Struggling Miners See Silver Lining in FX, Cheaper Oil

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Global mining companies stung by slumping commodity prices are looking forward to a modest consolation prize - weaker local currencies and falling oil prices that will help trim their costs.

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Metal prices have plunged to multi-year lows as the U.S. dollar strengthened against a basket of currencies. But for miners paying labor and other expenses in local currencies, this also lowers production costs on metals typically sold in U.S. dollars.

At the same time, a near 30-percent fall in global oil prices since June will make it cheaper to operate mines and equipment, a benefit to the bottom line that for investors may at least partially neutralize the pain from weaker metal prices.

"It's definitely a silver lining," said Chris Mancini, analyst at Gabelli Gold Fund. "The gold stocks have been so severely damaged, and their valuations relative to the price of gold, that I think any good news could surprise the market."

Agnico Eagle Mines Ltd, which produces two-thirds of its gold in Canada, estimates that local currency declines could reduce its U.S. dollar-denominated cash production costs by 5 to 6 percent, Chief Executive Sean Boyd told Reuters.

Since the end of June, the Canadian dollar, Australian dollar and South African rand, have slipped 6-8 percent against the greenback. Other currencies, from the Russian rouble to the Brazilian real, have also weakened.

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Meanwhile, gold is at four-year lows, and down 13 percent since end-June. Metallurgical coal is at its lowest in seven years, while copper prices are not far from four-year lows reached earlier this year.

Teck Resources Ltd estimates that for every 1 Canadian cent weakening in the exchange rate, some C$60 million ($52.87 million) is added to its annualized pre-tax earnings, providing relief for the world's second-largest shipper of steel-making coal.

FIXATION ON PRICE

Paul Rollinson, chief executive of Canada's Kinross Gold Corp, said last week that lower oil prices and weaker foreign currencies have helped keep its global portfolio of mines cash positive.

In South Africa, the rand is nearing five-year lows, a benefit that flows directly to the bottom line of miners with largely domestic production like Sibanye Gold Ltd and Harmony Gold Mining Co.

The "weaker rand is almost a natural hedge for us," said Sibanye spokesman James Wellsted.

In commodity-rich Australia, the falling currency helps lower costs for iron ore miners struggling under a flood of new supply from BHP Billiton Ltd, Rio Tinto Plc and Vale SA.

The shifts boost mines that pay some 60-70 percent of their costs in local currencies, said Deutsche Bank mining analyst Jorge Beristain. A devalued currency can take a meaningful bite out of wages, which can range from 30-50 percent of a mine's costs.

The bad news, he said, is that benefits from currency and lower fuel costs will not offset the headwind from falling prices.

A simple rule of thumb for commodity producers is that price changes have a two-to-one impact on the bottom line, while cost changes have a one-to-one impact, he said.

But for a struggling industry, any good news is welcome.

"It's definitely a tailwind," said Mancini.

(1 US dollar = 1.1349 Canadian dollar)

(By Susan Taylor; With additional reporting by Nicole Mordant in Vancouver, Ed Stoddard in Johannesburg, Polina Devitt in Moscow, James Regan in Sydney, Rosalba O'Brien in Santiago, and Stephen Eisenhammer in Rio De Janeiro; Editing by Jeffrey Hodgson and Marguerita Choy)