Inflation Hits Mining Companies’ 2Q22 Results

Experts said several mining companies were forced to raise their 2022 cost guidance in 2Q22 due to inflationary pressures that are driving up prices for key inputs. After many Mexican mining companies announced that inflation will continue to affect their operations in the second half of 2022, some are already looking for ways to mitigate its negative impact.

Jackie Przybylowski, Analyst, BMO Capital Markets Metals & Mining, warned that there is a growing trend of mining companies getting hit by inflation. Przybylowski explained that, for by-product companies, cost inflations are due to higher primary product prices or lower by-product costs. This last variable is severely impacting base metals companies, which had significant profits from their by-products.

“On average, C1 cost guidance of base metals companies under our coverage has increased by 13 percent since 2022 guidance was first released, while precious metals producers under our coverage have seen cost guidance increased by 2 percent. Across our coverage universe, royalty and streamers excluded, 2022 unit cost guidance has increased by 7 percent since it was initially released,” wrote Przybylowski in an August research note.

Several Mexican mining companies announced that their operations have been affected by inflation. For instance, Argonaut Gold said that if the trend continues to increase mining costs, it will adjust its 2022 cost guidance to a higher figure. Fresnillo announced that for the coming quarters it will still have to deal with a tight labor market, global supply chain bottlenecks and inflation.

Endeavour Silver highlighted that as inflationary pressures continue to increase, the prices of key materials such as reagents, explosives, diesel and energy, as well as operating and development costs could grow. The company plans to mitigate these costs in 2H22 through improved monitoring and tracking of operations, improved blasting, increased milling and waste reduction.

Although inflation is impacting most mining companies, Przybylowski said that for some companies the current market environment could become an opportunity to increase their share buyback program. The companies expected to benefit the most are Teck Resources, Newmont, Barrick and Agnico Eagle. The latter is BMO's favorite, as it has strong management, a low risk profile and balanced growth. “We have clearly seen a strong market preference for capital returns and capital discipline for the past several years. Companies have responded to these investor preferences by demonstrating their discipline and by increasing the regular dividend, special dividend or share buyback,” said Przybylowski.