Mining companies cut costs to weather lower metal prices

Mining companies the world over are battening down the hatches to weather low metal prices, as rising costs are further eroding their shrinking revenues.

One of the most extreme examples comes from Cornwall, England. There, the last of that county’s historic tin mines, operating at 600 tons per day, reduced the cost of producing a ton of metal contained in concentrates from $16,300 in 1985 to $6,500 in 1991. The change was prompted by the phenomenal drop in metal prices following the 1985 collapse of the tin cartel. The metal plummeted from $9 per lb. to the $3-3.50 that prevails today. Canadian cost-cutting is not so dramatic; nevertheless, several mines, including Giant, Pamour and Dickenson, owe their lives to the drastic and unpopular cost-cutting measures taken by management. Many jobs have been sacrificed to preserve the life of the community’s paymaster but by extension, the community’s life itself has been assured.

Some might ask, “If the cost of producing an ounce of gold — or whichever commodity it happens to be — has dropped from $350 to $300 through reorganization, why didn’t the company go about it earlier when the price of gold was higher?”

The question defies a simple answer.

Labor costs amount to 50-55% of the cash cost of producing most minerals but the elimination of jobs by en-masse layoffs runs counter to Canadian tradition. Full employment was the declared policy of many western governments after the Second World War. There was to be no repeat of the unemployment scene of the “dirty thirties.”

Unions also come into the picture in a big way. “Firing people creates too much turmoil, we’ll keep the payroll the size it is and absorb the cost as the price to pay for labor peace”: a common enough sentiment from the shift-boss underground to the chief executive officer in head office. Then there is the street-smart rule: “If it ain’t broke, don’t fix it.” Leave the organization alone if it is functioning satisfactorily.

As well, there is an unusual factor that can induce complacency in mine management. It may easily, and convincingly, sidestep the criticism that will invariably be directed toward a manufacturing company whenever its costs get out of line.

For example, if a vehicle manufacturer’s unit costs are $1,000 more than its competitors, there will be an outcry from financial analysts and stockholders. The directors are forced to act. There will be action. For the mining company producing gold at a cost of $350 per oz. and its neighbor doing the same for $200, the critics can readily be silenced. Management will point to differences in ore grade, more complex geology, higher rock pressures and many other uncontrollable vagaries of nature as well as the age of the operation. The reasons may be undeniable but to what degree they also hide inefficient organization can only be perceived by those intimately familiar with the operation, that is, mine management itself. Thus, many mining operations and older mines in particular, are reluctant to trim their single highest cost, their payroll, until crisis conditions occur. With the low metal prices of today, that time has arrived for many. A new mine will install high-productivity equipment and keep the labor force correspondingly small. Normal attrition will take care of the size of the payroll as improved equipment is introduced later on.

But what about the long-established gold and base metal producers? Many employees will have been with the company for 15 or more years. There may be two generations from the same family working at the same mine and this could easily be the case for long-lived operations such as the Dome mine of Placer Dome (TSE) or the Sullivan mine of Cominco (VSE).

Layoffs from such operations are traumatic for the entire mining community; witness the bitter 6-month strike at the Dome and the 9-month work suspension at Sullivan. Both events took place in 1990 with the ultimate loss of 479 jobs, or reductions of 45% and 20% of their respective job tallies. Some will see these losses as no more than union-company conflicts in which the union lost. Others will see them as the impact of a harsher, more unpredictable world that is now unfolding. Along with the disintegration of the Soviet Union, the Western world is also seeing change and one such change is that the right to a job is no longer inviolable.