While the Top 40 mining companies increased volumes by 6%, softer commodity prices meant that 2012 revenues of $731 billion was only the second year in a decade that mining revenue did not increase, according to the latest PwC report: Mine: A confidence crisis.
The Mine report highlights a range of activity causing stakeholders to question the mining sector's value proposition:
"Miners are faced with a confidence crisis and they're focused on trying to restore confidence," says John Gravelle, mining leader for Canada and the Americas, PwC. "Across the board, there's a renewed focus on maximizing returns from existing operations through managing productivity and improving efficiencies. Looking at the leadership changes last year, it reflects an industry that values experience and operational understanding over deal making and growth."
Gravelle added, "The importance of returning to a lower cost base rather than relying on higher commodity prices should be on every miner's agenda. Miners must deliver this while operating in an environment of intense resource nationalism where we see governments in traditional mining jurisdictions legislating substantial tax increases and emerging mining jurisdictions ignoring mining contracts after substantial investments are made."
Re-balancing capital spending
While 2012 marked a record year for capital spending, the overall message from the Top 40 is that the capital expenditure tap is being tightened, the report states. Project hurdle rates have increased, with the Top 40 stating that only projects with a return above 25% will be pursued.
The availability of cheap debt financing influenced the Top 40 to add leverage to their balance sheets, adding $108 billion in debt in 2012. "Favourable debt markets have helped to maintain liquidity," says Gravelle.
Gold left out in the cold
Despite a turbulent year for commodity prices, the Top 40 miners' total market capitalization was around the same at the end of 2012 as the start – roughly $1.2 trillion. But not for gold miners. The Top 40's gold miners lost $29 billion or 15% of market capitalization in 2012.
The Top 40's gold miners lost a further $58 billion in value, particularly due to a significant selloff in April following the largest one-day drop of gold prices ever.
China's changing role
According to the report, half of the industry's 40 largest miners by market capitalization have the bulk of the operations in emerging countries – the most ever.
"Emerging and developing markets have become the world's growth engine – with China leading the way. Demand is only one part of the China story. They're fuelling growth in their backyard and immersing themselves as a mining consumer, supplier, financier and regulator," says Gravelle.
Chinese companies will likely consolidate and with a few domestic mega-mergers and large overseas acquisitions, more Chinese companies will be part of the Top 40, if not the Top 10, notes the report.
In its 10th edition, PwC's Mine: A confidence crisis provides analysis on the financial performance and position of the global mining industry as represented by the Top 40 mining companies by market capitalization.
For more information, please visit PwC's mining site at: PwC.com/ca/mining.
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