PERTH (miningweekly.com) – Iron-ore and zinc have been tipped to be the top performers in the current weak economic environment, analyst Wood Mackenzie said in a new report, as cash margins came under pressure and producers focused on cutting costs.

The report noted that while the two metals would be the top performers, copper, export metallurgical coal and gold would not be as lucky.

Wood Mackenzie stated that among the bulk commodities, iron-ore stood above the rest. Despite pulling back from 2012 levels with a 19% cash margin decline, iron-ore still has a very strong average industry margin of $49/t (52% of average price) in 2014, enabling continued large cash generation in this high volume business.

This supported the ongoing focus by the major producers such as Rio Tinto, BHP Billiton and Vale, to push ahead with expansions at their low-cost iron-ore operations, the company said.

It was also in stark contrast to coal and bauxite, both of which had average margins of less than 25% in 2013. Furthermore, the outlook is particularly bleak for export thermal coal with an average margin of only 19% in 2014.

Wood Mackenzie principal mining analyst Steve Hulton said on Wednesday that the sectors that fared the worst, with biggest average falls in margins from 2012 to 2014, were copper, export metallurgical coal and gold.

“Nickel has the lowest average industry margin of only 13% of price in 2013. This rises slightly in 2014, but it is still the worst of all commodities studied. As such, the nickel industry is under severe pressure. In 2012, one-third of industry production generated negative margins after taking into account total cash and sustaining capex [capital expenditure] costs.”

Hulton pointed out that the zinc mining sector had a very high average margin as a percentage of the metal price, owing to the large contribution of by-product credits, such as copper, lead, silver and gold, offsetting operating costs. 

“While remaining relatively high, the average zinc margin is expected to decrease to 83% in 2014, even with a rising zinc price, due to the lower value of by-product revenue in this polymetallic sector.”

For the copper and gold industries, lower prices would continue to put pressure on overall operational cashflow. Wood Mackenzie's analysis showed that average industry margins in 2014 would fall to 39% for copper and 44% for gold, down from 49% and 50% respectively from 2012. In export metallurgical coal, margins in 2014 were only 25% of average price, down from 30% in 2012.

“Operating costs in the mining industry have risen rapidly over recent years, but now that prices have dropped there is a renewed focus from mining companies on reducing costs and trying to protect margins,” Hulton said.

He warned that individual mining companies would be variously affected depending on their exposure to the different commodities, and where their particular mines sit on the respective industry cost/margin curves.

“As price takers, there are limited tunes the producers can play and one of them will be to slow down on capital spend, and prioritise the commodities that have the best returns.”