2. Currency Exchange Rates & Lower Oil Should Reduce Operating Costs
Over the last two years -25%
against the USD (Figure 1). Consequently, we have painstakingly reviewed the asset-
by-asset exposures of the six largest North American gold miners. We have added or
refined our cost formulas to take into account local currency exposure and hedge
positions, in order to dynamically incorporate the currency forward curves. For the
most part, this has reduced our forward looking operating (and capital) cost estimates
for operations exposed. As a result, we have revised our forward looking financial
estimates and valuations so as to reflect disclosed currency exposures and hedge
positions. For many of the miners, the depreciation of local currencies against the
compared to the positive impact of a lower oil price on diesel. Our primary focus is
not only to better forecast the earnings and cash flows, but also to be ahead of the
market on valuing these companies.
Figure 1 : Currency Exchange Rate Historic Performance For Select Currencies (January 2013-Present)
Source: Cowen and Company, Bloomberg
We have reviewed asset-by-asset operating cost sensitivity to exchange rate
movement for the large North American gold miners.
exchange rate movements is a function of 1) expected shifts in local currencies versus
the USD (Figure 8), 2) relative exposure to jurisdictions in which it operates (Figure 7),
and 3) any currency hedging undertaken (explained further below). By our estimates,
Newmont Mining and Agnico-Eagle demonstrate the highest degree of sensitivity to
movement in exchange rates on 2015E and 2016E EPS, for a 10% change in respective
local currency exchange rates versus the USD. Barrick, Yamana, and Kinross,
however, due to respective currency hedging positions already in place for 2015, show
relatively less sensitivity to a 10% move in local currency exchange rates versus the
USD on 2015E EPS.
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1.10
Jan-13
Feb-13
Mar-13
Apr-13
May-13
Jun-13
Jul-13
Aug-13
Sep-13
Oct-13
Nov-13
Dec-13
Jan-14
Feb-14
Mar-14
Apr-14
May-14
Jun-14
Jul-14
Aug-14
Sep-14
Oct-14
Nov-14
Dec-14
Jan-15
USD/CAD USD/PEN USD/BRL USD/MXN USD/CLP USD/RUB USD/AUD
USD/RUB
USD/CLP
USD/AUD
USD/BRL
USD/CAD
USD/PEN
USD/MXN
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4. production, cost and capital spending guidance. Consistent with our methodology, we
build upon guidance provided by the companies, factoring in the futures curves for
metals, energy, and currency; our estimates reflect the impact of such futures. As
highlighted by Figure 2, our 2015E EPS are above Street for all six North American
senior miners under coverage. Figure 2 shows that for most of the six senior
producers, effects of 1) higher gold price, 2) lower oil price, and 3) weakening
currencies, have not yet been factored into 2015 estimates, and may explain much the
discrepancy between Cowen and Street.
Changes in Cowen 2015E EPS from November 2014 through present are derived from
evaluating the impact on select significant input factors over the two time periods, to
seek to explain the increase in our estimates. Not surprisingly, over this time period,
our estimates have been incrementally revised upward, a function of 1) higher gold
price, 2) lower oil price, and 3) weakening currencies, offset by a lower copper price.
Over this same time period, 2015E Street EPS estimates have generally declined,
despite indications of an improving environment for gold miners in 2015. This may be
reflective weaker announced 2015 operating guidance from senior miners (e.g. GG,
AUY), mine suspensions (e.g. KGC/GG, ABX), the impact of share issuance (AUY,
AEM), and the impact of asset sales (NEM). Therefore, we believe that current Street
consensus estimates must be either:
1. Using a 2015 gold price assumption below the current gold price, or
2. Not yet updated with respect to improving cost profile for miners as lower oil
price and weakening currencies.
We would expect upward revisions for Street estimates as we progress through 2015,
as lower cost inputs become incorporated into management guidance, and evidence
of cost structure improvement show in quarter-end financial statements.
