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How To Save $100 Million In A Commodities Downturn

How To Save $100 Million In A Commodities Downturn

The recent decline in commodities prices has stung a lot of companies and investors.

But at least one firm is now benefitting from the downturn in the resources sector.

That's Chinese miner MMG. Which said this week that lower metals prices and a cooler commodities industry will make development of new projects a lot cheaper.

Australian press reported that MMG expects to save a significant amount on building its Dugald River zinc, lead and silver mine in Queensland. Perhaps as a much as $100 million. Related: Ongoing Security Concerns In Kurdistan Have Oil Companies On Edge

That's because of costs for things like labor. Which--combined with other capital items at Dugald River--had originally added up to a projected capital cost of $1.5 billion for the project, when it was first planned in 2012.

MMG's management however, felt that figure was inflated because of the booming Australian resources sector. Which in 2012 was being lifted by hot markets for commodities like iron ore and coal.

Because of the cost pressures at the time, MMG put the development of Dugald River on hold. Where it remained until this week, when the company made a formal go-ahead decision on the building of the new mine. Related: Warren Buffett And Elon Musk To Spark A Lithium Boom

And waiting those three years has had a significant effect on costs. With the projected $1.5 billion price tag for the mine now having been reduced to $1.4 billion -- for a savings of $100 million.

Management attributes the reduction in costs directly to the downturn in mining. Saying that today it is finding "A-team" workers and contractors for the project -- where, during the 2012 boom, only "B-grade construction people" were available. Related: Long-Predicted U.S. Shale Production Collapse May Not Materialize Yet

The company said that having such seasoned workers is leading to greater efficiency. A factor that is directly responsible for reducing capital costs.

If the costs here do come in as projected, it will be some of the first evidence that inflationary pressures in the mining business are subsiding. Which would be great news for the profitability of firms still moving forward with new projects.

Here's to the A-Team,

By Dave Forest

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