TORONTO, June 6, 2012 /CNW/ - Despite record profits of US$133 billion
in 2011, market capitalization of the Top 40 global mining companies
fell by 25%, according to the latest PwC report - Mine 2012: The growing disconnect. In fact, only six companies out of the Top 40 global mining companies
saw their market capitalization increase in 2011.
The industry's stocks significantly underperformed in the broader equity
markets, losing value by year-end as a result of continuing global
economic fears stemming from, among others, the ongoing European
sovereign debt crisis and a projected slowdown of China's economy.
"Investors have simply not bought into the industry's growth story or
are reacting to other short-term global economic concerns," says John
Gravelle, Canadian mining leader, PwC. "There is a growing disconnect
between the two."
In 2011, the Top 40 global mining companies' price-to-earnings (PE)
ratio fell below 10, which is lower than the dismal PE ratio seen in
2008 during the global financial crisis. Mr. Gravelle adds, "The 2011
PE ratio alludes to the market's lack of confidence in the Top 40 and
their ability to grow or even sustain profitability. Despite this, I
believe the demand story remains robust and long-term growth in
emerging markets is more significant to the industry than short-term
fears in the developed world."
Challenges with supply
Mining companies believe that increasing supply is critical to the
future of the mining industry. The Top 40 invested US$98 billion in
capital projects in 2011 and plan for a further US$140 billion for
2012. However, given that market capitalization has fallen in a year
of such high capital expenditures, investors don't believe miners will
execute their projects as planned or deliver returns as promised.
"Compounded with calls to return more cash to shareholders, potentially
at the expense of capital projects if they are deferred, it is unlikely
that companies will be able to spend as planned. CEOs are faced with
increasingly difficult capital allocation decisions as they try to
balance growth with returns," says Mr. Gravelle.
Mr. Gravelle adds, "CEOs are exercising greater discipline and focus
when making big investment decisions. They're proceeding with caution
as resource nationalism, rising costs, labour challenges and investor
demands remain top of mind."
Iron ore growth in popularity
The price of iron ore hit record levels in 2011, at an annual average of
US$168/dmt, posting an annual increase of 29%.
Iron ore is leading the way in terms of earnings before interest and
taxes (EBIT), as well as revenue amongst other main commodities. As a
percentage of revenue, iron ore has jumped from 20% to 42%, and EBIT
has gone from 24% to 66% of the total.
"Diversified producers are adding more iron ore to their portfolio,"
says Mr. Gravelle. "Iron ore being the most profitable commodity is
driving a number of international developments. Global iron ore
reserves expanded by eight per cent last year with multi-billion dollar
capital projects underway in countries such as Australia and Brazil."
In its 10th annual edition, the Mine report provides a comprehensive analysis of
the financial performance and position of the global mining industry as
represented by the Top 40 global mining companies by market
For more information, please visit PwC's mining site at: www.pwc.com/ca/mining.
LinkedIn: Join the PwC Mining Community www.pwc.com/ca/mining-linkedin
Twitter: Follow @John_Gravelle for mining updates and business insights
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