Mining economics and operations: cost curves, cycles, steel and the supply chain
Unit economics of a copper mine, how the cost curve sets the price, why commodity cycles happen, how steel is made, and how ore reaches the customer.
Industry brief, with a one-minute summary: Mining and metalsKey takeaways
- In a commodity market, a producer's profit is the gap between the market price and its own cost.
- Mines have high fixed costs. When prices rise 20 percent, profit can double; when prices fall 20 percent, profit can vanish.
- Demand rises, for example from building in China or from grids and electric vehicles.
- Supply cannot respond quickly, because a new mine takes 10 years or more, so prices rise sharply.
- High prices make miners approve many new projects at the same time.
Key idea
In a commodity market, a producer's profit is the gap between the market price and its own cost. The market price tends to settle near the cost of the most expensive mine still needed to meet demand. So the cheapest mines make money in almost every year, and the most expensive mines only in good years.
Worked case
Unit economics of a copper mine
The prompt
Ridgecrest Copper (a fictional company) runs an open-pit mine in Chile. It processes 25 million tonnes of ore a year at a grade of 0.8 percent copper, with 90 percent recovery. Mining and processing cost USD 24 per tonne of ore. Transport, smelting charges and site overheads add USD 210 million a year. The copper price is USD 9,500 per tonne. What is the cash cost per tonne of copper and the yearly cash margin?
The structure
- Cash margin = copper produced x (price minus cash cost per tonne)
- Copper produced = ore x grade x recovery
- Total cash cost = ore x cost per tonne of ore + other costs
- Cash cost per tonne = total cash cost divided by copper produced
Working it through
1. Copper produced
25 million tonnes of ore, 0.8 percent copper, 90 percent recovered.
Copper produced (tonnes):25,000,000 × 0.008 × 0.9 = 180,0002. Total cash cost
USD 24 on 25 million tonnes is 600 million, plus 210 million.
Total cash cost (USD million):25 × 24 + 210 = 8103. Cash cost per tonne
USD 810 million divided by 180,000 tonnes.
Cash cost (USD per tonne of copper):810,000,000 ÷ 180,000 = 4,5004. Yearly cash margin
Margin of 5,000 dollars per tonne on 180,000 tonnes.
Yearly cash margin (USD million):(9,500 - 4,500) × 180,000 ÷ 1,000,000 = 900
The recommendation
Ridgecrest should keep the mine running and protect its grade, because it produces 180,000 tonnes of copper at a cash cost of USD 4,500 per tonne, earning about USD 900 million a year at USD 9,500. First, the margin of USD 5,000 per tonne gives a large cushion against a lower price. Second, cost per tonne of copper depends on the 0.8 percent grade and 90 percent recovery, since mining cost is paid per tonne of ore. The risk is a falling grade, which raises cost per tonne. As a next step, add royalties, taxes and sustaining capex before any investment decision.
The cost curve
A cost curve (sometimes called an industry supply curve) ranks every mine from lowest to highest cash cost, and shows how much each one produces. Read it from left to right: the cheapest mines first. Draw a vertical line at the level of world demand. The mine where demand is met is the marginal producer, and over time the price tends to settle near its cost. If the price falls below a mine's cash cost for long, that mine loses cash on every tonne and may close, which reduces supply and lets the price recover.
| Mine (fictional) | Cash cost (USD per tonne) | Output (thousand tonnes a year) | Cumulative output (thousand tonnes) |
|---|---|---|---|
| Mine A | 3,000 | 400 | 400 |
| Mine B | 4,500 | 300 | 700 |
| Mine C | 6,000 | 500 | 1,200 |
| Mine D | 7,500 | 300 | 1,500 |
| Mine E | 9,000 | 200 | 1,700 |
So-what
If demand is 1,400 thousand tonnes, Mine D is the marginal producer, so the price tends towards about USD 7,500. Mine E is out of the money unless demand grows.
Why commodities move in cycles
- 1Demand rises, for example from building in China or from grids and electric vehicles.
- 2Supply cannot respond quickly, because a new mine takes 10 years or more, so prices rise sharply.
- 3High prices make miners approve many new projects at the same time.
- 4Years later these mines open together, supply jumps, and prices fall.
- 5Miners cut capex, high-cost mines close, and the cycle starts again.
Mines have high fixed costs. When prices rise 20 percent, profit can double; when prices fall 20 percent, profit can vanish. In a case, always test a decision at a low price, not only at today's price.
Steel: the largest metal by volume
Steel is made in two main ways. The blast furnace route (BF-BOF, blast furnace and basic oxygen furnace) melts iron ore with coking coal. It is large scale and cheap, but produces a lot of carbon dioxide. The electric arc furnace route (EAF) melts scrap steel, or direct reduced iron (DRI) made by reducing iron ore with natural gas or, in future, hydrogen. EAF plants are smaller and more flexible and produce less carbon dioxide, especially with clean power. The Gulf uses mainly the gas-based DRI and EAF route because gas is cheap there. China uses mainly blast furnaces. India uses both: large integrated mills run blast furnaces, while many other plants use electric arc or induction furnaces fed with scrap and DRI (in India often made with coal rather than gas). A steel mill's profit depends on the spread: the steel price minus the cost of the raw materials needed per tonne.
A blast furnace mill in India uses 1.6 tonnes of iron ore at USD 100 per tonne and 0.75 tonnes of coking coal at USD 200 per tonne for each tonne of steel. Steel sells for USD 600 per tonne. What is the raw material spread per tonne of steel, in USD?
Supply chain and operations
- Mine operations: the main levers are truck and shovel productivity, plant throughput and uptime, recovery rate, energy use and maintenance planning. Haul trucks can carry more than 200 tonnes each, and some mines now run them without drivers.
- Logistics: bulk minerals move by rail and very large ships. Iron ore from Western Australia and Brazil travels in ships of about 180,000 tonnes or more to China. Port and rail capacity often limit how much a mine can sell.
- Energy and water: grinding ore uses a lot of electricity, and many mines are in dry places such as northern Chile, so they use desalinated seawater pumped long distances.
- Smelting and refining: much of the world's smelting and refining of copper, and even more of lithium, graphite and rare earths, happens in China. This concentration is a supply chain risk for buyers.
- Safety and tailings: tailings are the waste left after processing, often stored behind dams. Dam failures have caused deaths and major damage, so tailings management is a key operational and reputational issue.
- Community and permits: mines need a "social licence to operate", meaning the support of local communities, as well as legal permits.
A mine's grade falls from 1.0 percent to 0.8 percent. It processes the same tonnes at the same total cost. By what factor does its cost per tonne of metal change?
Sources for this lesson (2)
- Recognized public explanations of case-interview concepts and frameworks
- worldsteel, World Steel in Figures 2026
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