The marketplace is looking good for the world’s largest miners.
The top 40 largest miners reported record production, revenues, dividends and cash flows in 2018. But as at December last year, their market capitalisation as a group had fallen by 18 per cent against the previous year to $757 billion.
So, what has caused this discrepancy?
The PwC Mine 2019: Resourcing the future report brings together the financial numbers behind the 40 biggest mining companies on the planet.
Generally, the top 40 make up 50 per cent of the industry’s value, and therefore, provide a good picture of how the industry is performing.
PwC believes the issues that are weighing down market valuations are often to do with the public perception of mining, in particular, the industry’s ability to respond to a changing world.
Mining is not an industry where miners talk to their customers, according to PwC mining leader and managing partner Chris Dodd.
A person wearing gold jewellery, for example, wouldn’t ask where his or her jewellery comes from; just like a 15-year-old student wouldn’t ask where the parts of his or her iPhone come from. Or further still, how much copper is in his or her hands right now.
For the first time, some investment mandates are getting rid of mining companies, and not just coal producers, according to Dodd.
“There’s a time in history where people think cigarettes or gambling need to be taken out of an investment portfolio. And once that happens, they never go back in,” Dodd tells Australian Mining.
“You’ll see your market capitalisation starting to go down because people aren’t sure they want to be investing. It is then harder to source capital, it’s harder to grow, it’s harder to invest in technology. That’s a pretty important point in history that we need to think about.”
Dodd is convinced the trend of the carbon constrained world has taken dominance, and that the inconvenient truth of the carbon story hasn’t really been told.
Mining consumers continue to use iPhones, dry their hair and turn the lights and air conditioning on when they get home, but they project ‘a fairly convenient protest’ of mining at the same time, according to Dodd.
This is a challenge for mining companies who find themselves facing two generations of people who perceive mining as ‘evil’.
“Why is the world not interested that mining is doing so well? It’s almost like people disassociate the use of mining from the supplier of mining,” Dodd says.
“People are not listening when the industry speaks of the good things they are doing and that they are providing the resources needed for the future.”
The best example is diamonds. The precious gemstones have become the engagement present of choice and the girl’s best friend. Companies have a way to get to their consumers with these two campaigns, according to Dodd.
Such consumer marketing of the mining product is, however, difficult for coal or iron ore.
Though mining majors have openly acknowledged their need to address the issue in their operations, “we got to tell that story a little bit better, because it’s actually really important that we’re still involved,” Dodd says.
People are dealing with products that are part of the new economy, which are still required in a carbon constrained world.
“In our (corporate presentations), we’ve got one slide that is ‘The world without mining.’ And it’s a black slide,” Dodd says.
This is the picture that appears when putting together the top 40’s historic information – the analysis exposes the ‘bad things’ that happen across the industry, such as the low and success-defying market capitalisation.
Thankfully, mining companies do not measure their success based solely on their share price performance.
The top 40 continued to generate benefits from steady revenue growth (up $51 billion or eight per cent, to $683 billion) and profitability (up $7 billion or four per cent, to $165 billion), as predicted in PwC’s forecast last year.
These numbers are, in fact, the higher revenue and profitability statistics that were seen during the mining boom of 2011-13, according to Dodd.
“If it wasn’t for that last mining boom, we’d be talking about this like it’s the biggest mining boom in the world we’ve ever seen,” he says.
Another topic of conversation Dodd points to is diversity, which according to him, is an area of focus that hasn’t really changed.
He finds it interesting that the front covers of the 40’s annual reports have ‘a lot more women’ than are in their actual businesses.
Though the proportion of women on top 40 boards was up marginally to 21 per cent in 2018, putting miners on par with the average for Fortune1000 companies (21.3 per cent), there was no improvement in the number of women in senior management, which hovered at 11 per cent.
“Mining is, however, an industry where people have been working for 30-40 years. It will honestly take some time for that capability to trickle down all the way through the business structure,” Dodd says.
The report suggests that miners do not assume their current approach will deliver the workforce they need in the future.
More gold, more coal
The top 40 biggest mining companies in the world are topped with familiar names, such as BHP, Rio Tinto, Vale, Glencore and China Shenhua Energy Company, which account for 50 per cent of the total top 40 market capitalisation.
Its new entrants include gold producers Kirkland Lake Gold, AngloGold Ashanti and Polymetal International, and coal company Bayan Resources.
Gold also dominated the top 40 capital expenditure during 2018, attracting $30 billion of investment.
In fact, capital expenditure showed an increase for the first time in five years, albeit from historically low levels and still below 2008 pre-boom levels.
“A lot of the capital expenditure from the boom period went to a decline following 2014-17, allowing mining majors to soak the available capacity without having to spend a lot more,” Dodd says.
“As a consequence, the additional or incremental benefits drop to the bottom line fairly quickly. Various stakeholders, including governments and shareholders, receive a bigger share of the benefit than they might have last time.”
Though there hasn’t been many new major discoveries in the world as deposits are harder and deeper to get to, coal goes against this thematic.
The demands for a sustainable future haven’t shaped the commodity mix over the past decade by a great deal, with coal dropping by only two per cent from 25 per cent in 2006 to 23 per cent in 2018.
Many parts of the world such as China, India and South East Asia are expected to continue to use coal to meet primary energy needs, putting it in equal footing with copper as the largest revenue-generating commodity among the top 40.