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SPECIAL FEATURE: Global mining

Global mining industry faces a confidence crisis

Mining houses are working to rebuild investor confidence.

Worldwide, the mining industry has outperformed the broader equity markets over the past decade, but this trend recently changed. While mining stocks fell slightly in 2012, they slipped nearly 20% in the first four months of 2013, according to a PricewaterhouseCoopers (PwC) report earlier this year.

According to PwC’s tenth annual ‘Mine’ report, the industry is facing a confidence crisis. These include confidence over costs, return on capital and commodity prices.

The report analysed 40 of the largest listed mining companies by market capitalisation in several major economies. The financial information for 2012 covers the reporting periods from 1 April 2011 to 31 December 2012, with each company’s results included for the 12-month financial reporting period that falls into this time frame.

Although it was a turbulent year for commodity prices, the report shows total market capitalisation was roughly the same at the end of 2012 as the start – $1.2 trillion – but not for gold miners. The gold miners in the top 40 lost $29 billion in 2012, while in the first four months of 2013, they lost a further $58 billion in value. This followed a major sell-off in April after the largest one-day percentage drop in gold prices since the 1980s.

Hein Boegman, PwC Mining Leader for Africa, says: “On the demand side, long-term fundamentals are still there. Regaining investor confidence depends on how the mining industry responds to its rising costs; in particular labour, increasing volatile commodity prices and other challenges, such as resource nationalism and new CEOs delivering on promises.”

Closer to home, there have also been some changes in leadership in the mining industry. “Our analysis of the new leaders and their predecessors suggests there is a demand for a different type of leader as the industry undergoes change,” says Boegman. Compared to their predecessors, more have been recruited from an operational background and have spent most of their careers in the industry.

Despite this drop in confidence, it’s not all bad news as production volumes and dividend yields are up. While prices have fallen, they have not crashed – long-term fundamentals are positive.

“It’s important to recognise that the industry’s emphasis continues to shift. For the first time ever, half of the top 40 miners are from non-traditional markets. China continues to be the industry’s most important customer. While Chinese growth rates are slowing down, they are coming from a bigger base, so future demand for commodities still looks healthy,” adds Boegman.

To help restore confidence, shareholders have called for increased capital discipline and higher returns. Eight of the top ten have publicly announced that they will maintain or increase current dividend levels.

Boegman concludes: “Miners are trying to rebuild the market’s confidence – capital expenditures have been scaled back, hurdle rates are being increased and non-core assets are being disposed of.

“Across the board there is a shift from maximising value by solely increasing production volumes, to a renewed focus on maximising returns from existing operations through managing productivity and improving efficiencies. Both of which have suffered in recent years.”

• Mining revenues level at $731 billion; net profits down 49% to $68 billion.
• Market values down; gold miners hit especially hard.
• New CEOs at five of the top 10 companies.
• Forecast capex of $110 billion, 21% lower than 2012.

Author: Hein Boegman CA(SA), is PwC Mining Leader for Africa.