There is great optimism surrounding the industry, with increased profits, revenue and spending. How might mining companies take advantage of the current climate, and ensure that the mistakes of the past boom aren’t repeated?
Back in 2010, when the most recent mining boom ended, many observers wondered whether the industry had squandered its good fortune, and if the good times were over for the foreseeable future. PwC’s Mine 2018 report reveals that we may in fact be at the cusp of a second boom in ten years, but not many people are talking about it – at least not yet. Could it be that many of the investment decisions made at the peak of the last boom just before it crashed are now starting to pay off?
Mine 2018 is the latest edition in an annual series that goes back to 2004. PwC has looked at the financial results of the top 40 mining companies globally by market capitalisation up to December 2017, as well as assessing industry trends and providing a forecast for the year ahead.
An impressive set of figures
As PwC’s research shows, the underlying figures up to December 2017 are impressive. In 2017, the market capitalisation of the top 40 global mining companies increased by 30 per cent to US$926 billion. Revenue increased by 23 per cent to US$600 billion, while earnings before interest, tax, depreciation, amortisation and impairments (EBITDA) rose by 38 per cent to US$146 billion.
That 30 per cent growth reflects increased profits, increased revenue, increased cash flow and increased dividends. All in all, it presents a very impressive state of the industry. But is there a risk of returning to the bad habits of the past, where companies spent wildly on increasing production, only to see the bottom to fall out of the market? PwC Australia Mining Leader Chris Dodd thinks this is unlikely, and in fact the current numbers owe a lot to previous investments made when the market was peaking, which many companies have been copping criticism forever since.
‘The industry has maintained costs over this period, and companies haven’t lost their heads to chase tonnes. I think that it’s also to do with the fact that it’s five years on from the really massive investments, and now that they are operational, companies are able to increase capacity as the market has absorbed the extra supply, without having to invest heavily in infrastructure again.’
This more mature approach in resisting the temptation to increase production at all costs means that (for the moment at least) prices have remained relatively high.
A fiscal balancing act
While these strong balance sheets might create a temptation to pursue bold investment and growth opportunities, many of the top 40 mining companies remain focused on maintaining a robust and flexible balance sheet to avoid the pitfalls of the past. But are they in danger of becoming too conservative?
One person who believes this is Glencore chief executive Ivan Glasenberg. At the most recent Bank of America Merrill Lynch global mining conference in Miami, he suggested that if the industry is to ‘pivot to growth’, investment in new pipelines is required – particularly in new geographies across Asia, Africa and South and Central America.
In Australia, where the market is dominated by iron ore (38 per cent of global production), with coal, copper, gold and nickel also in the mix, there are currently no obvious major greenfield opportunities. Even so, the industry has been able to triple iron ore production in recent years without the price dropping through the floor. The story for coal miners is similar, with thermal coal production up 30 per cent year on year. Consequently, miners are beginning to produce cash surpluses, which they will have to decide how they will spend – either giving it to shareholders or through capital investment.
Planning investment in a cyclical industry
One obvious beneficiary of this ‘quiet boom’ is the Australian government and, by extension, Australian citizens. Increased revenues are leading to increased royalty payments, along with income taxes and even employee taxes. While this will make a welcome bonus for government coffers, Dodd warns that decision-makers should be wary of killing the goose that laid the golden egg.
‘When governments talk about increasing royalties or introducing a super profits tax, it does have an impact on the next round of investment decisions. Being greedy now could cause damage in the future.’
Dodd believes that the fact that the last boom came to an end less than a decade ago is a major factor in mining companies making mature investment decisions as revenues rise again. Noting that for most operators, the previous downturn ‘was only one CEO away’, Dodd says the last 3-5 years have been about cost reduction and finding efficiencies. However, like Glasenberg of Glencore, Dodd thinks the cyclical nature of the industry means that this is no time for complacency.
‘One of the reasons companies have been saving is that they’re not spending much on exploration, and they’re not spending much on capex. That has an impact in five or ten years’ time if you haven’t put money into the next wave of investment.’
So while many of the top 40 mining companies are now reaping the benefits of the spending from the previous peak, they need to ensure that when times are good they are not just preparing for the next trough, but also the peak that will inevitably follow.
New entrants staking their claim
The entry of new, non-traditional companies into the sector is something explored in detail in PwC’s previous report, We need to talk about the future of mining. 2017 saw a number of private equity investors confirm their status as potentially significant players, with private equity firms reportedly being active participants in almost every quality coal deal brought to market in Australia during the year. A private equity firm was also involved in the purchase of one of Rio Tinto’s Australian coal assets in March 2018 as part of a US$2.25 billion consortium bid.
Another trend for non-mining companies is to partner or merge with miners to secure critical commodities in their supply chain. Agrium, a Canadian fertiliser and chemical wholesale and retail company, merged with the world’s largest potash producer, PotashCorp. Automotive and energy storage company Tesla has continued to invest in lithium supplies, including their recent transaction with Kidman Resources in Australia.
PwC’s Global Mining and Metals Leader, Jock O’Callaghan, sees no reason for this trend to abate in the short term. He also believes the industry should view these new entrants as a source of opportunity rather than a threat.
‘We expect that interest from non-traditional players will increase in 2018 and beyond, particularly as operating conditions continue to improve. While some incumbent miners will see these new entrants as a threat, others will look to take advantage of their new ideas, capital and ways of delivering long-term value.’
A greater focus on safety
The 2018 global report continues to shine a light on safety practices and statistics in the industry; however, there is further work to be done. In 2017, there was a 36 per cent reduction in the number of fatalities among the 28 companies (of the top 40) that disclose safety statistics. Of the 22 companies that disclose injury statistics, 15 reported that the number of injuries had either fallen or remained consistent compared to the previous year.
While this highlights the improvements that are being made in the operations of some miners, there is still limited disclosure of safety statistics by companies in the top 40, particularly by Chinese companies. In 2017 the Chinese government commenced an evaluation of the safety fund requirements implemented in 2014, demonstrating a renewed focus on safety.
There is undoubtedly a direct link between levels of disclosure and improvements to safety performance. The numbers for fatalities disclosed in South Africa and India – two countries accounting for over half of the disclosed fatalities in 2017 – are down by one-third and one-half respectively when compared to ten years earlier.
In Australia, many of our mining companies represent world’s best practice when it comes to using technology and automation to improve worker safety. For example, drones and other types of driverless vehicles are enabling companies to reduce the exposure of employees to potentially hazardous environments.
While there is always room for further improvement, the industry should be commended for its efforts to continually reduce health and safety risks to its employees.
2018 and beyond
The authors of PwC’s global industry report have, for the first time, included an outlook on results for the following year. They suggest that the industry can expect the improved performances witnessed in 2017 to continue in 2018.
The projections are based on historic performance, in conjunction with estimates of future key variables such as price, production and input costs. The report cautions that despite the success of cost-saving initiatives to date, operating costs are expected to rise as a result of inflationary pressures on input costs. However, revenues are predicted to continue to increase on the back of higher prices and marginally higher production volumes.
Mine is an analysis of trends based on the financial performance and position of the global mining industry as represented by the top 40 global mining companies by market capitalisation. For more information, see www.pwc.com.au/mine.
Feature image: SeventyFour/Shutterstock.com.