Miners abroad advised to expect higher costs

Escalating costs pose a greater threat to the mining industry than do falling metal prices, according to the head of the mining group for Price Waterhouse.

In a speech delivered at the accounting firm’s World Mining Solutions conference in Vancouver, B.C., Robert Parsons said mining companies are wrong to think that hedging against falling world metal prices is the key to long-term profitability.

“Price hedging is the strategy they use to ensure themselves that, over the long haul, they will be ready for whatever comes, ” he said. “But that’s only part of the answer, and it’s not the largest part. “

He cited rising costs related to social, tax and labor expenditures as important factors that affect long-term profitability at mining projects, especially those in the Third World.

“More and more, mining companies are expected to provide what amounts to very expensive, quasi-government social services to remote communities, including basic services such as health care. The expectation is that the service will be provided to entire communities and regions, not just a company’s employees. “

Parsons added that this expectation is likely to grow, along with the accompanying cost to mining companies, both in North America and abroad.

“Up until now, developing countries have kept tax rates low to attract mining companies. However, it’s not wise to assume taxes will always be low. ” Labor costs, too, should be factored into cost projections, Parsons said, pointing out that most mining companies assume that labor costs will increase at the same rate as mineral prices.

“Labor costs could escalate at a much more rapid pace than prices are likely to grow. If that doesn’t happen, the tradeoff, in Third World countries, will be political risk. “