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5. Gold Miner Sensitivity To Currency Exchange Rates
We derive our forward-looking oil price and currency exchange rate assumptions
weekly, using respective futures curves, as listed in Figure 9. In Figure 3, we have
assessed the impact of lower 2015E-2016E -
2016E EPS by calculating the differential in EPS, using 2014 average oil price and
exchange rates. For example, using average 2014 oil price ($99/bbl) for 2015E (the
current average 2015E oil price, as implied by the current futures curve, is $58/bbl)
results in a $0.07/sh decrease to 2015E EPS. Similarly, using 2014 currency
exchange rates for 2015E (current average foreign currencies forwards for 2015E, vs
the USD, are 20% below 2014 values) caused a $0.03/sh decrease to ABX 2015E EPS.
Figure 3 : 2015E-2016E EPS Estimates, And The Impact Of Lower Oil and Weaker Foreign Currency
Source: Cowen and Company, Street consensus from Bloomberg
Note: 2015E oil and currency prices derived using respective futures curves, as listed in Figure 9
Figures 4-6 highlight the impact of weakening currencies on EPS estimates (2015E
and 2016E) and NAV. These tables indicate our calculated impact of a 10% change in
individual exchange rates on estimates, taking into account any hedging initiatives. As
an example of the impact of currency hedging on AUY, while Brazilian operations
account for approximately 25% of total production (Figure 8), substantial hedging of
the Brazilian Real undertaken for 2015 has left the company relatively insensitive to
fluctuations in the local currency.
For 2015, ABX shows the least earnings variability to fluctuations in local currencies in
2015, primarily due to currency hedging undertaken. As of September 30, 2014, for the
year 2015, 54% of Australian operating costs were hedged at A$1.06/US$, 61% of
Canadian operating costs were hedged at C$0.97/US$, and 50% of Chilean operating
costs were hedged at 0.002 CLP/US$. As of September 30, 2014, for the year 2016,
13% of Australian operating costs were hedged at A$1.10/US$.
Impact to 2015E EPS Impact to 2016E EPS
2015E EPS 2016E EPS
Using 2015E Oil
Price, Vs 2014
actual
Using 2015E
Currency Prices, Vs
2014 actuals
Using 2016E Oil
Price, Vs 2014
actual
Using 2016E
Currency Prices, Vs
2014 actuals
Cowen $1.02 $1.16 $0.07 $0.03 $0.08 $0.05
Street $0.75 $0.95
Cowen $1.05 $1.40 $0.18 $0.14 $0.11 $0.14
Street $0.78 $0.98
Cowen $1.43 $1.71 $0.45 $0.20 $0.38 $0.45
Street $1.02 $1.26
Cowen $0.27 $0.34 $0.10 $0.05 $0.10 $0.09
Street $0.09 $0.14
Cowen $1.58 $1.43 $0.38 $0.36 $0.23 $0.34
Street $0.84 $1.20
Cowen $0.28 $0.25 $0.07 $0.03 $0.05 $0.06
Street $0.17 $0.30
AUY
ABX
GG
NEM
KGC
AEM
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6. Figure 4 : Impact on 2015E EPS, for North American Senior Gold Producers, Per 10% Change in Respective Local Currency Exchange Rates
Source: Cowen and Company
Figure 5 : Impact on 2016E EPS, for North American Senior Gold Producers, Per 10% Change in Respective Local Currency Exchange Rates
Source: Cowen and Company
Figure 6 : Impact on 2015E NAV, for North American Senior Gold Producers, Per 10% Change in Respective Local Currency Exchange Rates
