CANADIAN MINING PERSPECTIVES: Revenues rise, costs right behind

For many months I've worried that the rising cost of labour and materials would wipe out the gains made by high com...


For many months I've worried that the rising cost of labour and materials would wipe out the gains made by high commodity prices. Now, thanks to PRICEWATERHOUSECOOPERS (PwC), I've seen figures that spell out the size of the problem. Released last month, "Mine As good as it gets?", is the fifth annual report providing analysis of the financial performance of the global mining industry.

The report says that revenues at the top 40 mining companies grew by 32% in 2007, but costs increased by 38%. Any time costs rise faster than revenues, profit margins can be seriously eroded.

The bad news does not stop there.

Market capitalization grew by 54% globally, but less so in the traditional mining powers (Canada, United States, Australia and South Africa). Instead companies in BRIC countries (Brazil, Russia, India and China) as well as South America grew fastest. In 2003, the market capitalizations for companies in these emerging markets made up 14% of the 40 largest companies; in 2007 they made up 36%.

For the first time since 2002, cash flows from operations were not enough to cover the increased levels of investment activity, resulting in growing debt to fund growth. Total shareholder returns for the 40 top companies averaged 119% in 2007, compared to 55% in 2006.

The light at the end of the tunnel may be the junior sector.

The PwC report concludes that although Canadian and Australian mining companies are well positioned for growth because of the strong junior and mid-tier miners in those countries. "Toronto's venture exchange listed Top 100 junior mining companies have experienced a 135% growth in market capitalization since 2006, with Australia's Top mid-tier mining companies (under $5 billion) showing 122% growth," it says.

Regular readers will recall that last week I pointed out that juniors are having less success raising money through initial public offerings (IPO) this year than last (CMJ Net News, July 10, 2008). That development came from an ERNST & YOUNG study.

So we seem to have a difference of opinion on the state of junior mining. On one hand, exploration companies have been growing at astonishing rates. On the other, funding their activities has become more difficult. If I had a third hand, I'd use it to point out that senior companies do not do enough of their own exploration, relying instead on acquisition of junior companies or their properties. Money-raising problems in the junior sector could soon affect the mid- and large-sized companies, ultimately leaving them without sufficient reserves.

The only advice is to support mineral exploration at every level. Without it, the mining industry will disappear.


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