Australia’s mid-tier mining sector has hit a turning point, with higher commodity prices and cautious spending improving returns.
According to PwC Australia’s Aussie Mine report, which looks at 50 of the nation’s largest ASX mining companies with a market capitalisation of less than $5 billion, the sector now has a golden opportunity to prosper in this new, more positive environment.
The report found revenue of the mid-tier miners was up on average 15 per cent, with operating costs flat, while impairments are at their lowest levels since 2011.
EBITDA (earnings before interest, taxes, depreciation and amortisation) margins were the highest recorded in over a decade, at 34 per cent and the MT50 returned to a collective net profit for the first time in five years.
Capital expenditure increased 35 per cent (excluding MMG’s capex reduction) in the last year, primarily focused on brownfield and expansion projects, while available cash was pumped into debt repayments, up a massive 64 per cent on 2016, and the level of new debt issued almost halved.
Investors enjoyed the 41 per cent increase in dividend payments, but with operating cash flows up 33 per cent and cash on hand increasing almost $1 billion, the report suggests shareholders may be left wanting more.
PwC Australia mining leader Chris Dodd said the increased investment in infrastructure in 2010/2011 was now paying off for many companies which are reaping the rewards in increased capacity to expand operations.
“It is a huge positive to see that the unprecedented mining investment boom is now allowing increased productivity and, combined with improved commodity prices almost across the board, we are seeing measured responses in terms of debt reduction and increased dividends,” Dodd said.
Dodd said the coal sector was a big improver with the most growth in terms of market capitalisation.
“It’s still a commodity with relevant demand and troubled supply dynamics – not one for the feint-hearted investor,” Dodd said.
He said gold remained a star but there was a significant increase in the number of mid-cap lithium players.
Dodd said the improved commodity prices were more sustained and expected to continue in the near future.
“We are into the next phase of the economic clock where you can expect to see good returns, increased activity, and increased inflows,” he said.
“Australia is very good at producing the resources and minerals we have but the productivity is nearly all from brownfield expansion. Little growth is coming from new discoveries or new mines and future supply is currently a significant factor in commodity price increases.
“We need to see the replacement of reserves as they are being diminished and this has been a problem for quite a while.”