Commodity prices have finally risen to the point that miners can start new development projects, but the rally in metals prices also brings higher costs for producers.
Both operating and capital costs tend to climb sharply during cyclical rallies for metals. However, some companies have proven more adept than others at generating returns in the face of this challenge.
Stephen D. Walker, head of global mining research at RBC Capital Markets, found that returns on invested capital (ROIC) for base metals companies exceeded those of gold miners during the recent commodity cycle.
Both groups have similar operating margins, yet senior gold producers posted an average ROIC of 4.4 per cent between 2001 and 2017, compared to 7.1 per cent for base metals companies.
“This appears to be a result of gold companies being impacted to a greater extent by rising operating and capital costs, and not benefiting from a more broadly diversified commodity portfolio,” Walker told clients.