2016 was a year of recovery for the world’s 40 largest mining companies by market capitalisation, with profitability returning and balance sheet repair well underway, according to PwC’s Mine 2017 report released today.
PwC Australia’s mining leader, Chris Dodd, said the stronger result provided “welcome relief to a group battered by a race to the bottom throughout 2015.”
“2015 was a brutal year with the first ever collective loss and investors piling in to punish the top 40 for perceived poor capital management and investment decisions,” he said. “The recovery in commodity prices throughout 2016 helped deliver a $48 billion turnaround and some much-needed space to pause and draw breath.”
The 14th edition of PwC’s Mine report analyses the financial performance of the world’s largest mining companies, and examines the global trends, opportunities, and hazards that will shape the industry in the future.
“There’s a safety mantra in the industry called ‘stop, think, act’ and that’s what the top 40 did in 2016,” said Dodd. “The danger has passed and the miners are in the ‘thinking’ phase; we haven’t seen any real decisive actions yet. What we have seen is a really commendable effort around paying down debt and repairing balance sheets.
Net debt was reduced by $20 billion, with most of the debt issued used to refinance, rather than fund acquisitions or mine development. Gearing ratios improved to 41 percent, retreating from a record high of 49 per cent in 2015.
Rapidly rising commodity prices sparked renewed market optimism and improved credit ratings across the top 40 firms. Valuations also climbed, especially for the traditional miners, with the trend continuing through Q1 2017 even as commodity prices remained flat.
“Industry observers who lashed the top 40 for squandering the benefits of the boom should rightly applaud the maturity that’s been shown over the past 18 months,” Dodd said.
“M&A is often more glamorous than knuckling down on cost control and technology advancement. There’s been plenty of that internal activity, it’s just less visible. We’ve seen a positive gap emerge between market caps and net book values that was absent in 2015, which reflects both prices and production cost discipline.”
Capex down to record low with exploration expenditure reduced
The effort to pay down debt contributed to a dramatic fall in capital expenditure, by a further 41 per cent, to a new low of just $50 billion.
For the fourth straight year, the industry reduced spending on exploration. $7.2 billion was invested1 in 2016, barely one-third of the record $21.5 billion allocated in 2012.
“It’s likely this caution will continue to play out in 2017, and we will see a trend towards near-field and brownfield development, rather than new exploration or asset acquisition,” said Dodd. “We are also seeing a continuation of the trend towards development in politically stable countries.”
“The longer term question, as the miners move from ‘think’ to ‘act,’ is when, where and how they do it. With the benefit of a reasonably benign outlook and breathing space, there’s an opportunity to make the type of strong, sensible decision that can yield benefits over the long term. It sounds obvious, but there’s now a genuine a chance for the miners to apply the lessons they learned during the last cycle, reap the benefits of the investments they made, and take a more countercyclical approach to acquisitions and disposals. We applaud any break in the ‘buy high, sell low’ paradigm.”
Limited M&A activity
One of the biggest M&A stories of 2016 concerned the assets that did not sell. Numerous large deals, expected to be completed by early 2017, were withdrawn from the market, possibly due to the rebound in commodity prices and the improving prospects of the companies that owned them. More broadly, asset sales in 2016 were largely strategic rather than fire sales. Miners, especially diversified players, sold minority stakes in non-mining businesses.
China in the driving seat
China remains the exception to the dominant investment behaviour within the Top 40. During the downturn, Chinese companies demonstrated one enormous advantage over other miners from both traditional and emerging countries: access to capital.
“The Chinese players had deeper pockets which gave them the ability to buy assets at bullish prices or moving quickly on assets made available at the bottom of the price cycle,” said Dodd. “The trend of Chinese interest in global mining assets is likely to continue as they look to wean themselves off their dependency on imports.”
Will the digital revolution become an enduring part of the mining psyche?
New technologies promising a boost for the sector include software to optimise asset utilisation, devices to remotely monitor and control activities, and robotics to automate repetitive tasks.
“High-end technology is starting to come online in a big way and the miners are seeing the safety and productivity benefits,” Dodd said. “We’ve had driverless trains for a while but now we have data analytics scheduling them. We have drones doing mine safety and environmental impact assessments. Technology and innovation will deliver constant but incremental benefits. Future improvements in safety and productivity won't come in a few leaps and bounds, it will come in many hops and steps.
“But benefitting from technology and innovation isn’t a question of technology, it’s one of mindset. The advantage of a ‘data boom’ in the sector will flow to those who are proactive, and move quickly to make it a core part of their business.”
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© 2017 PwC. All rights reserved.
© 2017 PwC. All rights reserved. PwC refers to the PwC network and/or one or more of its member firms, each of which is a separate legal entity. Please see www.pwc.com/structure for further details. Liability limited by a scheme approved under Professional Standards Legislation.