Dec '14/Jan '15

President's notes

Don’t bet against commodity prices

By Sean Waller

Sean_WallerIn my last note, I stated that a number of factors make mining a challenging business, one of which is that producers do not have control over the market price of their products. One might argue that this is not entirely correct, as technology innovation enables more efficient and lower cost of production and hence the option to sell products at a reduced price. Several examples of this include the development of very large-scale mining and processing methods and heap leaching technology, all of which served to lower unit production costs in constant dollar terms.

However, other factors beyond producers’ control determine commodity pricing. The most obvious is the strength of the global economy, which is variable in the short term and garners near-constant media attention. But step back from the daily media blasts and consider that we have just reached the seven billion mark in global population and current projections see it reaching eight billion as soon as 2035 – it was only two billion as recently as 1920! Pair this growth with the increase in the global standard of living and associated consumption, and it becomes apparent that over the longer term commodity supply may struggle to meet demand, and we know what the result will be.

In the future, commodity prices are bound to increase in real terms. Deposits are difficult to discover and develop and average grades are decreasing. Fortunately, the application of new methods and technologies will help make these lower-grade deposits commercially viable. For the shorter term, say in the next two to three years, commodity prices and the fortunes of our industry are more difficult to predict. The current softness in many commodity prices has caused our industry to pull back, cut costs and reduce debt. Investment in the mineral sector has dropped dramatically over the past two to three years and as a result the industry is in a downturn. These factors will eventually reverse and long-term growth will return. I, for one, will bet on that.

Sean Waller
CIM President

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A call to the more fortunate

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