Despite cost pressure, mining sector better prepared for challenges

Rising energy prices, restrictions on water supply, falling ore grades, empowered communities and environmental challenges are all factors for the following years, putting upward pressure on costs in the mining industry.

Despite these pressures, mining companies have learnt from past mistakes in the downward metals cycle, and are better prepared to face the challenges. That, at least, was the opinion of panelists in the Moody's Inside LatAm conference in Santiago, Chile.

Soledad Acoroni, head of credit research at Larrain Vial, said that based on information on companies they cover such as Milpo, Volcan and Minsur operating in Peru and Nexa and Vale in Brazil, miners have reduced their cash costs and have generated free cash flows.

"These companies have taken a series of measures to reduce costs. For instance, they have optimized their mining plans: Minsur with the San Rafael [tin] mine tried to concentrate on certain areas instead of exploiting all the veins," she said.

Other big mining companies have acquired smaller players, added Acoroni. This is the case of Glencore, which purchased a stake in Peru's Volcan. "These players bring all the know-how of the optimization of processes and increase productivity; they also generate operation synergies."

Barbara Mattos, senior VP of Moody's Investors Service, told those attending that the mining sector faces greater long-term cost pressure and that it will be more and more difficult to maintain competitiveness. "But at the same time, I think that companies are making strong efforts to reduce costs, and to generate stable and efficient operations."

Mattos added that in general, companies have a more adequate capital and cost structure so they are better prepared to face price volatility and falling prices.

"Free cash flow comes from higher metal prices but also from capex made in recent years," the analyst said.

Alejandro Sanhueza, finance manager at Chilean copper giant Codelco, said that in the last year the industry has seen higher costs related to the use of water and also from currency changes. However, companies have stronger balance sheets.

"Codelco's debt has been reduced significantly. Today, the focus, rather than growth, is on making a suitable allocation of the company's resources, and keeping costs under control. That was what we didn't manage to do in the high price cycle," said Sanhueza.