Miners wasted the boom, PwC says

Nearly a third of capital expenditure spent by the top 40 major miners since 2010 has been wasted, according to a new PricewaterhouseCoopers’ report.

The 13th annual Mine: PwC study into the largest 40 miners by market cap found the largest collective net loss in the top 40’s history, totalling US$427 billion.

“2015 was a race to the bottom with many new records set by the world’s 40 largest mining companies,” PwC stated.

The report unveiled that of the US$623 billion in capital expenditure invested over the five year period from 2010 to 2015, nearly 32 per cent, or US$199 billion, was booked as impairments.

PwC blamed a “lack of capital discipline”.

It went on to state all the ground gained during the boom was effectively negated, adding that “the collapse was all the more painful for producers in 2015 because the value destruction was perceived as self-inflicted”.

PwC Australia’s mining leader, Chris Dodd, told the AFR it was clear the industry squandered the boom.

“You would have to think if you were an investor in the industry the way to have made your money was to sell at the top,” Dodd said.

“The money hasn’t come through in dividends, the money hasn’t come through in capital accretion and it is not there anymore.”

This position was supported by the PwC report, which outlined evidence “signalling an almost stagnant investment environment”.

Much of this was driven by oversupply issues throughout most commodities – particularly in coal and iron ore – coupled with little action taken to reduce existing stockpile levels.

“The long-term nature of projects means the decisions are made a fair way in advance … but we are potentially guilty of looking at long-term price assumptions without looking at long-run supply impacts of what these changes would mean,” Dodd said.

“Really these prices are coming off because of the supply that is coming online. In economic modelling that is foreseeable.

“Maybe that was the time to decide it is not the time to construct because the mechanisms are telling us you have to pay more than it is worth,” he said.

“We did it anyway and realistically we are now paying the price for that.”

WoodMac’s coal analyst Andy Roberts was more succinct for the reasons behind the wasting of the boom: “Too much stimulus. Too little demand. A suspension of reason.”

However, despite this PwC believes the industry has taken action to right the mistakes of the past five years.

“A positive focus on cost reduction resulting in a 17 per cent drop in operating costs against a backdrop of higher production volumes and lower input costs – an impressive achievement given the production increases seen during 2015.”

This has been driven by cost-cutting exercises by the majors, such as BHP, Rio Tinto, Anglo American (which has taken some of the most drastic measures), Vale, and Fortescue.

Even smaller companies like South32 have followed this path, driving down debt and operating expenditures.

“In just 12 months, we’ve radically restructured our operations to reset the cost base and we’re on track to achieve controllable cost savings of $US300 million this financial year,” South32 CEO Graham Kerr said.

He went on to say they plan to reduce capital expenditure by US$218 million in the 2016 financial year.

“The reality is, prices have been worse than our low-case scenario ever envisaged. Yet, we have reduced net debt by US$692 million.”

Movements such as these have resulted in positive action on the Bloomberg Commodity index, which is on track to close more than 20 per cent above its January low, according to Bloomberg, putting the industry within the definition of a bull market.

The Bloomberg World Mining Index itself is also up 23 per cent following a three year long rout.

“The broad-based recovery in commodity markets this year has tipped several markets into bull market territory,” Mark Keenan, head of commodities research for Asia at Societe Generale in Singapore told Bloomberg.

“Overall, sentiment is good but remains cautious, the market is evolving significantly.”


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