Mining strategy: Is consensus in the right place on 2023 costs?

A key theme from Dec-22 investor updates and 4Q22 trading statements/production reports from the miners so far has been generally higher than expected cost/capex guidance for 2023. Energy/consumables: We acknowledge that certain cost pressures (energy, steel, some consumables) are peaking; if spot prices persist some cost items should decline in 2023E, and broader inflation indicators appear to be topping out. This combined modest volume growth/recovery should provide positive tailwinds for unit costs in 2023. But in our view the outlook for 2023 is not deflationary. FX: Strong USD/ weaker producer FX in 2022 was an important offset for inflation; but USD weakness has driven a reversal in producer FX with spot AUD/CLP/EUR/MXN stronger than 2H22 averages, and in many cases producer currencies are stronger than rates used in 2023 guidance. Inflation expectations may be peaking, but UBS still forecasts 2023E y/y inflation (CPI) of: Australia 5%, SA 5%, Chile 8%, Brazil 4%; this implies key domestic inputs including labour are likely to see mid-high single % inflation in 2023.

Over the last 1-2yrs the 'consensus' has had a tendency to factor in 'post-covid cost normalisation' as bottlenecks/catch-up spend ease; but this has generally not materialised, or 'normalisation' has been consumed by higher levels of underlying inflation. Now that most companies have provided guidance for 2023, is consensus in the right place? Commodity prices are the biggest driver of consensus for the miners and companies generally guide on unit costs, not absolute costs/inflation, making it sometimes difficult to isolate operating costs, particularly for diversified miners producing multiple commodities. Using Visible Alpha consensus we use a high level approach to analyse cost inflation implied by consensus for 2023. We calculate opex as consolidated revenue - EBITDA and compare y/y increases in opex vs y/y change in copper equivalent sales volumes.

We observe that negative share price reactions to higher cost guidance and sell side consensus downgrades have become more muted over the last 1-2 months, suggesting the market is generally anticipating further increases in costs/capex guidance over 4Q/ FY22 reporting season. We do not expect material 'shocks' from consensus downgrades due to costs and this is likely to be partly offset by mark-to-market upgrades to commodity prices after 1Q23 gains; but in our view the market quicky prices in changes to commodity prices but is slower to factor in costs/FX. In our view increases in consensus cost estimates is a modest headwind for the miners into results, and consensus spot valuations are unlikely to be as 'cheap' as they seem.