Mara Rosa boosting the company’s prospects, alongside production being suspended at high-cost mine Pallancata.
Peel Hunt updated its Hochschild forecasts this week, leaving adjusted Ebitda at $289mn for next year and hiking it 84 per cent to $270mn for 2025, thereby reversing a declining earnings outlook. Analysts at Panmure Gordon have cut the forecast for AISC to $1,206 an oz from $1,468 an oz for 2025.
Ewoyaa and Mara Rosa are outliers in cost terms.
Returning to copper, Bernstein used the cost curve to estimate a long-term price for the red metal, with forecasts for production and demand over the next decade feeding into the model. The result – $10,599 a tonne. This is ahead of consensus (Liberum puts the long-term price below current levels, at $6,190 a tonne) but could point to the struggle to keep costs under control just getting started.
