Cost inflation to eat miners' results in 2013

The rise of mining costs will have a more dramatic impact on 2013 industry results than in the last couple of years, global ranking agency Fitch Ratings revealed Thursday.

According to the firm’s experts, a gloomy macroeconomic outlook in western economies, and China’s growth related worries, will continue to impact commodity prices.

After initially falling in late 2011 commodities have remained weak, while mining cost inflation is likely to persist, driven by wage inflation and rising energy prices, said Fitch.

During previous periods of cost inflation, including the four-year period from 2004 to 2008 and the 2010-2011 downturn, the impact on results has been masked by rising prices.

“But in the coming year we expect higher costs to be much more evident in miners' earnings,” said the agency.

South Africa, added the experts, is the country to be most affected as mining operations have experienced the most high-profile disputes over wages, including the long-running strike by Lonmin (LON:LMI) miners, who returned to work after agreeing a 22% wage increase.

Higher wage demands are also likely to affect other operations in Africa, including copper miners in Zambia, where a low – to mid – teens increase seems likely, added Fitch.

The agency warns the proportion of total costs represented by wages varies significantly, depending on the country.

“Generally, labour costs for mines in developed economies account for around 40% of the total, whereas 20% is more typical in developing economies. The proportions for South African gold miners and Zambian copper miners are more typical of developed economy mines,” said the agency.

Among the major diversified miners, Anglo American (LON:AAL) is the one with the biggest exposure to Africa, particularly South Africa. Its operations in Africa's largest economy were responsible for 49% of the company’s 2011 revenue.

Fitch expects Anglo's labour-cost inflation to average mid to high single digits for the next three to five years.

The agency also highlighted that increasing energy prices will likely limit miners' ability to control costs in some regions, adding that it expects electricity tariffs for South African operators to rise by 20% or more per year for the next three to five years.