When The Going Gets Tough

What a difference 12 months can make. According to PricewaterhouseCoopers’ annual survey of the top 40 mining companies in the world, Mine: Review of global trends in the mining industry, compared to this time last year when mining companies experienced a boom period, the mining industry faces a more uncertain future. But one thing is certain: the CEO agenda looks markedly different today than a year ago–and steering a path through this downturn will require tough decisions.

A spectacular and rapid decline

2008 started where 2007 left off, and the continuation of strong demand and record prices, epitomized by record-breaking iron ore prices negotiated by BHP Billiton, Rio Tinto and Vale provided the foundation of another spectacular year for the industry. In particular, revenues increased 23% year-on-year, net assets increased 10%, and cash flows from operation increased by 25% and exceeded $100 billion for the first time.

However, despite the strong financial results, 2008 was definitely a year of two parts with the good times quickly turning as the global economic crisis took hold in the last quarter and commodity prices went into freefall. In fact, 2008 has seen the market capitalization of the Top 40 decrease by 62% from 2007. Although this represents a spectacular and rapid decline for the industry, it is mirrored in many sectors.

Gold companies have been the least impacted with their market capitalization decreasing by 20% based on the perception that the commodity is a safe haven in a time of economic turmoil, and a protector of wealth. Gold companies now comprise 26% of the total market capitalization, more than double the 2007 level, having taken the place of base metals, platinum and coal companies.

Other notable findings include:

Operating costs continued to rise at a greater rate than revenue (27%), further eroding margins;

Fifty percent of the Top 40 recorded impairment charges in the year that total $31 billion; and

Total assets are more than 3.5 times those reported in 2002 fuelled by acquisitions and expansion capital spending during the boom times; and

Total liabilities have increased 3.3 times to fund the growth.

Investors in mining companies who had ridden the boom over the past five years, experiencing high levels of returns, both through capital growth, dividends and share buyback programs, were hard hit in 2008, coming face to face with the impact of the downturn. Only three companies had positive Total Shareholder Return (TSR) and the four lowest were a 75% or greater decline. Last year, 14 of the Top 40 achieved a one year TSR of greater than 100%, only three companies had positive TSR and the four lowest were a 75% or greater decline.

The CEO perspective

From discussions with leading CEOs highlighted in this year’s survey, the global economic conditions have created two kinds of companies: the ‘haves’ and the ‘have nots,’ and actions will depend on which type of company the CEO is leading.

One of the keys to managing in the current environment is having a motivated and experienced team. However, according to the survey, CEOs believe there is a shortage of management with the right skills and experience to manage in a downturn. As a result, how to reward and retain the best in the industry will be high on the agenda of most public company remuneration committees.

Flexibility is also important. The boom encouraged the industry to invest heavily in capital projects and grow the top line, but in these cautious times, the ability to turn the cost tap on and off quickly may be the difference between success and failure. Today the CEO focus is on reexamining the feasibility of some projects, while making difficult decisions where necessary and ensuring, where possible, that the company still invests for the future.

Decision time

It is reassuring to hear many CEOs talk of grasping the challenge presented today, building leaner organizations that will create value throughout the cycle, rather than trying to ride out the current economic tide. But while most indicators point toward a tough period for the mining industry as short-term issues dominate the agenda, success in the long term will depend on how well the mining industry is equipped to react to the current circumstances to survive the storm–and invests in the future to position itself for the inevitable return of the good times.

For more information and to download a copy of Mine, visit www.pwc.com/ca/mining.

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