Similar to most publicly-listed companies, the volatility in world financial markets has hurt mining stock values and levels of market capitalization as well. Mining companies find themselves in an unusual position. In general they have posted strong third quarter earnings. Depending on their current cash positions, they are looking at astonishing drops in spot metals prices and trying to determine what the future holds.

In an environment where cash is king, a large diversified mining company with safely-operating, low-cost assets will not just survive, it will thrive. Everyone knows that safety and profitability walk hand-in-hand. Cutting corners never makes sense and doing so now could be the death knell. Mining companies that operate profitably at lower metals prices also have the ability to invest when others can not. Inversely, a cash-constrained mining company with marginally performing, highcost asset(s) will be toast.

The thought that bothers everyone is that no one knows how long the economic downturn will last or how bad the global economy will become. Leading OECD indicators are pointing to slower growth figures for at least the next year. Growth figures for the five largest Asian economies have dropped. The International Monetary Fund forecasts 9% growth for China in 2009, down from 12% in 2007.

The mining companies that maintain strong balance sheets and use a disciplined approach to capital investment will fair the best. Mining companies will have to look more closely at the project pipeline and evaluate costs and development schedules. They will have to strike a balance between being lean enough to survive should the situation get worse, yet nimble enough to take advantage of an opportunity when others falter. These are the times when bean counters can bring clarity to a boardroom full of mining engineers.

Is there any good news? Yes. The industry that produces commodities also consumes commodities. Some could argue it’s a zero-sum game, but miners do benefit from declining commodity prices. In the last month or so, oil has dropped more than 50% to less than $70/barrel. Steel has dropped from $525/metric ton (mt) to $230/mt and prices for sulphuric acid have decreased from $400/mt to $200/mt. So the inflationary items that were eroding profitability have declined, in some cases, further than spot prices for metals on a percentage basis.

The world will continue to consume the raw materials the mining industry provides. Because mining is an upstream industry with a reserve base that is depleting from the day the mine is commissioned, miners are continually looking ahead to new projects and opportunities. While prices have declined to levels not seen in the past few years, they have certainly not reached the trough from which this industry emerged in 2001-2002. Already analysts are saying that the mining companies that can weather the financial storm will reap the rewards of new records for metals prices in 2011 and 2012. An early recovery might hasten that scenario.

Steve Fiscor, Editor-in-Chief, E&MJ