US Mining Winning The Costs Race
Mining booms are nearly always driven by rising commodity prices but what’s happening in the U.S. today indicates that falling costs are the driving force behind a revitalized interest in all forms of resources, from oil and gas to gold.
Activist investors, sometimes criticized for being too aggressive, have spotted the value gap developing between international mining and oil operations and those in the country winning the low-cost race, the U.S.
Cliffs Natural Resources CLF -1.03% and Apache APA +0.78% Corporation have been targeted by activist funds demanding the sale of high-cost, low-profit, assets in Australia with Cliffs under pressure to sell an iron ore mine in Western Australia and Apache planning to sell a 13% stake in a big Australian liquefied natural gas project being developed by Chevron CVX +0.35% Corporation.
Both U.S.-based companies will probably re-invest the capital generated in U.S. projects in much the same way some industrial companies are shifting their international operations back to the U.S. because it has become the global go-to destination, in some cases surpassing the long-term low-cost leaders, China and Germany.
Gold Cheapest To Mine In The Americas
In the commodity world the value-gap is best illustrated by that universal material gold, with the cost profile of one company demonstrating why the U.S. is a preferred destination for new mine developments.
AngloGold Ashanti AU -0.9%, a South African based business which was once the gold arm of the world’s fourth biggest mining company, London-based Anglo American PLC, has goldmines around the world, with four major divisions; South Africa, Continental Africa, Australia and the Americas, a division which includes the big Cripple Creek & Victor mine in Colorado.
Earlier this week AngloGold reported a 4% rise in group gold production to just over one million ounces for the June quarter with costs on a year-to-year basis down 7% to an average of $836 an ounce, comfortably below the gold price of around $1300/oz.
But, within the overall gold production and cost information was a breakdown of the four divisions, and while it was once safe to assume that production in Africa would be the low-cost leader the winner on costs in the June quarter was the Americas division which includes mines in Colombia and Brazil.
South African Gold The Most Expensive
An analysis of the AngloGold results by the Bank of America Merrill Lynch showed the Americas division producing gold at $765/oz, close to $100/oz less than the company’s traditional operations in South Africa which produced gold at $863 in the June quarter thanks in part to the extreme depth of mines in that country, and rising labor costs which have often been associated with bitter industrial disputes .
Continental African operations of AngloGold produced at $846/oz, and the company’s Australian mines at $850/oz.
The data from one company is not a trend, but with AngloGold you get a look at what it costs to produce a common commodity, one that is generally associated with third-world countries and not the world’s most advanced economy.
When it comes to future investment it is likely that proposals from the Americas division of AngloGold will win a capital allocation ahead of other divisions simply on the question of costs, a situation which could soon attract the attention of environmental groups opposed to most forms of mining.
Other AngloGold divisions might have more attractive geology, but they are not winners when it comes to profitability, which is why the U.S. has reclaimed its position as a preferred mining investment destination, and a reason why fleet-footed fund managers are demanding that U.S. natural resource companies re-focus on opportunities closer to home.