Cost inflation to bite miners’ results in 2013:Fitch

WINDHOEK: Mining cost inflation will have a more visible negative impact on mining companies’ 2013 results than in the last couple of years, Fitch Ratings warned this week. The global ratings’ agency blamed this on expectations of stagnant commodity prices, according to a media statement issued by Fitch Ratings and published on its website on Thursday.

After initially falling in late 2011, general commodity prices have remained weak. The bleak macro-economic outlook in Western economies and concerns about growth in China means that a sharp pick-up in prices in 2013 seems unlikely.

“But mining cost inflation is likely to continue, driven by wage inflation and rising energy prices. During previous periods of cost inflation, including 2004-2008 and 2010-2011, the impact on results has been masked by rising prices, but in the coming year, we expect higher costs to be much more evident in miners’ earnings,” it noted.

Specific reference was also made to South African mining operations, which have experienced the most high-profile disputes over wages. This included a long-running strike by Lonmin workers, who returned to work after agreeing a 22 per cent wage increase.

Fitch said higher wage demands are also likely to affect other operations in Africa, including copper miners in Zambia, where a low- to mid-teens’ increase seems likely. The proportion of total costs represented by wages also varies significantly.

Generally, labour costs for mines in developed economies account for around 40 per cent of the total, whereas 20 per cent is more typical in developing economies. It noted that the proportions for South African gold miners and Zambian copper miners are more typical of developed economy mines. Among the major diversified miners, Anglo American has the biggest exposure to Africa, particularly South Africa. Its operations there were responsible for 49 per cent of 2011 revenue.

“We expect the group’s labour-cost inflation to average mid to high single digits for the next three to five years. Rising energy prices are also likely to limit miners’ ability to control costs in some regions. We expect electricity tariffs for South African operators to rise by 20 per cent or more per year for the next three to five years,” it added.