Surging inflation rippled through balance sheets across the mining sector in the third quarter and raised uncertainty over how far cost escalation will run amid supply chain bottlenecks and tightening labor markets.

Ballooning prices for fuel and critical items such as steel, used in construction and in mine processing, were among key items that drove inflation in the third quarter, while higher labor costs also put pressure on the sector, mining executives said during earnings calls and in response to S&P Global Market Intelligence questions.

Inflation drove cost increases in the 5% range during the recent quarter, according to mining executives. "For the operators, inflation, supply chain and labor are all growing problems," Franco-Nevada Corp. Chair David Harquail said in an email.

Fuel and steel prices jumped to multiyear highs in 2021, while global economic growth picked up pace as countries recovered from the worst impacts of the COVID-19 pandemic. That has put pressure on supply chains, driving up transport costs and tightening labor markets in some places.

"It's across the board. A lot of consumables are going up, like reagents and support materials," said Neil Ringdahl, managing director of Kirungu Corp., a private equity firm that is expanding the El Mochito silver-zinc mine in Honduras. "We are doing quite a lot of structural steelwork, and this has all increased dramatically. We have also had some challenges adapting our supply chains to minimize shipping delays."

Ringdahl estimated that costs for steel and other materials have jumped at least 25%, while seaborne freight prices have skyrocketed, up by double or triple, making imports far more expensive.

"At least we are close to the U.S. ... so aren't as badly affected as I would imagine some mining companies in South America are," Ringdahl said.

Newmont Corp. COO Robert Atkinson flagged "unpredictable freight costs and timing of deliveries" on an Oct. 28 earnings call, while Freeport-McMoRan Inc. President and CFO Kathleen Quirk also underscored higher shipping costs during an Oct. 21 earnings call.

Looking forward to 2022, executives and analysts see the potential for further cost escalation. "We are expecting upward pressure on our cash unit cost through the balance of the year and into 2022," Teck Resources Ltd. President and CEO Don Lindsay said on an Oct. 27 earnings call.

Taking a broad view of the sector, Market Intelligence mining analyst William Mason pointed to rising inflation as a downside risk for mining companies in 2022. But, if increasing costs are biting deeper, companies in the sector are also benefitting from strong metal prices that have supported robust margins.

"Costs have risen in 2021, and we expect them to rise in 2022 as well. However, margins will still stay relatively high," Mason said in an email.

Margins in the gold sector will contract slightly in 2021, Mason predicted, while noting they hit a historic high in 2020. Mason saw much the same for base metal miners, with high metal prices expected to offset the pain of rising costs.

Mining executives pointed to increasingly tough labor conditions, with Newmont's Atkinson underlining Canada and Australia as markets where labor tightness has had an impact on productivity.

"While [COVID-19] infection rates are declining and vaccination rates are improving near our operations, the knock-on effect from supply chain disruptions and tightening labor markets is creating new complexities to manage," Atkinson said, noting that the company is pushing to lower voluntary attrition among its workforce.

Higher metal prices may help offset rising costs but will not necessarily solve the woes in attracting qualified workers to the mining industry, Franco-Nevada's Harquail said. "Longer term, if you can't find labor to work new remote locations or underground, it won't matter what the commodity price does," Harquail said. "It puts a premium on existing operations."

Executives also cast inflation and labor tightness as a cyclical swing in the sector that has come after years of low and relatively stable costs.

Newmont President and CEO Tom Palmer expects costs to continue to rise amid a longer than normal inflationary cycle. In the same vein, David Garofalo, president, chair and CEO of Gold Royalty Corp., said inflation is rearing its head in the wake of a mining bear market in the mid-2010s that included a pullback in exploration and mine-building activity.

"These trends have largely reversed themselves and, after years of underinvestment, the mining industry must invest in exploration and new mine development to reverse declines in reserves and production," Garofalo said, with mining companies forced to boost spending "in the midst of an inflationary cycle."