Source: Cowen and Company
operating exposure to Canadian operations (~70% of production), coupled with
relatively minimal currency hedging in place, leaves the company relatively vulnerable
to fluctua
operations (~30% of production) is mitigated by hedging undertaken on the
Australian Dollar. The company hedges its currency exposure to the AUD and NZ$. In
2015E
EPS CAD % of EPS EUR AUD MXN PEN CLP ARS RUB
ABX $1.02 $0.01 (1%) $0.01 (1%) $0.00 (0%)
$1.05 $0.06 (6%) $0.04 (4%) $0.01 (1%)
NEM $1.43 $0.11 (8%) $0.11 (8%)
KGC $0.27 $0.01 (3%) $0.00 (2%)
AEM $1.58 $0.18 (12%) $0.04 (2%) $0.03 (2%)
AUY $0.28 $0.01 (2%) $0.00 (0%) $0.02 (9%) $0.00 (0%)
2016E
EPS CAD % of EPS EUR AUD MXN PEN CLP ARS RUB
ABX $1.16 $0.01 (1%) $0.01 (1%) $0.00 (0%)
$1.40 $0.07 (5%) $0.04 (3%) $0.01 (0%)
NEM $1.71 $0.14 (8%) $0.01 (1%)
KGC $0.34 $0.01 (4%) $0.01 (2%)
AEM $1.43 $0.20 (14%) $0.03 (2%) $0.03 (2%)
AUY $0.25 $0.01 (3%) $0.02 (7%) $0.02 (10%) $0.00 (0%)
2015E
NAV CAD
% of
NAV EUR AUD MXN PEN CLP ARS RUB
ABX $9.59 $0.13 (1%) $0.04 (0%) $0.00 (0%)
$19.85 $0.50 (3%) $0.51 (3%) $0.02 (0%)
NEM $28.97 $0.97 (3%) $0.39 (1%)
KGC $4.68 $0.21 (5%) $0.02 (1%)
AEM $27.19 $1.97 (7%) $0.57 (2%) $0.25 (1%)
AUY $6.01 $0.13 (2%) $0.20 (3%) $0.22 (4%) $0.00 (0%)
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7. 2015, 2016, and 2017, the company has hedged 18%, 11%, and 7% of operating
expenses, respectively at 0.98 $/A$, 0.95 $/A$, and 0.93 $/A$, respectively.
Figure 7 -In Costs, Versus 2014
Source: Cowen and Company, All-In Costs made-up of: Net Operating Costs After-Byproduct + Capex + SGA + Exploration + Interest + Taxes
-
(AISC) near-or-below $1,000/oz in 2015. Our -
defined as Net Operating Costs After-Byproduct + Capex + SGA + Exploration +
Interest + Taxes); driven by reductions to capital expenditures. For NEM, AEM, and
($750)
($250)
$250
$750
$1,250
$1,750
2014E 2015E
$/ozAu
Oil Price Currencies Other
incl. capex
($750)
($250)
$250
$750
$1,250
$1,750
2014E 2015E$/ozAu
Oil Price Currencies Other
incl. capex
($750)
($250)
$250
$750
$1,250
$1,750
2014E 2015E
$/ozAu
Oil Price Currencies Other
incl. capex
($750)
($250)
$250
$750
$1,250
$1,750
2014E 2015E
$/ozAu
Oil Price Currencies Other
incl. capex
($750)
($250)
$250
$750
$1,250
$1,750
2014E 2015E
$/ozAu
Oil Price Currencies Other
incl. capex
($750)
($250)
$250
$750
$1,250
$1,750
2014E 2015E
$/ozAu
Oil Price Currencies Other
incl. capex
ABX
KGC
AEM AUY
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8. KGC, however, lower oil and weakening currencies reduce the operating cost
component of the AIC reduction in 2015 (at the current futures curve for oil and
respective currencies).
To-date, the sell-off in oil is expected to contribute more to the expected decrease in
2015 net operating costs than weakening currencies. Based on the current futures
curve for metals and currency (Figure 9), however, we would expect to continue to see
currencies contribute to improved operating cost profiles for miners, whereas the
benefit of lower oil price should be expected to contract as we head into 2016 and
beyond.
