Mine report indicates boom times could be returning to the industry
TORONTO, May 25 /CNW/ - In 2009, the top 40 global mining companies experienced rapid recovery of market capitalization lost in 2008. Despite a shaky start to the year, market capitalization for the top 40 increased to levels similar to those seen in 2007, increasing 118% (US$696 billion) by the end of 2009, according to the annual PricewaterhouseCoopers (PwC) report Mine: Back to the Boom, a review of the financial performance of the top 40 mining companies.
The beginning of 2009 saw commodity prices continue to fall globally, tough price negotiations with customers and challenging market conditions. However, mining companies responded swiftly to protect their bottom lines; funding was restructured, mines were closed and production was cut as margins declined. In stark contrast to the first half of 2009, the year ended with a significant rebound in commodity prices.
"Despite the global economic crisis, none of the top 40 mining companies were subject to bankruptcy or voluntary administration provisions," says John Gravelle, partner and national leader of PwC's Mining Practice. "This is largely due to their success in removing their debt overhang, and benefitting from strengthening commodity markets and government stimulus packages."
Despite the increase in market capitalization, 2009 proved to be a challenging year for the top 40:
- Revenues declined 15% year-on-year against 2008
- Net profit was down 26%
- Cash flow from operations decreased 27%
Industry leaders largely refrained from significant spending in 2009. There were no large-scale takeovers completed during 2009, pointing to a potential missed opportunity for those who may have had available financial resources. Although the top 40 spent approximately US$74 billion on investing activities in 2009, most was spent on plant and equipment as funds were channelled to existing projects. Moreover, production remained flat across most commodities despite US$200 billion of capital expenditure over the past three years and exploration spend also declined significantly as the top 40 scaled back during the downturn.
In interviews conducted over the past year, mining industry CEOs indicate their main areas of concern are the economy in China and its impact on demand, foreign exchange rates, the cost of energy, and the impact of potentially unsustainable government budget deficits on interest rates, tax regimes and the global economy.
"The outlook expressed by industry leaders is more positive than in 2008 when tough decisions were required to cope with the downturn," says Gravelle. "However, CEOs remain concerned that governments with challenging budget deficits will look to the mining industry as a source of additional tax revenues."
While some of the pressure was initially taken out of the labour market, the mining labour market remains tight in areas where miners are competing with other resource companies and infrastructure projects for skilled labour. Miners are increasingly looking to automated technology to reduce labour costs from mine sites.
Commodity prices are also on an upward trend. After metal prices experienced a decline for the first six months of 2009, a sharp recovery for most commodities occurred in the last half of 2009 and into 2010. The turnaround in copper prices was closely followed, with the 2009 year-end price reaching approximately US$3.30 per pound. As a result of the 12% increase in the average price of gold from 2008 to 2009, the top 40 companies' share of total revenue from gold increased from 10% to 14% in 2009. Additionally, to be sure iron ore buyers and sellers could continue to transact at prices closer to market, buyers and sellers have begun negotiating prices quarterly rather than annually.
"Although short-term volatility in the industry remains, there are definite signs of improvement for the mining sector," says Gravelle. "It's essential that lessons from the past are learned and the new challenges quickly addressed so that the industry can continue down its road to recovery."
PwC analyzed 40 of the largest listed mining companies by market capitalization. The analysis includes major companies in all parts of the world whose primary business is assessed to be mining. The results aggregated in this report have been sourced from the latest publicly available information, primarily annual reports and financial reports available to shareholders. The financial information shown for 2009 covers reporting periods from April 1, 2008 to December 31, 2009, with each company's results included for the 12-month financial reporting period that falls into this timeframe.
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