Cost Trends in Mining
William G. Meister
Tel. 1 314 984 8800
[email protected]
www.marston.com
Today’s Presentation
• Relative Cost Competitiveness of
Major Coal Exporting Countries
• Comparative Cost Analysis
• Historical Cost Escalation
• Productivity Impacts
• Future Cost Trends
Cost Competitiveness
• Production costs in the major coal
exporting countries are determined
by:
• a) Physical Parameters
• b) Commodity Costs
• FOB loading port costs are lowest in
those countries with both favorable
mining conditions and lower
commodity prices
Cash Cost Ranges for
Export Steam Coal
United States
New South Wales
Venezuela
Queensland
Colombia
South Africa
Indonesia
$0
$10
$20
$30
$40
$50
FOB VESSEL CASH COST (US$/tonne)
$60
$70
$80
Physical Mining Cost Factors
•
•
•
•
•
•
Seam Geology (thickness, dip, etc.)
Coal Quality
Deposit Size
Stripping Ratio
Production Tax & Royalty Levies
Distance to Export Ports & Mode of
Transport
Production Cost Comparison
$60
FOB VESSEL CASH COST (US$/tonne)
$55
$50
$45
$40
$35
$30
$25
$20
$15
$10
$5
$0
d
In
u
.S
t.
Bi
b
Af
S.
a
ric
O
/C
Mining
l
Co
bi
om
a
Af
S.
a
ric
U
/G
Coal Processing
I
a
si
e
on
nd
.
ld
Q
/C
O
Taxes & Royalties
/C
O
W
NS
-N
US
P
AP
U
/G
Inland Transport
G
U/
W
NS
-C
US
P
AP
U
/G
Port & Loading
Commodity Cost Factors
•
•
•
•
•
•
•
Labor
Diesel Fuel
Electric Power
Tires
Explosives
Parts
Steel Products
Production Cost Comparison
by Cost Component
FOB VESSEL CASH COST (US$/tonne)
$60
$55
$50
$45
$40
$35
$30
$25
$20
$15
$10
$5
$0
In
d
u
.S
t.
Bi
b
Af
S.
a
ric
O
/C
l
Co
bi
om
a
Af
S.
Labor
Taxes & Royalties
a
ric
U
/G
I
a
si
e
on
nd
Diesel Fuel
Inland Transport
ld
Q
/C
.O
/C
O
W
NS
-N
US
Steel Products
Port & Loading
P
AP
U
/G
G
U/
W
NS
Other
-C
US
P
AP
U
/G
Typical Cost Breakdowns –
Direct Mining Costs
100%
FOB VESSEL CASH COST (US$/tonne)
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
S
a
ic
fr
A
.
O
/C
I
.
nd
/C
O
Labor
Co
bi
m
o
l
a
Diesel Fuel
/C
.O
d
l
Q
Electricity
/C
O
W
NS
Af
S.
Repairs
a
ric
U
/G
US
G
U/
Steel Products
G
U/
W
NS
Other
Production Cost Increases
• Costs of coal production are
increasing due to:
• Escalating commodity prices
• Depletion of lowest cost reserves
• Increasing work effort – higher stripping ratios,
longer inland transport distances, etc.
• Increasingly more stringent environmental &
governmental regulations
Average Cost Increase
2003 to 2008
% INCREASE IN MINING COSTS 2003 to 2007
100%
90%
80%
70%
60%
50%
40%
49%
47%
30%
46%
45%
20%
10%
0%
A
lia
ra
t
us
d
In
es
on
ia
Australia
S
Indonesia
ic
fr
A
.