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9. Figure 8 : 2015E Gold Production Distribution by Jurisdiction for Top Six North American Senior Producers
Source: Cowen and Company
Canada
USA
Dominican
Republic
Argentina
Peru
Australasia
Tanzania
ABX
Canada
USA
Dominican
Republic
Mexico/Centra
l America
Argentina
GG
USA
Brazil
Chile
Russia
Ghana
Mauritania
KGC
Canada
Brazil
Mexico/Centra
l America
Argentina
Chile
AUY
Canada
Finland
Mexico
AEM
USA
Peru
SurinameIndonesia
Australia
Ghana
NEM
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10. Barrick
Approximately 45 The
remaining operations are spread across Australia, Peru, Canada, Dominican Republic,
Chile/Argentina, Tanzania, and Saudi Arabia, representing 15%, 12%, 1%, 9%, 9%,
eaker commodity
ABX, however, has mitigated its exposure to various currency movements through
hedging positions established in the Australian Dollar, Canadian Dollar, and Chilean
Peso. As of September 30, 2014, for the year 2015, 54% of Australian operating costs
were hedged at A$1.06/US$, 61% of Canadian operating costs were hedged at
C$0.97/US$, and 50% of Chilean operating costs were hedged at 0.002 CLP/US$. As of
September 30, 2014, for the year 2016, 13% of Australian operating costs were hedged
at A$1.10/US$.
Goldcorp
A
approximately 30% of production is tied to Mexican operations. With Cerro Negro now
online, Argentinian operations represent roughly 18% of longer-term production
volumes. The Dominican Republic (Pueblo Viejo 40% ownership) accounts for ~12%
of total production.
Newmont
Africa, with gold production from each accounting for 35%, 11%, 5%, 29%, and 19%,
respectively, of total production. Furthermore, the company is currently developing the
Merian Project in Suriname, which once in operation (end-2016), will account for
~10% of total production. Inclusive of copper production, the company is further
exposed to Nevada (46.4MM lbs in 2015), Indonesia (458.0MM lbs in 2015), and
Australia (61.4MM lbs in 2015). The company hedges its currency exposure to the
AUD and NZ$. In 2015, 2016, and 2017, the company has hedged 18%, 11%, and 7%
of operating expenses, respectively at 0.98 $/A$, 0.95 $/A$, and 0.93 $/A$, respectively.
Kinross
Operations are spread across USA,
Brazil, Chile, Russia, and Mauritania, with each region accounting for 25%, 20%, 10%,
20%, and 25% of operations, respectively. According to Kinross, approximately 60%
70% of the Company s costs are denominated in U.S. dollars. However, a portion of
operating costs and capital expenditures are denominated in their respective local
currencies. According to the company, 45% of Russian operations, 40% of Chilean
operations, 75% of Brazilian operations, 45% of Ghanaian operations, and 30% of
Mauritanian operations, are denominated in the local currency. As of September 30,
2014, for 2015, the company has hedged US$152MM at 2.42 BRL/USD, US$53MM at
577.36 CLP/USD, US$48MM at 35.88 RUB/USD, and US$45MM at 1.09 CAD/USD.
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11. Agnico-Eagle
and Finland. Agnico- Canadian exposure - 70% of gold production in 2015 is
the largest among the top six senior producers. The company uses derivative financial
instruments (primarily option and forward contracts) to manage exposure to
fluctuations in by-product metal prices, interest rates and foreign currency exchange
rates and may use such means to manage exposure to certain input costs. As at
September 30, 2014, the company had outstanding foreign exchange zero cost collars,
relating to $72.0MM of 2014 expenditures and $24.0MM of 2015 expenditures.
Figure 9 : Currency Exchange Rate Futures Curve For Select Currencies (as of February 2, 2015)
Source: Cowen and Company, Bloomberg
Yamana
American operations make up ~70-75% of annual production; equity production from
following the recent joint-
acquisition of Osisko, makes up ~20% of annual gold production. Within South
America, Brazil, Argentina, and Chile account for 27%, 10%, and 34% of total
production for 2015. Once Cerro Moro comes online in 2016, gold production from
Argentina will account for 20% of total annual gold production. The c
operating expenses are incurred in United States Dollars, Brazilian Reals (BRL),
Chilean Pesos (CLP), Argentine Pesos (ARG), Mexican Pesos (MXN) and Canadian
Dollars (CAD). The company is currently engaged in forward contracts to
economically hedge against the risk of an increase in the value of the Brazilian Real,
and Mexican Peso, versus the US Dollar. As of September 30, 2014, for 2015, the
company has hedged US$520MM at 2.28 BRL/USD, and US$65MM at 13.32
MXN/USD.
