Mining stocks are rallying today, as China’s economy shows signs of life. Still, it would be foolish for investors to assume that commodity prices will soar back to their previous levels, if only because mining companies have been cutting costs as if they expect prices will stay low.
Agence France-Presse/Getty Images Cowen’s Adam Graf and Misha Levental look at the recent data:
Monthly U.S. cost data for 2Q13 show an improvement in capital spending, for both surface and underground activities, while operating costs and milling costs have held relatively steady. Lower capital costs were primarily driven by decreased spending in iron and steel products, timber, and industrial chemicals. In Canada, new data shows reversal of the cost increases seen between December 2012 and March 2013. Overall, corresponding to our original thesis, costs appear to have peaked, or stabilized, and are showing signs of retreat…
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We believe that, should gold price remain at current levels, mining companies will continue
to reduce costs, primarily on the operating side, in efforts to restore margins and shore up
balance sheets. While there may not be as much room to maneuver with respect to capital
costs, miners will continue to rejigger mine plans pushing back capital expenditures and
forward higher grades.
The rush to cut costs has been felt the hardest by mining-industry suppliers, including Caterpillar (CAT) and Joy Global (JOY), Graf and Levental say, because cancelling orders for new equipment is one of the easiest ways to cut costs.
Among S&P-500 mining stocks, Freeport McMoran Copper & Gold (FCX) has gained 2.6% to $31.00, Consol Energy (CNX) has jumped 2.5% to $32.00 and Newmont Mining (NEM) has fallen 0.3% to $31.44.
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