An Overview of Costs in the Base Metal and Gold Mining Industries
Authors: Smith Paul , Fellows Mark , Coombs David , Mitchell Andrew 
Published: February 2024

This paper examines certain capital and operating cost trends from the base metal and gold mining industries. The fundamental determinant of any mine’s capital and operating costs is the geology of the orebody; its size, shape, depth, mineralogy, and grade. Optimizing this mineral resource requires discretionary choices to be made regarding scale of operation, cutoff grade, mining method, and ore processing (beneficiation) route. However, the mine also has to operate under several fixed factors over which the operator has no control. The most fundamental of these is the geology of the orebody, but the location (country risk and fiscal regime) and external economic risks, such as metal price, realization terms and exchange rate, also have a significant impact.

The biggest drivers of capital costs are scale and location of the project. Capital costs can vary widely between projects of a similar scale and are often highly dependent on the amount of infrastructural investment required. Capital intensity in terms of dollar per unit throughput provides a useful indicator of project risk but unless allied with a divisor containing yield grade considerations, it is not informative as to how competitive the project may be.

When considering operating cost trends it is important to use a normalized data set, one for which all items of cost information have been properly and consistently processed. Indeed, many operating costs terms can be misleading and open to misinterpretation if not properly defined.

Changes in operating costs year-on-year are determined by factors over which management has some degree of control (technical factors and production volume) and others over which management has no control (currency exchange rates, inflation, metal prices, freight rates, concentrate treatment, and refining charges). Of these, the uncontrollable factors are by far the most important to the majority of operations. Exchange rate movements and inflation are the principal drivers of year-on-year changes in copper and gold mine operating costs, while treatment charges are responsible for the most significant changes for zinc mines.

Over time there may be more significant changes in the operating cost structure of an industry brought about by the changing population of mines and any significant technological improvements. Copper production by solvent extraction-electrowinning (SX-EW) is one example of the implementation of new technology that had a significant impact on cost trends in the copper mining industry. Operations which had a supply of low-grade leachable dump material were able to improve their operating costs significantly for a very low capital expenditure. However, SX-EW copper is not cheap copper, since the capital investment for specific Mine-for-Leach (MFL) mines is comparable to that for conventional flotation and smelting-refining operations.

An examination of the residual cash flow from the zinc, copper, and gold mining industries reveals a wide range in their ability to create wealth. The zinc mining industry actually lost money (pre-tax) over the period 1993 to 2003 (inclusive), after allowing for capital expenditure on new capacity. The copper mining industry fared better with a residual cash flow of over US$14 billion, while gold mining produced even better results, with a residual cash flow of over $ 30 billion.

The recent rise in metal prices, which has been in large part driven by extraordinary growth in demand for raw materials by China and, to a lesser extent, India, bodes well for the metal mining industries, at least in the medium term. However, the history of mining includes numerous episodes of over-investment in new capacity at times of high prices, which have inevitably resulted in subsequent oversupply of metal and low prices. It seems highly unlikely that the boom and bust nature of this most cyclical of industries has fundamentally changed.