C1 cash costs
Among all the major iron ore players, Rio Tinto plc (RIO) has the lowest cash and all-in costs. Its cash costs for iron ore production were $20.80 per ton in 2013. Owing to higher quality and economies of scale, Vale SA (VALE) comes second with C1 cash costs of ~$23.6 per ton. BHP Billiton Ltd. (BHP) has a cash cost of $27–$28 per ton. Cliffs Natural Resources Inc. (CLF), which primarily operates out of North America and has less seaborne exposure, has cash costs of ~$70 per ton.
Cash costs include mining, process, and administration. These costs don’t include royalties, exploration, sustaining capital, depreciation and amortization, interest, and taxes.
Although Vale is quite competitive in terms of C1 cash costs, its freight costs are much higher than its rivals’ costs because of its location. Brazil is almost three times as far from Asian markets as Australia, where Vale’s biggest competitors have operations. While BHP, Rio, and Fortescue Metals Group Ltd. (FSUGY) have freight costs of between $10 and $12 per ton, Vale must incur $22 per ton to transport its wares to Asia.
Targetted cost cutting
In the currently subdued iron ore price environment, all the iron ore players are targeting reduced costs per ton to remain competitive. BHP is vying to be the lowest-cost iron ore player two years down the line. Rio is also investing in technology to reduce its per unit costs. Vale, meanwhile, expects that once completed, its S11D project will add 90 million tons per year to its iron ore suite. This addition will reduce its overall cost per ton to $19.6 per ton from the current $23.6 per ton. We’ll discuss the S11D project and its likely impact on Vale’s overall cost and production profile in a subsequent part of this series.
The SPDR S&P Metals and Mining ETF (XME) invests in the above-mentioned stocks.