The global economy has faltered in the past couple of years due to the COVID-19 pandemic, strained supply chains, shortages and the fallout from the Russia-Ukraine war. In June, the UN predicted that inflation would rise to 6.7% in 2022, more than twice the average inflation levels recorded from 2010 to 2020.
Several industries have been affected by the rising inflation levels, with sectors such as mining being especially affected. Mining companies have reported increased operational costs due to bottlenecks in the supply chain, rising shipping costs and rising prices for critical mining inputs such as steel. Mining executives reported that inflation had driven their operational costs up by 5% in late 2021, and they expected costs to rise into 2022.
Barrick Gold president and CEO Mark Bristow is of the same opinion, stating in a recent interview that the idea that costs in the mining sector have reached their peak is “wishful thinking.” Currently the second-largest producer of gold on the globe, Barrick Gold reported recently that its earnings for the second quarter had slightly exceeded its estimates.
The Toronto-based miner managed to surpass its earning estimates partly by capping its cost increases at 4.1% from quarter one. According to Barrick Gold, the industry can expect costs to continue trending upward and even surpassing the guidance range.
Given that miners such as Barrick are highly dependent on fuel, mitigation efforts can only do so much given the soaring costs of fuel and energy around the world. Speaking after the company released its Q2 earnings, Bristow said he didn’t see inflation going away any time soon, even though players in the mining industry seem to be “wishing inflation away.”
He cited the lingering effects of COVID-19 stimulus, coronavirus-relation nationalism and a disparate political environment as some of the factors behind rising costs in the mining industry. Despite the rising inflation levels, Bristow believes companies in the mining space will still be able to make it if they have stocked good ore bodies with long life. Ever since Bristow took over Barrick Gold in 2018, he has never missed an estimate, a feat he attributes to correcting the market whenever it ran ahead of itself.
The company managed to cushion itself against inflation by moving to a younger workforce, unlocking its savings and stoking up on inputs such as explosives. Even so, external factors such as supply chain disruptions, lockdowns in China and the Russia-Ukraine war will cause prices to trend upwards over the next couple of years.
Established mining companies such as Newmont Corporation (NYSE: NEM) (TSX: NGT) are likely fine-tuning their plans to ride out this expected inflationary pressure without affecting shareholder value in the immediate to short term.
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