Could Rising Costs Jeopardize Existing Mining Projects?

After NovaGold's (NG) Galore Creek project was unexpectedly shuttered last month because of soaring costs, a lot of investors are wondering if the same thing could happen to other large projects.

According to UBS mining analysts Tony Lesiak, Alec Kodatsky and Brian MacArthur, Galore Creek was probably a unique case. However, they figure other large projects could also face weaker financial returns because of capital cost creep, higher royalty and tax structures, the weak U.S. dollar, and long delays.

Because of the high costs and risks associated with large Greenfield projects, the analysts figure there will be more industry consolidation, especially given the valuation gap between the bigger and smaller players.

"Why build when you can buy for less with less risk?" they wrote in a note to clients.

They also identified a number of large-scale development projects that could end up going over budget. They figure the largest upward cost revisions could come at Cerro Casale (a Barrick (ABX)/Kinross (KGC) project), Petaquilla (Inmet [INM/TSX]/Teck Cominco (TCK)), and Agua Rica (Yamana (AUY)).

They are assuming a 40% cost increase at Cerro Casale, and a 30% increase at Petaquilla. The future of Agua Rica depends on whether Yamana can integrate it with Xstrata's [XTA:LSE] Alumbrera project, but Xstrata appears to be in no rush to do a joint venture.

NG vs. AUG vs. ABX vs. KGC vs.TCK 1-yr chart: