NEW YORK (Reuters) - These are boom times for mining companies but the big profits are being eaten into not only by spiraling energy costs but suddenly rising prices for the explosives used to blast into the rocks.
It's all because of the high price of natural gas, which when converted into ammonia is used to produce ammonium nitrate, a key ingredient in fertilizers and explosives. Natural gas prices are up 75 percent so far this year and ammonia prices have doubled since last summer.
The price rises have added to explosives companies' profits but for miners it is an added cost, along with higher diesel, energy and labor expenses, narrowing their margins at a time when metals and coal are in big demand.
Newmont Mining, the world's second-largest gold producer, said it spent approximately $70 million on explosives last year, but this year expects to pay 16 percent more.
Freeport-McMoRan Copper & Gold, the world's biggest publicly traded copper miner, would not say how much more it expects to pay, but acknowledged the increases.
Many of the factors driving the strong demand for copper are also impacting the materials and commodities we use in our mining and processing operations, spokesman William Collier said. Among these, the cost of explosives has risen significantly.
Freeport, he said, moved an average of 670,000 tonnes of rock every day in 2007 at its vast Grasberg copper and gold mine in Indonesia.
Mining companies are definitely putting pressure on us to keep costs down, said Kenneth Larsen, marketing director for Maxam North America, a commercial explosives manufacturer.
Our customers have to break rock and there's only one way to do it. Fortunately for us, it's a necessary evil.
Larsen said a rival company told him a mining company recently balked at its price for 10,000 tonnes of ammonium nitrate. 'Fine,' the other explosives company said, 'We can export it at a higher price then,' Larsen recalled.
He said ammonia prices have risen in proportion to natural gas prices, which have increased more than 75 percent since the start of the year to around $13 per million Btu.
A tonne of ammonia that cost $300 last summer, was $635 in April and is still up around $510-$535. It takes one tonne of ammonia to make two tonnes of ammonium nitrate, he said.
If ammonia goes up $100, then ammonium nitrate goes up $50 and that's what the mining companies are seeing, Larsen said.
In April, Australia's Orica Ltd, the world's largest explosives company, reported a 13-percent rise in first-half profit. The world's No. 2, Dyno Nobel, which is set to be taken over by Incitec Pivot Ltd, reported a 20.4 percent rise in full-year profit.
Canada's Nordex Explosives Ltd, which sells about 80 percent of its product to the mining industry, reported 2007 revenue increased 45 percent, with net earnings per share rising 72 percent for the year.
Asked by Reuters if explosives costs in general are rising, President and Chief Executive Officer John Kozak said yes.
The cost side, as far as the inputs for the explosive products themselves, are under tremendous pressure right now.
He said prices were rising not only because of raw material costs but also demand for ammonium nitrate for fertilizers.
The fact that demand on the agricultural side has increased so much has affected this industry as well. I believe it will get worse, Kozak said.
Now the agricultural-grade ammonium nitrate is selling at such a premium that the manufacturers of the ammonium nitrate are asking themselves: 'Why are we selling it to explosives manufacturers, when we can sell agricultural-grade, which is a lower grade, at an as-good or higher price?'
Larsen, of privately held Maxam, said that because of the run-up in natural gas and ammonia prices, current contracts do not include a mechanism to keep up with costs. But new contracts are now being linked to the ammonia index or the NYMEX natural gas index.
Victor Flores, a mining industry analyst with HSBC Securities, said the cost increase might force miners to find more efficient ways to get the coal or ore they need.
They have to blast the rock and there's no real alternative, he said. What they can do is look at how they do the blasting and try and use less explosives per blast.
But then the rock will not be in such small pieces and it will take more energy to grind it to extract the ore. It's a constant battle as costs go up, and companies try to find ways to lessen the impact, Flores said. (Additional reporting by Cameron French in Toronto; editing by Carol Bishopric)