Two Rocks for Miners to Overcome

There’s been a lot of grumbling recently about the rising price of
oil. How well consumers can absorb the rise without cutting spending to a
GDP slashing level remains to be seen. But for certain, the rise in oil –
if it lasts – is going to cut into miners’ profit margins.

For those of us who are heavily invested in precious metals mining
companies this price action is one thing to add to the list of items to
watch out for. An article out today about Thompson Creek Metals’
struggles to complete its Mt. Milligan copper and
gold project on time and on budget is exactly what we don’t want to hear
from the companies we own.

CEO of Thompson Creek Kevin Loughrey said that the company had
expected CapEx at Mt. Milligan to be $1 billion when it started the
project in late 2010. The costs now will likely surpass $1.26 billion,
and may reach $1.5 billion. For sure, 20% over budget stings – but 50%
over budget is a killer.

Mr. Loughrey stated that the culprits are mainly rising labor costs
and worker turnover, coupled with higher materials costs. He didn’t cite
fuel specifically, but if oil continues rising well above $100 a barrel
you can be sure he will mention it on the next earnings call.

The second rock to drop came today when Ben Bernanke failed to
excite the fear trade caused by the easy money policies that have helped
gold and silver rally in 2012. It was Bernanke’s lack of enthusiasm for
further quantitative easing that beat back silver and gold.

Personally, I’m more concerned with rising costs cutting into
profit margins and skyrocketing project development budgets than I am
with a correction in the price of these metals as each pertains to a
miners’ overall health. Certainly, a correction in gold an silver prices
mean lower revenues. But we don’t need 20% gains in gold every two months
for miners to be profitable. And clearly those types of gains are never

Better to be able to control costs, increase production and have a
relatively strong market to sell into. I see the first as the bigger rock
right now.

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