Mining sector faces confidence crisis: PwC

Globally the mining sector is facing the flow on effects of uncertainty and a lack of confidence, a report has found.

According to PricewaterhouseCoopers’ 10th annual global report, Mine: A Confidence Crisis, rising costs, profit falls, and dropping planned capital expenditure are all signals that the sector is in for a tough ride.

PwC’s annual report reviews the financial performance and position of the global mining industry as represented by the top 40 mining companies by market capitalisation.

“The global mining industry lacks confidence about whether costs can be controlled, whether capital returns will improve and whether commodity prices will not suffer a collapse,” PwC Australia’s energy, utilities and mining leader Jock O’Callaghan said.

In Australia mining has long been credited for protecting the economy from the full affects of the GFC.

“Because mining played such a pivotal role in Australia’s miracle economy, staving off the full effects of the GFC, the response from industry and government will be critical,” O’Callaghan said.

“Hanging in the balance is everything from short-term tax revenues to whether the nation can hold on to its proud performance of economic growth and global competitiveness.”

Last year was the second time in a decade that revenues failed to grow; 2012 saw profits of the world’s 40 mining giants drop almost 50 per cent or $US68 billion, levels not seen since 2006, the report found.

Adding to the flailing results was a 9 per cent rise in costs which climbed to $US340 billion.

“The plunge in profits is worse than the GFC, and the profit plunge is the deepest in the past decade – maybe the biggest ever. The same applies for return on capital employed,” he said.

Mounting calls for shareholder accountability have been further fuelled by heightened impartment charges, which the report found amounted to $US45 billion.

“This may seem trivial when weighed against a record total asset base of $US1.2 trillion but given it equates to 27 per cent of 2012 investing cash flows it is no wonder there is a strong chorus of shareholders seeking greater capital discipline,” O’Callaghan stated.

The top 40 global miners’ shares on the whole remained steady in 2012.

But the report found gold miners were the exception, losing on a whole about 15 per cent in market capitalisation.

However the share market has not been so kind in 2013, with share prices among the top 40 falling almost 20 per cent in the four months to the end of April.

And plummeting gold prices has seen the sector lose another $US58 billion in value in the four months to the end of April 2013.

 “The first four months of 2013 have been rougher and tougher than at any time in the past decade, with market values plunging $US220 billion, or 18 per cent, for 37of the world’s top 40,” he said.

Mounting operation costs

Miner’s operating costs are growing faster than production, the report found.

Increasing labour costs and higher development expenditure as a result of lower grade assets were the two key contributing factors.

In Australia the industry is responding with stringent cost cutting agendas, cutting jobs, slashing exploration budgets, and putting underperforming assets up for sale.

“Longer term, the industry needs to find a path that leads to sustainably lower costs and capital efficiencies that boost productivity and margins,” O’Callaghan stated.

“The industry must continue its focus on productivity, not just austerity.”

According to PwC’s report the top 40 miners also plan to cut capital expenditure in 2013 to $US110 billion, down 21 per cent from $US138 billion in 2012, a figure which reflects a string of project deferrals in recent months.

Future demand

Despite Chinese growth slowing, the Asian powerhouse is still consuming about 40 per cent of global metals.

A Chinese slow down will come off the back of a bigger base, with annual iron ore import volumes almost tripling since 2005, copper imports almost doubling in value and overall GDP more than doubling, the report explained.

“Although the growth experienced over the past eight years can be expected to moderate we remain optimistic in our outlook on China. But the industry should not ignore the potential for further fluctuations in real growth rates,” he said.

With five of the top 10 global miners replacing their chief executives in the last 12 months, change is in the works and priorities are shifting.

“A new generation of CEOs is in place at the top. How the events of the next few years transpire will fundamentally shape the industry for the next decade and beyond.

 “Fortune is no longer so favourable for the industry as in the past. It is now up to the top-40 to show that the industry can deliver not only in the good times, but in the tough times as well.”

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