October 2017

‘Stop. Think … Act’ – PwC’s Mine 2017   report

  • By Chris Dodd, Partner, Mining Leader – Australia and Simon McKenna, Director, PwC

PwC’s latest mining report looks at the performance of the Top 40 companies during 2016, and discusses what might be in store for the future

Recovering from 2015’s race to the bottom, the world’s Top 40 mining companies paused and drew breath in 2016. Rapidly rising commodity prices promised a way forward and the valuations of the Top 40 responded. But valuations aside, there is little to suggest that the Top 40 made any substantial advances throughout the year, according to PwC’s report Mine 2017: Stop. Think … Act.

The 14th edition of PwC’s industry series, which analyses financial performance and global trends of the Top 40 mining companies, also considered opportunities and hazards on the horizon – and the impact of intransigent or innovative activity.

The poor results of 2015 had demanded a reaction. While short-term price rebounds provided the scaffolding to make the Top 40 great again, restraint was the order of the day. Price rises were welcomed but with cautious optimism and warnings to heed the lessons of the past. The narrative of the Top 40 in 2016 therefore read more like a mine site safety mantra: ‘Stop. Think … Act’.


In 2016, the traditional miners continued bolstering balance sheets to calm the market and stop the angst associated with financial distress. A heavy emphasis was placed on shedding debt. The deep distress witnessed in 2015 had abated. Impairments tailed off, and there were no new significant bankruptcies. An absence of any significant streaming transactions entered into by the majors was evident.

The market rightly applauded this, reinstating a positive gap between market caps and net book values that was absent in 2015. The positive gap of approximately $220 billion between the two in 2016 represents the first increase since 2010 (Figure 1); this is supported by the $204 billion of impairments booked in the last five years, including $53 billion in 2015 alone.

Healthier price-to-earnings (P/E) multiples returned. And even as price growth slowed early this year, valuations continued to rise until April 2017.

The price rebound provided miners with the opportunity to focus on debt repayment. Many of the Top 40 diverted cash away from dividends and investments, and instead used it to reduce liabilities. At the same time, the fire sale of assets reduced to a trickle. As a result, net borrowings (borrowings less cash) fell from $239 billion to $202 billion, and leverage ratios improved while liquidity ratios remained stable. With the significant rise in free cash flow (up to $40 billion from $13 billion), miners were also able to avoid pressure to pay down debt using other, expensive sources of capital (Figure 2).

The brakes were firmly applied to exploration activities, which continued to shrink. The $7.2 billion expenditure in 2016 was barely one-third of the record $21.5 billion allocated in 2012, according to research by S&P Global Market Intelligence. And what little was undertaken was generally allocated to less risky, later stage assets, typically located in politically stable countries.

Capex fell dramatically again by a further 41 per cent to a new record low of just $50 billion. There was a lack of significant greenfield projects announced and production was generally flat.

More positively, despite the external headwinds in the form of increased energy prices, prudent cost control measures ensured that operating expenditure was constrained.

China – in the driving seat

The 11 Chinese companies within the Top 40 proved the exception to many of the 2016 observations. China defied conventional industry behaviour and invested at the bottom of the cycle.

Indeed, the most significant asset buyers among the Top 40 were Chinese companies.

During the downturn, Chinese companies demonstrated one enormous advantage over other miners in both traditional and emerging countries: access to capital. With deeper pockets than their competitors, Chinese players were able to fund more acquisitions than their counterparts.

We also witnessed an increase in acquisitions by Chinese private equity firms, and we expect China to continue to be active in acquiring global mining assets as a way to reduce its dependency on imports.

However, one variable worth watching is concern regarding restrictions on capital outflows by the Chinese government. For example, we have recently seen tighter approval processes for foreign acquisitions by Chinese companies, although these are not specifically targeting the mining sector.

The Chinese government said in February 2017 that the new measures are only directed at reducing suspicious or fraudulent transactions.


What was unclear from our 2016 analysis is where the industry will head next. Will the strategy of repaying debt, preserving cash, sustaining existing assets and waiting for a sustained increase in prices prevail?

The old guard have donned hard hats, high-vis jackets and steel-capped boots in a bid to protect themselves from the pitfalls of the recent past. Praise should be given for the efforts to repay debt, innovate and adopt new efficiency measures – all of which have helped to curb costs and restore credit ratings and investor trust. But where will this thinking take the industry if a ‘playing it safe’ attitude to investment prevails in the future?

In the short term, shareholders may appreciate the strengthening of balance sheets and share price increases. But the industry will need to execute a longer-term vision or it will remain at the mercy of speculators for commodities. Shareholders will demand performance from the existing asset base, culminating in share price growth and the return of dividends, or they may simply reallocate their capital if the mining sector cannot provide a long-term growth vision.

And looking to the future, it’s clear that opportunities and hazards abound. Consider Apple’s question of ‘Can we one day stop mining the Earth altogether?’ or when Elon Musk puts forward a 100-day guarantee to fix South Australia’s energy crisis with battery technology. The industry must carefully consider how it responds.

Licence to operate remains critical as the community increasingly demands exceptional corporate social responsibility. Some in the industry are now making bold declarations on matters such as diversity and transparency, but they will need to demonstrate action soon or risk becoming laggards in the broader corporate pack.

While the sirens are not sounding, the warnings to adapt to these challenges are increasing.


During 2016 we failed to see any significant action on the future direction of the Top 40, at least by the traditional players. We’ve called the industry out in the past for reacting to short-term price movements, and thankfully this did not happen in 2016. Is the pause an indication of longer-term thinking by the industry?

Already well-known is the rising importance of battery technology and its impact on coal and ‘new world’ lithium, cobalt and graphite. Our sole lithium player from last year (Tianqi Lithium Industries) remains in the Top 40, and we know of other integrated companies in these sectors that qualify for inclusion if they were pure-play miners. But the future may be about integration. Emerging market companies, who are also focused on new world minerals, are increasingly integrated. In the traditional markets we are seeing new players seeking to secure supply, and even calls by stakeholders for BHP to get on board the battery train. It remains to be seen if a major will pivot in this direction.

Aside from the completion of new projects, none of the majors have signalled bold intentions for future growth. Few things are certain in this industry, but we know that China is unwavering in its strategy, shareholder activism is rising, government interventions are becoming more commonplace and new players are disruptive.

The platform is there for some decisive industry moves. While many will be willing to ride the waves of industry sentiment, others will see the conditions as ripe for value accretive moves, with market differentiation their immediate goal.

Action might also come in the form of commitments to greenfield projects, mergers and acquisitions or technology – or a combination of these.

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.

The benefits of asset optimisation tools are significant. Separate PwC analysis estimates maintenance costs can be reduced by 20 to 40 per cent, asset utilisation increased by up to 20 per cent, and capital expenses reduced by five to ten per cent while also delivering improved environmental and health and safety outcomes. A number of Top 40 miners have announced or implemented digital innovations that are already enhancing performance.

While new technologies can be costly to acquire, implement and maintain, the payoff can be significant. Mining companies that genuinely understand technology and leverage it strategically will benefit the most. The challenge will be to combine engineering excellence and know-how with a new open-mindedness to learn from advanced analytics, robotics and other platforms that fundamentally challenge decades of doing things the same way. This is as much about behaviour as technology.

With so many opportunities and hazards on the horizon, the key question for the mining industry in 2017 is: will it act, or simply react?

PwC’s Mine 2017 report is available from www.pwc.com.au/mine2017.


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