Low commodity prices worldwide have resulted in mining operations having to deal with increased pressure in the form of escalating operational costs.

At the beginning of this month, the gold price was about $1 182/oz, silver was priced at $16.69/oz, copper at $2.763/oz and crude oil at $65.49/bbl.

Owing to these lower-than-average prices, various commentators point out that mining companies have started deploying mechanisms that will help them prepare for the subsequent risks of uncertain global commodity cycles.

Multinational professional services company PwC published a survey on volatile commodity markets at the end of 2014, which states that the drop in commodity prices has led to a widespread decrease in mining-sector activities, from exploration to production as well as a reduction in operating and capital expenses.

PwC global mining leader John Gravelle says miners have been in a survival mode, with mining companies having resorted to using strict cost-management strategies and responsible investment in production growth.

Moreover, professional services company KPMG partner Daniel Hooijer adds that the low commodity prices has led to an impairment loss of $70-billion for mining companies in the 2013/14 financial year, owing to a change in focus, from cash generation and the economics of mining to cost management.

Professional services company Deloitte Central Africa mining leader John Woods notes that, since 2012, mining exploration investment has dropped by about 50% across the African continent. Amid this environment, mining companies will focus heavily on costs and continue to explore selling noncore assets to meet cash flow expectations, and selectively pursue growth opportunities and expansion strategies, he adds.

“The strategy is to have low-cost positions and to develop pipelines of growth, which create more low-cost opportunities. In an environment with expectations for softening commodity prices, all mining companies are going to look at their portfolios,” he explains.

Given these challenges, Gravelle states that mining companies are pressured to establish new records of their performances that will guarantee their survival, with the current strength of the US dollar and declining oil prices helping some miners to manage their costs.

However, he points out that, in the next few years, mining companies will find it more difficult to cope, owing to investment in the industry and those of key consumers, for example, in China, having slowed down because of recent reforms in the country.

Precautions
Given these pressures, gold mining company Harmony Gold CEO Graham Briggs indicates in the PwC survey that companies are trying to divest some of their assets to repay their debts in tough times when gold prices are decreasing.

However, he mentions that decreasing gold prices can be advantageous, as was the case for Harmony Gold. The company has been able to reduce costs, especially in the current environment, where gold prices have fallen by more than a third in three years to about $1 200/oz by the end of the third quarter of 2014 amid uncertain commodity cycles, he elaborates.

Harmony reported an 18% reduction in sustaining costs to $1 242/oz for the 2014 financial year, compared with the previous financial year, Briggs states, adding that the company cut its capital expenditure by 30% year-on-year.

Subsequently, Harmony plans to boost margins by increasing free cash flow through higher grades, cost control and growing its assets for the next five years, Briggs points out.

“This includes completing studies that will lead to the building of the company’s Golpu mine, in Papua New Guinea, which Harmony regards as the world’s premier new gold region,” he explains.

Silver
The price of silver has continued to decrease since 2011, as at the end of 2014, the price was between $16/oz and $20/oz. PwC notes that, compared with 2011, the trading price has dropped by 60%. This demonstrates the volatility of the metal, which serves as a currency and an industrial commodity.

However, Vancouver-based silver producer First Majestic CEO Keith Neumeyer says in the PwC survey that, until the end of the second quarter of 2014, the company registered 19 consecutive quarters of growth. He adds that this was also encompassed by more than $250-million in investment over the past three years.

After producing more than ten-million ounces of silver in the first half of 2014, the company declared itself as a senior silver producer. In 2013, the total production of silver reached a record of about 13-million ounces, a 40% increase from 2012 production.

“Despite this growth, we are currently focused on trimming costs by automating sections of our operations, reducing staff levels and implementing other cost-saving programmes,” he states.

Moreover, First Majestic recently moved its noncore exploration assets into a separate company called First Mining Finance Corporation, of which 30% is owned by First Majestic.

Owing to the dropping silver prices, Neumeyer states that the company is also expanding its operations, as it plans to go public with a roster of 19 projects during the course of this year.

Copper
PwC mentions that China continues to drive the copper industry. With lower growth rates of urbanisation in China, copper prices have not been affected as they have for other industrial commodities such as iron-ore.

PwC China mining leader Ken Su indicated that copper producers did not have the same success as their iron-ore counterparts in ramping up new low-cost production, resulting in global copper supply still lagging.

“The current copper market is in a deficit, owing to troubles with new projects that recently came on line. Some major projects were expected to begin commercial production last year, but have been delayed,” explains Canadian-based mining company Capstone Mining Corporation CEO Darryn Pylot.

He adds that other companies are producing copper containing high amounts of arsenic, which means that the copper cannot be sold directly to smelters without first being blended with other clean concentrates, thereby slowing its time to market.

Despite these challenges, Pylot further notes that the company’s Pinto Valley mine, which accounts for more than 60% of production, and the Santo Domingo project that is set to start production in 2018, have positioned the company well for the changing market.

The Pinto Valley mine’s extended mine life of 12 years to 2026, will enable the company to focus on strategically advancing its Santo Domingo project, which is one of a few projects going through the permitting process in Chile’s Region III.

Other Factors
While there is always volatility in the commodity market and companies are working on ways to survive, Woods points out that, moving forward, there are six key factors that can gear up any mining project for success.

He elaborates that a good mineral deposit and its location in an economic region with good governance and consistent application of civil and tax law will influence the success of a project.

Consequently, Woods highlights that infrastructure, such as roads, rail, ports, electricity and communications, to support a mine should be available and must function well. Also, a well-understood inbound and outbound supply chain supporting the mine, with points to market, are also important.

“Having a competent and cohesive team that works together on site is also important for the success of an operation, as well as having a social licence to operate,” he mentions.

Woods believes that another determining factor that will enable mining companies to survive the uncertainty of commodity prices could be tied in with the growth in consumer demand in manufacturing key markets, as that could positively influence certain global commodity cycles.