a
S. Africa
Ve
Venezuela
ne
e
zu
la
Commodity Cost Increases
•
Mining commodity costs have increased
dramatically in the past few years
i) Labor costs in certain exporting countries
have increased by 30% to 45% since 2003
ii) Diesel fuel prices in major exporting countries
have increased by 100% to more than 500%
since 2003
iii) Tire prices have increased by 20% to 35%
iv) Repair parts costs have increased by 15% to
25%
v) Steel products costs have increased by 50%
to 90%
vi) Electricity costs have increased by 20% to
25%
Labor Escalation
50.00%
45.00%
40.00%
35.00%
% Change
30.00%
25.00%
20.00%
15.00%
10.00%
5.00%
0.00%
2003
2004
2005
US
2006
South Africa
Australia
2007
2008
Indonesia
South Africa
Australia
-0
7
07
Ja
n-
08
-0
7
M
ay
Se
p
6
-0
6
-0
Ja
n-
Se
p
M
ay
06
-0
5
Ja
n-
Se
p
5
05
-0
Colombia
ay
Ja
n-
-0
4
-0
4
M
ay
04
-0
3
Se
p
-100%
US
M
03
-0
3
Ja
n-
Se
p
M
ay
Ja
n-
% Change
Diesel Escalation
600%
500%
400%
300%
200%
100%
0%
US
Colombia
-5%
South Africa
7
7
Ap
r-0
8
8
n0
7
l-0
7
ct
-0
Ja
O
Ju
Ap
r-0
n0
6
l-0
6
ct
-0
Ja
O
Ju
6
6
n0
Ap
r-0
Ja
5
l-0
5
ct
-0
Ju
5
5
n0
4
Ap
r-0
O
4
4
l-0
4
ct
-0
Ja
O
Ju
Ap
r-0
n0
3
l-0
3
ct
-0
Ja
O
Ju
3
3
n0
Ap
r-0
Ja
% Change
Tire Escalation
40%
35%
30%
25%
20%
15%
10%
5%
0%
n03
3
4
US
Colombia
5
% Change
South Africa
6
7
Ap
r-0
8
n08
ct
-0
Ja
O
Ap
r-0
7
Ju
l-0
7
n07
ct
-0
Ja
O
Ap
r-0
6
Ju
l-0
6
n06
ct
-0
Ja
O
Ap
r-0
5
Ju
l-0
5
n05
ct
-0
Ja
O
Ap
r-0
4
Ju
l-0
4
n04
ct
-0
Ja
O
Ap
r-0
3
Ju
l-0
3
Ja
Repair Parts Escalation
30%
25%
20%
15%
10%
5%
0%
US
Colombia
-20%
South Africa
Ju
l-0
7
O
ct
-0
7
Ja
n08
Ap
r-0
8
Ju
l-0
6
O
ct
-0
6
Ja
n07
Ap
r-0
7
Ju
l-0
5
O
ct
-0
5
Ja
n06
Ap
r-0
6
Ju
l-0
4
O
ct
-0
4
Ja
n05
Ap
r-0
5
Ju
l-0
3
O
ct
-0
3
Ja
n04
Ap
r-0
4
Ja
n03
Ap
r-0
3
% Change
Steel Escalation
100%
80%
60%
40%
20%
0%
Electricity Escalation
30%
25%
% Change
20%
15%
10%
5%
0%
2003
2004
2005
US
2006
South Africa
Australia
2007
2008
Productivity Impacts
• Increases in productivity have helped
offset cost increases in some major
producing countries
• However, productivity improvements
have required increased levels of
capital spending
PRB
CAPP-Underground
CAPP-Surface
6
4
2
0
8
6
4
2
0
8
6
4
2
0
8
6
4
2
0
20
0
20
0
20
0
20
0
19
9
19
9
19
9
19
9
19
9
19
8
19
8
19
8
19
8
19
8
19
7
19
7
19
7
19
7
19
7
Tons/Employee-Hour
Productivity
45
40
35
30
25
20
15
10
5
0
Productivity vs. Capital
Requirements - Australia
7.0
$3.50
6.0
$3.00
5.5
5.0
$2.50
4.5
4.0
$2.00
3.5
3.0
$1.50
2.5
2.0
$1.00
1.5
1.0
$0.50
0.5
0.0
$0.00
97
19
06
20
Development Capex
Labor Productivity
DEVELOPMENT CAPITAL ($/tonne)
PRODUCTIVITY (saleable tonnes/empl. hour)
6.5
Foreign Exchange Impacts
• Deteriorating foreign exchanges
rates relative to the US$ have also
adversely impacted mining costs in
terms of local currencies
Foreign Exchange Impacts on
South African Mining Costs
(2003 to 2008)
16.00
1.52
14.00
US$ / Tonne
12.00
4.61
10.00
New US$ Cost
Increase due to Stronger Rand
8.00
15.14
6.00
4.00
2.00
0.00
Increase due to SA Inflation
Original US$ Cost
9.01
Future Cost Trends
• In the short-term, increased upwards
pressure on mining costs can likely
be at least partially offset by
continued improvements in
productivity, technological
advancements, and achievement of
greater economies of scale
• In the longer-term
Cost Curves
Major Seaborne Steam Coal
$75
$70
$65
FOB Vessel Cost (US$/tonne)
$60
$55
$50
$45
$40
$35
$30
$25
$20
$15
$10
$5
$0
0
50
100
150
200
250
300
Steam Coal Exports (Mt)
2007
2015
350
400
450
500
550
Cost Curves
Major Seaborne Steam Coal
$75
$70
$65
Escalated Labor @
Recent Historical Trend
$60
FOB Vessel Cost (US$/tonne)
$55
$50
$45
$40
$35
$30
$25
$20
$15
$10
$5
$0
0
50
100
150
200
250
300
350
Steam Coal Exports (Mt)
2007
2015
2015 Escal
400
450
500
550
Thank You!
Q&A
William G. Meister
Tel. 1 314 984 8800
[email protected]
www.marston.com