Cash costs or direct costs per tonne processed?

There's a question for you, metalheads. What's the best way of definining the costs of production for a mining company? Do you go for the much vaunted cash costs number normally pushed in front of your face by the company, or do you look at the amount of money it costs the miner to process a tonne of mineral and get all that yummy scrumptious metal out?

Here's an example, from Endeavour Silver (EDR.to). This little chart compares the vaunted and reported cash cost per ounce of silver, net of credits, to the cost of processing 100kg of ore at the company (EDR.to reports that number per metric tonne, we do a simple 10X division to make the scale fit neatly on the chart).

Seems to me that when a company like EDR.to trumpets its fabulous cuts in cash costs, all it's really saying is, "We were dumblucky and got more moolah for our byproducts". DYODD, dude.

Codelco's costs (an excerpt from IKN59, out yesterday)

As well as a lot of stockfollowing we also do macro-regional stuff as regards mining in The IKN Weekly, so here are 341 words selected from the 11,347 sent to subscribers yesterday. The section was about costs at Codelco and what they might mean for the industry as a whole. Enjoy.

Codelco’s costs evolution provide a backbone to copper pricing

More Codelco, but for different reasons. A stats-packed article in Chile’s La Tercera this week (19) highlighted the rise in costs for copper production. Adding a bit of searching at the Codelco website (20) to the La Tercera note, the chart below came into being and shows that in the period 2007 to the estimates for 2012, the cost of producing one Lb of cathode at the company will have doubled in six years if Codelco estimates prove to be accurate.

Now for sure you can point to Codelco as perhaps not the most efficient major miner in the world (for example, it’s not overly surprising that the payroll of this State run company is inordinately large compared to roughly equivalent megaminers such as VALE or BHP), but the big size and the relative stability over time of Codelco production and fixed assets does give us a pretty useful benchmark for the whole industry.

The most obvious first reflection that comes from that chart is that the era of sub-$2 copper is now confined to history, assuming we don’t suffer a major and prolonged deflationary period (something that’s extremely unlikely). When marginal costs rise to this kind of level it makes no sense at all to expect copper to return to low levels for any great period, as good old fahsioned supply and demand dynamics will soon crimp supply if prices drop.

This small section of today’s Weekly isn’t saying that copper couldn’t possibly drop below $2/lb. Of course it could, as if the market applies enough pressure a spike to such low prices is possible (though unlikely). What we are saying here is that there’s very solid fundamental reasons to assume long term prices of above $2 and little reason to expect a sub $2/lb price for much more than the shortest period possible. If the world’s biggest copper player expects costs to have doubled in the six years to 2012, consider that a very strong backbone for longer-term pricings going forward.

Troy Resources (TRY.to): Interesting news

Another Troy that exploits its sector and gets rich

And it's interesting for both the company and for the wider sector.

By now most readers will know just how much I like Troy Resources (TRY.to) (TRY.ax) going forward. If you don't, see here for more details on that, but your humble correspondent has already sold 33 copies of the report (that has been read by at least 500 people thanks to the miracle of the forward button....hey, that's perfectly ok by me). However today Mining Weekly reports a positive development at Troy, namely that the closure of its Sandstone operation in Australia has been deferred and the mine will continue through 2009 at the very least.

The reason for the change of mind is the new costs scenario in the gold mining industry. As mentioned here several times in the last few weeks, opex costs in mining have dropped significantly since the financial storm began...it's the silver lining that came with the cloud. So it seems the guys in suits at Troy has been busy with the pocket calculators and now say that the mine is still economic thanks to the price cuts for all types of goods need to produce gold, from truck tires to steel girders to fuel to chemicals to whatever else you'd like to add.

This is good news for Troy, of course, but it's also good news for the wider industry. I remember back just a few days ago when Goldcorp (GG) guided for 2009 and set a cash cost forecast of $365/oz. At the time I thought "hey look, GG are playing UPOD* with the market" and this Troy news fits right in with that. So this news is good for Troy and may be an indication of things to come in the wider scene. But whatever it turns out to be I like it so far.

*Under Promise Over Deliver; in this case I firmly believe GG's cash costs will be substantially less than $365/oz in FY09