Brent Oil $99.45 $57.69 $64.96 $69.07 $72.14 $74.57 $76.34
Mexican Peso (MXN) 13.29 15.12 15.49 16.10 16.57 17.03 17.03
Argentine Peso (ARS) 8.11 10.17 14.04 21.08 25.40 31.64 31.64
Canadian Dollar (CAD) 1.10 1.27 1.27 1.26 1.25 1.25 1.25
Peruvian Nuevo Sol. (PEN) 2.80 3.13 3.26 3.41 3.41 3.41 3.41
Australian Dollar (AUD) 1.11 1.30 1.33 1.34 1.35 1.36 1.36
Euro (EUR) 0.75 0.88 0.87 0.85 0.84 0.82 0.82
Brazil Real (BRL) 2.34 2.86 3.14 3.53 3.83 4.13 4.13
S. African Rand (ZAR) 10.83 11.96 12.66 13.76 14.53 15.30 15.30
Chilean Peso (CLP) 569.99 644.18 659.18 678.51 689.05 710.19 710.19
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15. The following is an excerpt
from our previously published report,
Miners Benefit From Lower Oil Price,
dated January 20, 2015.
(link to full report & disclosures)
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17. The Effect of Oil Price on Gold Miners
We have reviewed asset-by-asset operating cost sensitivity to oil for the large North
American gold miners. By our estimates, Newmont Mining, Yamana Gold, and
Kinross Gold appear to demonstrate a higher degree of EPS and operating cost
exposure (leverage) to changes in oil prices, versus peers. Thus, shares would be in a
better position to benefit more from lower oil prices. By contrast, for Goldcorp and
Agnico-Eagle, oil appears to account for a much smaller percentage of operating
costs, or is subject to a greater degree of federally regulated pricing. In the case of
ABX, oil price sensitivity has been muted with its ~47% usage hedged at $85/bbl oil
for the next 3 years. We update our estimates weekly for the latest changes in metal
price, currencies, and oil price.
Figure 1 : Impact on EPS for every $10/bbl change in Oil Price
Source: Cowen and Company
Figure 2 : Impact on NAV for every $10/bbl change in Oil Price
Source: Cowen and Company
We have revised our estimates compared to our contribution to the multi-sector note
on oil by Cowen on January 15. Similar to EPS sensitivity, the large open-pit miners:
NEM, KGC, and ABX have a higher degree of leverage to oil prices, vs. more
underground focused miners (AEM, AUY, GG). This greater impact NAV vs. EPS for
Barrick is due to the longer-term nature of the NAV calculation, which is less sensitive
to the impact of their oil hedge program.
Company
2015E EPS Estimate
(Cowen)
Change in EPS per
$10/bbl Change in Oil
ABX $1.22 $0.02
GG $0.82 $0.03
NEM $1.58 $0.16
KGC $0.16 $0.06
AEM $1.22 $0.05
AUY $0.15 $0.03
Company
2015E NAVPS
Estimate (Cowen)
Change to NAVPS
per $10/bbl Change
ABX $17.71 $0.85
GG $20.16 $0.45
NEM $30.44 $2.19
KGC $6.21 $0.33
AEM $29.86 $0.32
AUY $8.43 $0.24
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18. Barrick
While production from open-pit mines accoun
operations, the costs and earnings will only see a limited benefit from the recent
decline in global oil price, due to a hedging program in which ~47% of oil usage has
been hedged at $85/bbl oil for the next 3 years (ac -
Operations are exposed to Peruvian, Argentine, and Australian currencies, and South
American and Australian operations account for 20% of operations each. Weaker
cost structure.
