In an excerpt from his exclusive interview with Mexico Mining Review 2016, Mitchell J. Krebs, President & CEO of Coeur Mining discusses Mexico’s positioning in the company’s global portfolio and shares its strategy for lowering costs while maintaining institutional knowledge.
Q: You operate across the Americas, with operations in Australia and New Zealand, so what part does Mexico play in your portfolio and why is it an attractive destination for Coeur Mining?
A: We have two projects in Mexico, one that is currently operating and one that is not. Palmarejo, the project that is currently operational, is our largest mine on a global scale, and this makes Mexico a strategically important location for us. The country is attractive due to a number of factors, including favorable logistics in terms of its proximity to the US. Moreover, the amount of mineral potential that exists in Mexico makes it a truly attractive country, and when considering the long history of mining, it has had to develop a well-established set of laws, with reasonable permitting, and quality human talent. All of these factors as a combination make the country an extremely attractive jurisdiction, but it does have its challenges.
Q: Certain operators like Grupo Mexico have capitalized on the Energy Reform to become self-sufficient energy generators. To what extent do you see opportunities for Coeur Mining in this regard?
A: We are on the grid at Palmarejo as a customer of CFE. We have full generator backups there that we use intermittently. In terms of power generation, we have a project called La Preciosa in Durango that we bought in 2013, at a much higher silver price environment. This is on hold at the moment, since it is uneconomic to run this project at a silver price of US$16. However, we are continually trying to develop innovative scenarios under which this mine is able to operate, and under that mandate we will be looking into pursuing some different courses of action in terms of power generation, as well as in all kinds of different innovations that we can apply to a mine.
Q: The industry has recently experienced a drop in commodity prices, the depreciation of the peso, and the Mexican mining royalty. How have these factors affected Coeur Mining’s operations?
A: We run five operations, and Mexico is the only one in which we see any benefit, especially given the weakening of the peso. Last year, we ran our budget at an exchange rate of MX$12.5 to the dollar, and the savings that this generated equated to around US$10 million. Unlike a lot of companies that have several operations in Mexico, we have only one, and even though it is sizeable, the peso devaluation has constituted a considerable tailwind for us. We have also seen our costs per kWh of power reduced due to the increase in competition from US$0.115 down to US$0.08, and that has a significant impact. Additionally, we burn a tremendous amount of diesel, and the cost per gallon is now down from over US$3 to less than US$2. In mining, there are ups and downs all along the cost structure, and although the peso devaluation has certainly helped us, this has then been offset by some other factors.
Q: Often, in a low price environment, the first cut to be made is to human capital, which brings with it the risk of a loss of institutional knowledge and expertise. How is Coeur Mining striking a balance between optimizing costs and retaining high quality employees?
A: Our first approach has never been to cut human capital, and this is due to a lot of these reasons such as the loss of institutional knowledge. Without the people, the company has nothing. Conversely, there is a lot of low hanging fruit when first examining potential efficiency gains. A simple example can be seen in a mine of ours in Nevada, in which the processes that were previously used meant that, in the time taken between blasting the ore and laying it out on a leach pad, the ore was dropped on the ground five times. Each time this is done, it costs about US$0.25 per tonne. The simple practice of scheduling more efficient truck routes, planning, and logistics means that it will now be dropped twice, and at a volume of 17 million tonnes per year, a cost reduction of more than US$1 per tonne is a substantial, tangible saving.
Another two factors that we have prioritized is an increased focus on grade and on scale, as both will drag the unit cost down and offset, to a large extent, some of the price erosion we have seen. Approximately 95% of the money we spend on exploration is channeled to the areas around our existing mines, where we know we already have reserves, meaning that the odds of finding more are high. Moreover, the payback is a lot faster because the staff, infrastructure, and processes are already in place, so we have been extremely focused on the programs to find higher grade. We have been successful in this endeavor both in our mine in Alaska and our Palmarejo mine. At our Nevada mine, we have almost doubled mining, crushing, and placement rates, and with larger trucks, greater crushing capacity, and more efficient planning, the costs per ounce have dropped from US$25 to US$11. This can all be attributed to scaling up the mining rates and volumes, driving down unit costs, and becoming a more efficiently run company.
In terms of the effect of our cutbacks on human capital, these savings are taken from our corporate office. Our general and administrative (G&A) costs have gone down from US$55 million in 2013 to US$34 million last year, a saving of 45%, and that is generated by a reduction in head count and a less profound reliance on third parties. It is a delicate balance between identifying which skills are less necessary in a declining price environment that may have been needed in a different scenario. However, if too many cuts are made, the company becomes exposed to certain risks that would have been mitigated with these capabilities. I always warn our investors not to wish for continuous reductions in G&A, because it could reach the point where we begin cutting down to the bone and exposing ourselves to the negative consequences. We are always mindful of ensuring we have just what we need and no more.
Exclusive interview with Mitchell J. Krebs, President & CEO of Coeur Mining.
This is an exclusive preview of the 2016 edition of Mexico Mining Review. If you want to get all the information, plus other relevant insights regarding this industry, get your copy here.