We use the term Cost Curve a lot … a lot more than many of our peers.
An industry cost curve is a chart that maps a producer’s or product’s cost of production relative to its competitors. In micro-economics it can be used to measure available capacity incrementally, allowing one to use the order of increasing costs as a tool to analyse pricing dynamics relative to demand. In many industries simple factors such as energy and labour can be the key differentiating factors of competitiveness, hence the hollowing out of basic industries in developed countries to the advantage of developing countries based on energy and labour costs alone.
In mining there are many more factors affecting the competitiveness of one project over another, with geography, orebody parameters, and metallurgy all being important considerations in conjunction with labour and energy. There are many examples of projects in all commodities with high grades or large mineral deposits being uneconomic / un-bankable while a much smaller and or lower grade project will be economic. Many millions have been spent on feasibility studies when one could have reasonably determined that the project would fail at the outset due to simple factors such as distance. At Pan Asia we aim to secure opportunities which have the potential to be positioned in the first tercile (bottom third) of the cost curve. We believe a project in the first tercile will be very robust, debt and equity finance should be more easily obtainable than it otherwise would be for a project situated in the top half or third of the cost curve.
Cost curves can be complex and often companies can approach them in an over simplistic fashion i.e. measuring direct cash operating costs only without considering other important factors, including capital costs and equipment depreciation. In addition, until a mine is operating, we will never be know exactly where it sits on the cost curve – nevertheless, one can make educated decisions based on precedents.
The cost curve to the left is one that Pan Asia has used to determine where mines operating in SE Asia may sit on a tonnes milled basis, as opposed to costs on a per unit of metal produced, i.e., all else being equal, the process of getting mine output to and through a mill is fairly standard. Therefore, this cost curve can be a reasonable measure of direct cash operating costs in specific countries. In this cost curve we identify that Thailand is a low-cost jurisdiction, the operation identified is positioned in the 1st octile. From this we can determined that an opportunity with negative factors such as lower grades or a deeper ore body may still be economic whereas, if the same opportunity was situated in a high cost jurisdiction, it might not be. Further, an operation with peer group leading parameters, including grade, will likely be well positioned on the cost curve.
The cost curve can be an informative tool but if its application is incorrectly used, i.e., the curve is measuring the wrong parameters, it can be highly misleading.