Australian mid-tier miners flex their muscle

15 November 2011

Net profits for Australia's top-50 mid-tier miners leapt from $38 million in 2010 to $2.4 billion in 2011, underpinning a remarkable year for the sector with demand surging for iron ore, coal, gold and copper, lead by developing markets such as China and India.

The mid-tier 50's combined market capitalisation soared 39 per cent over the year to 30 June 2011 from $49 billion to $67 billion, according to PwC's "Aussie Mine - Onwards and Upwards" report.

Tim Goldsmith, Australian and Global Mining Leader, PwC said; "The 2011 financial year has been a stellar period for Australia's 50 largest mid-tier miners.

"High levels of consolidation, extraordinary growth in both operating revenues and a staggering $4.4billion (62 per cent) lift in capitalised exploration and development has not stopped many companies boosting their cash reserves. The sector largely overcame the volatility in equity markets.

"Rock-solid balance sheets will help them navigate some of the potential headwinds - ranging from labour shortages and the high dollar to the implementation of the mining tax and carbon price - in 2012," said Mr Goldsmith.

Market values grow despite the ups and downs

According to the report, market capitalisation of the mid-tier 50 peaked at $76.7 billion in December, 2010. But concerns over global growth triggered a $10 billion fall - or 15 per cent - in values between June 2011 and 30 September 2011, in line with the broader market.

Shareholders have backed the sector over the past year with 80 per cent of companies calling on further funds, mostly to fund major new projects. This trend is expected to continue. However, the threat to capital markets from the European debt crisis means volatility is likely to remain a feature in 2012.

"Balance sheets are just about bullet-proof, suggesting the sector has learnt the lessons from the GFC," Mr Goldsmith said.

"Their cash on hand forms a formidable war chest, having grown 20 per cent during the year to $7.6 billion, but with no net debt, the big question is how they plan to spend it.

"This solid position has also prompted a welcome return to exploration (up 58 per cent), indicating the generally high confidence levels throughout the industry. CEOs and boards are putting their money where their mouth is," said Mr Goldsmith.

M&A -opportunity knocks here and abroad

M&A activity among the mid-50 in FY 2011 saw 34 transactions totalling $40 billion, with the average deal size topping $1.2 billion - up 30 per cent on FY 2010. Eight of last year's 50 exited the list due to M&A. The mid-tiers increasingly adopted a predatory role with 71 per cent of completed deals involving the sector as acquirers- compared with less than half the year before.

"2011 was the year of the deal. The deal momentum throughout the year reflected the sector's ability to manage and develop quality assets," Mr Goldsmith said.

Four of the top five transactions involved companies with an African footprint. Companies with mostly African investments now comprise almost 20 per cent of the sector's $67 billion market capitalisation. That compares with less than 5 per cent in 2007.

"Africa is a high-risk, but increasingly high-reward market for mid-tier miners. As companies continue to look to new frontiers for resources it is likely that local miners will increasingly go overseas for growth," Mr Goldsmith said.

Iron ore flexes its muscle …while uranium takes a breather

This year confirmed the growing might of the mid-tier iron ore producer. The top seven iron ore miners' capitalisation reached $8.7 billion - up 81 per cent. This was not just a function of the 46 per cent rise in average spot prices, as production increases contributed an additional $269 million of revenue.

"One trend to watch for is the emergence of aspiring players in the nascent magnetite iron ore industry.

With the Asian Century now in its second decade, iron ore is no longer the exclusive domain of the world's biggest miners," Mr Goldsmith said.

The Japanese earthquake and tsunami triggered (another) global rethink on nuclear energy. The subsequent impact on uranium prices combined with the high Australian dollar made it the only sector to report a fall in revenues.

"But with demand for clean energy on the rise, uranium is expected to recover," Mr Goldsmith said.

Plan carefully in 2012

Looking ahead, Mr Goldsmith said despite the mid-tier miners enjoying unprecedented opportunity, careful planning remained a top priority.

"The mid-tiers will need to get their strategies in place in 2012, whether it be preparing for the MRRT and carbon price or developing their engagement with their local communities.

"They will also need to beware of any contagion that flows from the European debt situation. Fortunately, their strong cash positions will assist.

"The sector's strong fundamentals are undeniable, which is why we remain firm in our belief that the industry is extraordinarily well placed to meet the challenges ahead," said Mr Goldsmith.

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