Goldcorp
-pit and underground
operations to stay relatively insulated to oil price volatility; by our estimates, every
$10/bbl move in the price of oil will result in an opposite ~$12/oz change in operating
expenses, one of the lowest versus peers. Goldcorp
those tied to the Canadian Dollar and Mexican Peso. Diesel prices in Mexico are
federally controlled. Consequently, there is little in the way of near-term positive
there. Approximately 40% of
production is tied to Mexican operations. With Cerro Negro now online, Argentinian
operations represent roughly 18% of longer-term production volumes.
Figure 3 : 2015E-2016E EPS Comparison, Cowen versus Street
Source: Cowen and Company
2015E 2016E
Cowen $1.22 $1.32
Street $0.75 $0.91
Cowen $0.82 $1.21
Street $0.80 $1.03
Cowen $1.58 $1.86
Street $0.96 $1.26
Cowen $0.16 $0.16
Street $0.09 $0.12
Cowen $1.22 $1.02
Street $0.76 $1.11
Cowen $0.15 $0.13
Street $0.17 $0.29
ABX
AEM
GG
KGC
NEM
AUY
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19. Newmont
Newmont is one of the highest-exposed to oil prices among peers. With production
from open-pit operations accounting for
business is relatively heavily impacted by shifts in oil price. To help mitigate this risk,
the company engages in oil hedging at its Nevada operations. Nevada operations are
58%, 33%, and 12% hedged in 2015, 2016, and 2017, respectively. In 2015, we estimate
that every $10/bbl decrease in the price of oil would correspond to close to $30/oz of
-in cash costs after
by-product credits are expected to total around $1,080/oz. According to the company,
every $10/bbl decrease in the price of oil would allow for an additional $40MM in FCF.
Figure 4 : Impact on 2015E Cash Costs for North American Senior Gold Producers, Per $10/bbl Change in Oil Price
Source: Cowen and Company
Kinross
Kinross is one of the most exposed to fluctuations in oil price, versus peers; ~70% of
production is attributable to open-pit operations.
Dvoinoye mines, located in Russia, and its Tasiast mine in Mauritania operate solely
off of diesel powered generators. The combination of a large percentage of open pit
mines, and diesel sourced electrical power, result in high oil price exposure vs. its
peers. We estimate that a $10/bbl decrease in the price of oil corresponds to a
~$40/oz decrease in production costs. Kinross manages oil price volatility by hedging
roughly 25% of its near-term exposure. Fuel deliveries to remote operations are made
once a year. Consequently, those operations will be booking the use of higher cost
fuel until new deliveries are made. In 2013, management estimates that over 1.6MM
bbls of oil equivalent were used in operations.
diverse. Operations are spread across USA, Brazil, Chile, Russia, and Mauritania, with
each region accounting for 25%, 20%, 10%, 20%, and 25% of operations, respectively.
According to Kinross, approximately 60% 70% of the Company s costs are
denominated in U.S. dollars.
$-
$5
$10
$15
$20
$25
$30
$35
$40
$45
ABX GG NEM KGC AEM AUY
$/ozAu
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20. Agnico-Eagle
Agnico-Eagle is known to be one of the most experienced underground operators
among peers. Five out of its nine operations are underground; in 2015, production
Larger oil consuming operations include Canadian Malartic, Meadowbank, and La
India open pit operations. At the remote Meadowbank operation (and likely will also
delivered once a year. Management estimates that Canadian Malartic uses 50MM
well as Kittila operations in Finland) purchase fuel at a federally regulated price. Thus
these operations will also not see a near-term benefit cost structure. Operating costs
are also exposed to fluctuations in the USD/CAD, as Canadian operations account for
-in sustaining
costs to decline y/y to ~$1,000/oz, rising steadily thereafter due to rising capital
expenditures. We estimate capital expenditures will rise to fund Meliadine coming
online around 2019.
