Chile is the largest copper producer in the world contributing 30% of global mine output. A look at the average copper grade produced shows how significantly the average copper grade in Chile has come down: From 1.11% in 2004 to 0.86% in 2012.
Below are some comments from SCOTIABANK:
A Review of Cash Costs at Chilean Copper Mines…: Scotiabank LatAm Metals & Mining Analyst Alfonso Salazar noting that The Chilean Copper Commission (Cochilco) recently published its new Observatorio de Costos report, comparing cash costs of Chile's largest mines in Q1/16 vs. Q1/15. The analysis includes 19 large-scale mining operations with total mine output representing 88% of Chile's production in the period. For reference, Chile produced 5.8 million tonnes of copper in 2015, contributing 30% of global mine output. According to the study, the average cash cost in Chile's large mines declined US$0.20/lb in the period to US$1.28 per pound from US$1.48 per pound. Lower costs YOY were the result of:
1. Cost-reduction initiatives undertaken by management (US$0.14/lb), which were necessary to remain competitive against a backdrop of lower copper prices.
2. The positive impact of market factors, including a weaker Chilean peso and lower oil and energy prices (US$0.14/lb).
However, cash costs were negatively impacted by some adverse geological and market factors, including declining ore grades, copper production cuts, and lower by-product (molybdenum, gold, silver) prices. From a total of 19 mine operations included in Cochilco's analysis, 14 decreased their cash costs in Q1/16 (to US$1.25/lb from US$1.50/lb in Q1/15). Cash costs increased at five Chilean mines during the period (to US$1.46/lb from US$1.39/lb).
What Is Driving Cash Costs Down in Chile?
How much lower can cash costs get in Chile? The tables below shows two different cash cost breakdowns provided by Cochilco. Alfonso notes that costs of some relevant production inputs seem to already be in an uptrend (TC/RCs, fuel, and freight) when compared with Q1/16. In addition, the Chilean peso strengthened by 3% in Q2/16 vs. Q1/16 and is now up 7% so far in Q3/16 relative to Cochilco's analysis' period. As such, Alfonso is of the thought that costs will likely face upward pressure from now on. Further to this, and in the longer term, Alfonso expects continued (Chilean) ore grade declines to negatively affect production and unit costs; as ore grades continue their a downtrend and rock hardness negatively affects throughput, Alfonso believes mines will face cost increases related to higher energy, water, and labor costs per unit of copper produced.
Two Additional Cash Cost Breakdowns Provided by Cochilco
Average Copper Grades in Chile Expected to Continue Trending Down …
Savings today may impact production in years to come. To preserve cash, state-owned copper producer Codelco is planning to delay investments in projects that will take longer to mature, as noted by CEO Nelson Pizarro during CESCO week in April. Over the next five years, the strategy should result in US$4B less capital expenditures and US$2B of operating expense savings. The expected impact on production volumes should be small in the first five years (around 70kt on a cumulative basis) but will likely increase in time (to 600kt in the following five-year period and to 2Mt in the subsequent five years). As a result, Codelco's copper production guidance of 44 million tonnes in the next 25 years (1.76Mtpa on average) should be revised down.
No Signs of Higher Production in Chile Despite Billions Invested in New Chilean Mines
Small and medium-sized mines are at a clear disadvantage to large mines in a scenario of depressed copper prices, as they lack the economies of scale and, in some cases, access to financing. In addition, a decline in ore grades tends to have a more pronounced effect on small and mid-sized mining operations than on larger mines. A second report published recently by Cochilco – Situación de la Mediana Minería – provides an update on mid-sized mining operations in Chile, albeit using a relatively small sample of 23 companies in the study, with total production of 259k tonnes (Cu Eq) in 2014. The report concludes that not only has the average cash cost for mid-sized operations (US$2.28/lb in 2014) remained consistently above that of large-scale mines, but it has also been highly dispersed in past years.
Cash Costs of Mid-sized Copper Mines in Chile (Red Line) Highly Dispersed and Above Large Mines (Blue Line)