It was a rollercoaster of a year, but 2009 ended on a positive note for the mining industry. By the end of 2009, the top 40 global mining companies experienced a rapid recovery of market capitalization lost in 2008, signaling a positive turn for the mining sector.
Despite a shaky start to the year, market capitalization for the top 40 increased to levels similar to those seen in 2007, increasing 118% (US$696 billion) by the end of 2009, according to the annual PricewaterhouseCoopers (PwC) report Mine: Back to the Boom, a review of the financial performance of the top 40 mining companies.
2009: The Year of Two Halves
The beginning of 2009 posed significant challenges for the mining industry with commodity prices continuing to fall lobally, volatile market conditions and tough price negotiations with customers. However, mining companies responded swiftly to protect their bottom lines; funding was restructured, mines were closed and production was cut as margins declined. By the end of 2009, the year had taken a financial toll on the top 40 mining companies as revenues declined 15% from 2008, net profit decreased by 26% and cash flow from operations dropped by 27%.
Fortunately, as a testament to the top 40’s decisiveness at the onset of 2009, none of the top mining companies were subject to bankruptcy or voluntary administration provisions despite the global economic crisis. This was a direct result of their success in removing their debt overhang, and benefitting from strengthening commodity markets and government stimulus packages. In stark contrast to the start of the year, the last half of 2009 also saw a significant rebound in commodity prices that has spilled into 2010.
Today’s Top Issues: The CEO Perspective
While the outlook expressed by industry leaders is more positive than in 2008, most are still being cautious. In interviews PwC conducted over the past year, mining industry CEOs indicated their main areas of concern are the economy in China and its impact on demand, foreign exchange rates, the cost of energy, and the impact of potentially unsustainable government budget deficits on interest rates, tax regimes and the global economy.
CEOs are concerned that governments with challenging budget deficits will look to the mining industry as a source of additional tax revenues. These worries are with good reason as several countries have recently seen these actions unfold, including Australia’s proposed 40% “Resource Super Profits Tax” and mining royalty hikes imposed in Quebec, Chile and Ghana (among others).
Also top-of-mind for today’s mining leaders is the cost of labour. While some of the pressure was initially taken out of the labour market, the mining labour market remains tight in areas where miners are competing with other resource companies and infrastructure projects for skilled workers. As a result, miners are increasingly looking to automated technology to help reduce labour costs from mine sites.
Road to Recovery
Although the market capitalization for the top 40 experienced a significant rebound in 2009, many companies missed their chance to make affordable acquisitions as there were no large-scale takeovers made in 2009. In their efforts to conserve cash, production remained flat across most commodities and investment activities were mostly spent on plant and equipment as funds were channeled to existing projects in an effort to cope with the downturn. For boom times to return, it’s imperative that emerging issues be quickly addressed and new growth opportunities identified so that the sector can continue down a road of recovery.
And while short-term volatility remains, there are definite signs of improvement, reflected by stronger commodity prices and a more positive outlook by the leaders of the industry.
For more information on our services to the mining industry or to read the Mine: Back to the Boom report, please visit www.pwc.com/ca/mining.