Yamana
gold production is attributable to
underground operations. Nevertheless in 2015, by our model, AUY shows a relatively
large cost-per-ounce impact to fluctuations in oil price, in part due to the large
exposure of the cost structure to by-product credits produced from open-pit
operations. The company
South American operations make up ~70-75% of annual production; equity
following the
recent joint-acquisition of Osisko, makes up ~20% of annual production.
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22. Overview of Oil Dependency in Mining Operations
Diesel fuel is the principle fuel used in mining operations to operate heavy equipment.
In addition, ANFO (ammonium nitrate + fuel oil) is the principle explosive used in
mining, for which HSD (High Speed Diesel) is a major component. Thus oil and its
derivatives are a major overall component of mining costs. In addition, remote
operations often generate electrical power by the use of diesel power generators.
Depending on the type and extent of crushing and processing, electrical power may
be the largest component of processing costs. Finally, for mines that produce
intermediate products, such as copper concentrate, beneficiated coal or iron ore, etc,
significant transportation costs may be involved in moving volumes to the customer,
again often relying on diesel fueled transport (trains, trucks, ship).
Open-pit operations generally require a much higher degree of fuel consumption than
do underground operations, due to the increased use of fuel-powered machinery and
hauling equipment, and larger volumes of lower grade ore. We estimate that diesel
and ANFO make up roughly 35%-40% open-pit mining costs. Underground mines, by
contrast, generally move much less material by truck, but have significantly higher
electrical and explosive costs as a percentage of cost structure. We estimate that
diesel make up roughly 13%-17% of underground mining costs. For remote
underground operations that are not connected to the power grid, and instead rely on
diesel power generators, we estimate diesel generated power could comprise another
10%-16% of mining costs. Electrical use in underground mining may include
electricity to power airflow, pumping, lighting, ventilation, and hauling miners and
materials.
Figure 6 : 2015 Estimated Break-Out Of Gold Ounces From Open Pit (O/P) Mines, Versus Underground (U/G)
Source: Cowen and Company
After the ore is mined, ore processing operations are frequently very power intensive,
as they may involve conveying, crushing, grinding, and pumping of heavy materials.
The average North American mine spends 17%-26% of processing costs on electricity.
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23. We estimate that diesel generated power could comprise up to 50% of processing
costs for a remote mine without grid access. Some miners break-out energy usage as
a percentage of total operating costs; Goldcorp, for example, states that fuel charges
make-up roughly 9% of operating costs, company-wide.
We have attempted to determine the positive leverage of the large North American
gold miners to lower oil (diesel) price. Barrick, Goldcorp, Newmont, and Kinross have
the highest exposure to open-pit mining, based on total tons of ore processed.
However,
processed tons will have corresponded to open-pit mining activities. However, by our
-pit operations provide only 56% of its total estimated production of
gold ounces, meaning oil prices should have a lower impact per ounce produced.
impact operating costs. Simply put, lower oil will correspond to lower operating costs,
therefore helping to expand margins. As is consistent with our methodology, our
forward looking oil price assumptions use the forward curve for Brent oil price. Our
model is updated weekly to reflect a dynamic futures curve for the commodities that
drive our model. As of January 12, 2015, the futures curve for crude oil assumes an
average price of ~$60/bbl in 2015, rising steadily y/y to ~$80/bbl by 2021.
Gold and Oil Historically Volatile Relationship
Figure 7 : Gold/Oil Historic Ratio
Source: Cowen and Company, Bloomberg
Over the last 45 years, we see a broad longer-term relationship between gold and oil
price, and a great deal of shorter-term volatility. Both commodities fluctuate based on
different market forces, and as such, it is difficult to predict the movement of gold
price based on a movement in oil. As oil is a major component of the mining cost
structure, gold miners should outperform base metal producer when the gold to oil
ratio is high, but underperform base metal miners when the ratio is low and oil looks
expensive relative to gold.
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