Inflation anxiety — what’s in store

The Q4 edition of The Northern Miner’s Global Mining Symposium on November 17 and 18 was another resounding success. The conference featured a top notch roster of guests from the mining industry including Mark Bristow, CEO of Barrick Gold; Rob McEwen, chief owner and chairman of McEwen Mining; Candace MacGibbon, former CEO of INV Metals; and George Ogilvie, CEO of Arizona Sonoran Copper Company; to name just a few. Also present were George Salamis, president and CEO of Integra Resources, Trent Mell, CEO of Electra Battery Materials; and Anthony Milewski, chairman of Nickel 28.

The virtual event saw 1,226 delegates tune in from 73 countries — from Afghanistan to Zambia and everywhere in between. Video recordings of the sessions can be viewed on our website and I encourage you to watch each and every one of them. (Our next GMS is scheduled for February 23 and 24.)

One theme discussed at the conference was inflation and its impact on miners and commodities. Prices have surged this year, driven higher by disruptions in the global economy, kinks in the supply chain, higher shipping rates, and rising costs for everything from fuel and food to housing and wages. Over the last twelve months, inflation in the United States in October was up 6.2% — the biggest annual jump in more than three decades. According to Oxford Economics, natural gas prices in October were up 565% year-on-year; coal prices jumped 244% year-on-year; and oil prices gained 102%.

The U.S. Federal Reserve recently approved plans to cut back monthly bond purchases and is likely to start raising interest rates in the second half of next year, although with a dangerous new variant of the Covid-19 virus emerging in South Africa, all bets are off.

In a keynote interview at the Global Mining Symposium with Anthony Vaccaro, president of The Northern Miner Group, Barrick Gold’s Bristow, dialing in from London, noted that inflation is here to stay, specifically in the gold industry.

“We’ve got two legs to inflation: Inflation drives the gold price because you devalue money. And then, there are the input costs of your operations,” he explained. “As managers, we should be all about cost control, efficiencies, automation and investing to take our industry into the future. Since 2019, Barrick has taken out hundreds of millions of dollars of costs.”

In a research note published on November 26, mining analyst Farooq Hamed of Raymond James pointed out that when a number of companies recently reported their third quarter results, some warned that “full-year cash cost and AISCs would be towards the upper end of the guided ranges as inflation continues to push consumable, labour, and logistical costs higher.”

“Operating and capital cost guidance for 2021 was generally maintained in 3Q,” Hamed noted, “however the majority of companies under coverage discussed inflationary pressures on input items expected in 2022, varying from ~2-10%. On inflation pressure on input items, common elements driving higher costs seem to be steel and grinding media, diesel and chemicals/reagents and labour costs specifically on skilled labour and contractors.”

The analyst then extracted comments on inflation from third-quarter earnings calls and MDAs from ten companies he covers, including Agnico Eagle Mines, Iamgold, Kinross Gold, and Hudbay Minerals. Agnico Eagle noted that it is “seeing cost inflation on consumables and supplies in the order of about 5% to 7% going into next year,” Hamed noted. Kinross said it was “seeing inflation in the range of 3% to 5% in the second half of this year,” and “as the price of key inputs remain elevated, we expect inflationary pressure on our operating cost in the range of 5% to 7% going forward.” On a recent mine tour, according to Hamed, Hudbay Minerals said it is seeing “~10% inflation impact on opex and capex,” while Iamgold has estimated that higher prices for grinding steel, cyanide, fuel and shipping rates “does impact surcharges for a lot of the bulk materials we receive and/or parts,” adding that a “dollar of per tonne mined, dollar per tonne milled, we’re probably seeing [5-6% inflation] on costs in 2022 over 2021, maybe be slightly higher, but not a lot higher.”

Other analysts weighing in recently on the impact inflation is having and will likely continue to have in the months ahead, along with other cost pressures on the mining industry, are CIBC Capital Markets analyst Giorgia Anton and her team.

“Cost pressures facing the producers have squeezed margins, but it is the long permitting timelines, increasing ESG requirements, and lack of projects in the development queue that do not require meaningful infrastructure capex that have contributed to the higher-for-longer commodity price forecasts,” she commented in a research note focused on precious metals released on November 23.

Anton believes the US Federal Reserve is likely to raise rates in the second half of next year, but it will take time for any change to be felt. “Despite expectations for inflation to subside and rate hikes to emerge during the latter part of 2022, it will be difficult to see a substantial recovery in real rates in the near term, as Central Banks will need to walk a fine line between controlling inflation and managing debt levels. If we’re wrong, and Central Banks decide to let inflation stay higher-for-longer, our forecast for a gradual pullback in gold and silver could prove to be too conservative.”

Anton also noted that the allure of cryptocurrencies may impair some of the market’s appetite for gold as a safe haven asset.

“We continue to believe that the demand for physical gold and silver will remain high, not only from traditional investors, but also from a wider array of investors seeking a safe-haven option to hedge against inflation and market volatility,” she wrote. “However, the resilience of cryptocurrencies, despite commentary out of China on potential crackdowns, has been stronger than expected and clearly offered investors an alternative monetary instrument. While the playbook on cryptocurrencies has yet to be fully defined and some rationalization among the group will likely occur, it is clear that some form of crypto is here to stay.”