Strong gold and base metals prices have been key to the Toronto Stock Exchange's winning formula, but the continuing upward creep of mining costs has put the brakes on bigger gains.

Based largely on the strength of the materials and energy sectors, the S&P/TSX composite index has extended its record levels, even as U.S. and European markets have crumbled under economic worries.

This past week, the index eased marginally to 14,714.73 points, after touching a record high of 15,128.56 on May 21.

The index is up 6.8 percent so far in 2008, and has been able to weather a sharp fall in financials on the back of a 25 percent rise among energy stocks and a 13 percent rise in materials issues, which consist mainly of gold and base metals miners.

But even as gold prices hover around $900 an ounce and base metals sit at historically strong levels, analysts are remaining cautious on the outlook for the stocks.

On the operating costs, they're influenced by everything from oil through to trucking to metal costs, steel pricing. That kind of consumable input is all up over the course of 2008, said John Hughes, a mining analyst at Desjardins Securities.

Copper and gold miner FNX Mining (FNX.TO) was the latest miner to raise cost estimates, saying on Thursday it expects its mining and processing costs this year will be 12.5 percent higher than previously forecast.

The company's stock has fallen 22 percent on cost worries since it announced first-quarter earnings on May 8.

Other companies have been able to keep costs within estimated ranges, but have still seen ballooning expenses year over year.

Barrick Gold (ABX.TO) saw its cash costs per ounce rise to $393 in the first quarter from $309 in the year-before period, while Goldcorp's (G.TO) cash costs rose to $240 an ounce from $181 and Kinross Gold's (K.TO) climbed to $455 from $328.


The higher gold company expenses have been largely offset so far by the continued upward drive of gold prices, but on the base metals side, prices have moderated or declined.

Copper prices have been steady at or near record levels over the past two years, but zinc is down 44 percent year on year, and nickel has fallen 56 percent. However, both zinc and nickel are high on a historical basis, having run up sharply in the early part of the decade.

The recent price declines have made it tough for base metals miners such as FNX or HudBay Minerals (HBM.TO), which saw its quarterly profit squeezed by both slumping zinc prices and higher operating expenses.

We're still optimistic on the commodities, but the one bugaboo that there is, obviously, is the costs, said John Kinsey, a portfolio manager at Caldwell Securities in Toronto.

They're certainty putting the emphasis on bringing the costs down. But how successful they'll be -- I guess the jury's still out on that.

He noted that, on the gold side, the cost inflation has kept investors wary of the stocks.

There seems to be a skepticism discount in the shares, he said.

However, analysts say the high costs could end up helping commodity prices in the longer term, as rising input and construction costs will simply make some mines unprofitable, leading to closures and cutting off demand at a time when the global economy is in recovery mode.

($1=$0.99 Canadian)

(Reporting by Cameron French; editing by Rob Wilson)

© Thomson Reuters 2008. All rights reserved.