Boom Times may be back for Global Miners

25 May 2010

A return to boom-time conditions is expected by the world's 40 largest miners despite experiencing their first decline in revenue since 2002.

Combined revenue dipped 15 per cent from US$ 383 billion to US$ 325 billion for the 12 months to December 2009, according to the PricewaterhouseCoopers 'Mine: Back to the Boom' report.

The decrease in revenue was driven by falling commodity prices and less-favourable outcomes from customer price negotiations during the first half of 2009. Net profit was also hard-hit during this period, plunging 26 per cent to $US 49 billion.

In contrast, a second-half rally in mineral demand saw the Top 40's market capitalisation surged by 118 per cent ($696 billion) by the close of 2009 - a level just shy of its 2007 peak.

Tim Goldsmith, Australian and Global Mining Leader, PricewaterhouseCoopers says, "2009 was a dual-tracked year for the world's largest miners. The first half was defined by rising extraction costs and declining mineral prices that placed enormous strain on earnings."

"Most companies responded swiftly and decisively to arrest the decline: funding was restructured, debt repaid, loss-making projects closed, and production cut in response to tightening margins."

According to the report, the Top 40's conservative approach was evidenced by a 32 per cent increase in cash reserves to US$ 74 billion.

Second half bounce-back

Mr Goldsmith said, "During the second half, easing conditions and improved sentiment helped uplift results. This period saw the return of traditional, high-volume commodity buyers, notably Japan and Korea. These nations, combined with ongoing consumption by developing nations such as China, India and Indonesia, boosted demand and asset prices."

He believes general volatility and uncertainty in the global economy, exacerbated by sovereign debt issues across the PIIGS (Portugal, Ireland, Italy, Greece and Spain) economies could still impact the miners.

"In the near-term, further economic dips could occur that will adversely affect the mining industry. But the future path remains bright - demand from an industrialising Asia is growing - but supply challenges are increasing daily, too."

"None of the Top 40 companies took fatal hits during the global financial crisis although many suffered adverse financial stress. However, they are now well capitalised with low levels of gearing," he said."

"Share-prices have recovered rapidly ahead of an actual profit recovery, which clearly demonstrates the market's confidence in the long-term fundamentals driving demand. We are at the start of the second phase of the boom."

Where's the next Eureka moment?

Exploration expenses by the Top 40 was slashed by a quarter (23 per cent) to $US 3.11 billion in 2009.

Mr Goldsmith said, "The downturn prompted many companies to cut discretionary costs, including exploration, and shifted their focus to expanding more mature exploration projects."

"'Brown-field' projects, which deliver a quicker pay-back, were given preference over longer-term 'green-field' developments."

"While this approach will replenish reserves and satisfy demand, it does not improve overall resource growth. Reserve replacement will becomes more challenging - driven by demand from China and other developing nations. The lack of spend on exploration poses the question - when and where will the next world-class mines be found?"

Mr Goldsmith added, "However, global miners are looking further afield into largely unexplored regions such as Mongolia and Kazakhstan to address this issue."

Dragon's appetite to exceed Uncle Sam's

For the first time since the Industrial Revolution, demand for minerals by the Middle Kingdom reached near-parity with that of the United States and Canada. According to the report, China accounted for 17 per cent of the top 40's revenues - rivalling North America's 18 per cent.

Mr Goldsmith said, "We are fast approaching a water-shed moment where China will surpass North America to become the mining industry's biggest customer."

"While China's 4 trillion Yuan stimulus package and ongoing industrialisation helped drive this result, it is a remarkable achievement considering the short time-frame that it has occurred."

A taxing year

Mr Goldsmith said, "The mining industry's ongoing success has been fortuitous but also presented a challenge. This success has helped shield many economies during the GFC."

"However, governments with demanding budget deficits have looked to the mining industry as an additional source of taxation revenue. They are also taking a more active role in determining how the benefits of future booms can be shared."

"The Australian government's recently announced 'Resources Super Profits Tax' is one example, while other jurisdictions have flagged royalty increases."

"It is important how this process is managed. Taxation can be a tremendous lever in determining a country's attractiveness as an investment destination. Clearly sovereign risk will be a much greater consideration, across more jurisdictions in future," he said.

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