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Pitfalls and pipedreams: is mining a good investment?

The typical capital return of the mining industry is lower than the average across the market. Investors should carefully consider which mines are worth developing—and which are not.

Contrary to popular belief, mining delivers returns on capital that are markedly below other industries. Going back to 1990, the graph displays the return on invested capital for 52 industries. Over this period, the global market has achieved annual returns equivalent to 9.3% on average—while the metals and minerals sector has offered investors a much more modest return of 5.9%. At 6.2%, the oil and gas sector has not done much better.

Not all mines are alike.

To a large extent, this performance reflects significant differences within the resource sector, including projects that are far more profitable than the average and others that are far less profitable. For each commodity, this variance ultimately responds to a number of factors that define the industry’s cost structure, notably the degree of mineral concentration in the ore, the proximity to markets and the associated cost of transportation, the regulatory environment that defines, among other things, the tax pressure faced by investors, as well as the efficiency with which operators run their mines.

Different projects extracting the same commodity will therefore have completely different cost structures. This means that, given a certain price for a product defined in the open market, some projects will operate profitably while others will not be able to cover their costs. As such, mining projects that sit at the lower end of a cost curve are more likely to operate successfully during downturns and thus sustain benefits for both the host nation and the investors throughout the cycle. (For more, check out our interview with David Humphreys).