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Inflation Is Great for Commodities—But Not Necessarily for Miners

by Lobo Tiggre
Wednesday, March 16, 12:00pm, UTC, 2022

Commodities are correcting this week—pre-Powell—but they’ve been on such a tear this year, even mainstream financial media talks about them every day. Many are still up a lot more than a measly 7.9% CPI inflation rate or a 10% PPI increase.

As a commodities speculator, what’s not to love?

Well, if you’re a miner, you might not be as excited about inflation hitting “everything.”

Suppose that your mine is in a remote location running diesel generators (“gensets”) to power operations; your energy cost is up about 50% over a year ago. A week ago, it was up about 90%—and it may return there before the Ukraine war is over. Regardless, the cost of hauling ore, trucking in materials, shipping concentrate, and so forth are all way up.

And there are a lot of mines in remote locations.

(Urban real estate is usually too valuable for other uses to allow for mining.)

It’s not just energy costs, of course. There are reagents, tires, drill rods, explosives, labor, and many other factors contributing to higher operating expenses (opex).

But don’t higher commodity prices pay for all that?

Usually, yes. For higher-margin operations, at least.

Still, as investors, we need to watch our producers closely to make sure revenue gains are outpacing higher opex.

Beware of any producer with shrinking margins during times of high inflation.

There’s a different, and potentially much bigger problem for those of us who speculate on exploration and development companies.

High input costs are causing capital expenditures (capex) for building mines to go through the roof.

Even if a company is still exploring, awareness of soaring capex among institutional investors, banks, and streaming companies will raise the bar for raising money. It will—or should—also raise the bar for what drill results move share prices higher.

For instance, look at what’s happened to Integra Resources. The company recently came out with a credible, robust pre-feasibility study. Unfortunately, margins were not as high as in the preliminary assessment just a couple years ago. The primary culprit was not ESG spending, but a huge increase in capex for the processing plant. Despite still-healthy margins, the stock took a drubbing because investors were surprised by the higher capex and lower return. (No arm-twisting, but for my own take on all this, please consider subscribing to My Take.)

Industry sources tell me that capex blowouts are widespread.

What to do?


We need to be especially cautious about…

  • Buying marginal producers.
  • Buying production turnaround stories (failed mines new management says they can fix).
  • Putting much weight on feasibility studies more than a year old (when inflation really started picking up).
  • Putting much weight on feasibility studies that don’t have generous cost-overrun contingencies built in.
  • Putting any weight on feasibility studies more than two or three years old.
  • Buying developers building mines with old feasibility studies (unless they raised more than enough cash—a lot more).
  • Buying developers not reporting whether their projects remain on budget.
  • Buying land bank plays that want to become developers (mine-builders).
  • Buying exploration stories with “low for its type” grades. (See: What is High Grade?)

That’s what I’ll be looking to avoid.

Caveat emptor,



P.S. To be kept abreast of more dangers, opportunities, and issues affecting investors, please sign up for our free, no-hype, no-spam, weekly Speculator’s Digest.

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