Richard (Rick) Mills
Ahead of the Herd
As a general rule, the most successful man in life is the man who has the best information
Capital inputs account for about half the total costs in mining production - the average for the economy as a whole is 21 per cent. Obviously many of the costs, once incurred, cannot be recovered by sale or transfer of the fixed assets.
Mining is an extremely capital intensive business for two reasons. Firstly mining has a large, up front layout of construction capital called Capex - the costs associated with the development and construction of open-pit and underground mines. There are often other company built infrastructure assets like roads, railways, bridges, power generating stations and seaports to facilitate extraction and shipping of ore and concentrate. Secondly there is a continuously rising Opex, or operational expenditures. These are the day to day costs of operation; rubber tires, wages, fuel, camp costs for employees etc.
Copper mining has become an especially capital intensive industry - the average capital intensity for a new copper mine in 2000 was between US$4,000 - 5,000 to build the capacity to produce a tonne of copper, now capital intensity is north of $10,000/t, on average, for new projects.
Capex costs are escalating because:
- Declining copper ore grades means a much larger relative scale of required mining and milling operations
- A growing proportion of mining projects are in remote areas of developing economies where there’s little to no existing infrastructure
The bottom line? It is becoming increasingly expensive to bring new mines, especially new copper mines, on line and run them:
- Antofagasta’s Esperanza Sur project capex went from under US$3 billion to US$3.5 billion
- Inmet’s Cobre Panama project capex climbed to US$6.2 billion from US$4.8 billion, that’s a capital intensity north of $15,000/t
- Teck’s Quebrada Blanca’s capex is US$5.6 billion. The amount of money required to build Teck’s new, and very large copper mine in a difficult environment, corresponds to a US$28,000/t capital intensity. CLICK HERE TO READ MORE