Confidence crisis hits miners

The mining industry faces a confidence crisis, a PricewaterhouseCoopers (PwC) review of global trends in the industry has revealed.

The confidence crisis is over whether costs can be controlled, return on capital will improve or commodity prices will not collapse, among others, PwC said. 

Mining stocks fell only slightly last year, PwC said, but they plunged by almost 20 percent in the first four months of 2013. And while over the past decade the mining industry has outperformed the broader equity markets, this trend has recently changed. 

The report said regaining confidence in the industry depends on how the companies respond to rising costs, increasingly volatile commodity prices, and other challenges such as resource nationalism.

But despite the problems “it’s not all bad news”, the report said. “Production volumes and dividend yields are up; and while prices have fallen, they have not crashed,” it added. 

Tim Goldsmith, Global Mining Leader at PwC, told a conference in Accra that miners are trying to rebuild their shaky confidence by scaling-back capital expenditures, disposing of non-core assets and reducing hurdle rates -- which refer to companies’ minimum expected returns on an investment.

He said, across the board, there is a shift from maximising value by increasing production volumes to a renewed focus on maximising returns from existing operations through managing productivity and improving efficiencies.

Last year, production volumes of the top-40 mining companies by market capitalisation increased by 6 percent, but softer commodity prices meant that 2012 revenue of US$731billion was only the second year in a decade that mining revenue did not increase. 

Net profit was down 49 percent to US$68billion as decreased commodity prices, an escalating cost base, and US$45billion in impairment charges hit the bottom line. At only 8 percent, the companies’ return on capital employed (ROCE) was the lowest it’s been for a decade.

Operating cash flows fell with reduced profits, down 23 percent to US$137billion, while investing cash outflows increased 22 percent to US$169billion. The top-40’s cash position fell 10 percent to US$104billion, salvaged by the issuing of US$108billion in new debt. 

Concerns about resource nationalism have further weighed on the industry, said Mr. Goldsmith, adding that shareholders have called for top-management changes. Since April 2012, half of the top-10 CEOs have been replaced. 

“But simply changing the captain doesn’t turn the ship. In reaction to shareholder demands and both commodity price and cost pressures, miners have started to shift their focus. 

“The days of maximising value by solely increasing production volumes are gone. The future is about managing productivity and improving efficiencies, both of which have suffered in recent years, he said.

Mr. Goldsmith, speaking with B&FT at the conference, proposed a mature and transparent dialogue between Governments and miners regarding implementation of industry taxes and policies to ensure maximum benefit. 

“I think there will be very interesting times ahead. A good Government will work very well with a good industry to come up with good solutions, and a bad Government and bad industry will end up with bad solutions.”

He said both companies and Governments got carried away in the last 10 years, hence the implementation of new mining tax regimes in some countries.

“Governments need to understand that the easy days are gone, and that both must work together in the industry.” 

PwC’s annual report, the tenth in the series, provides analysis on the financial performance and position of the global mining industry, as represented by the top-40 mining companies by market capitalisation.