Overall global mining market values plummeted by 23% last year to $958 million as gold miners were particularly hit hard, says a new PwC report.
‘2013 was a year that forced the global mining industry to realign expectations in one of the most difficult operating environments for years,’ said PwC in its latest Mine report published last week .
Led by gold’s greatest decline in three decades, commodity prices decreased significantly and mining stocks fell 23% in 2013.
Coupled with record impairments of $57 billion last year, global mining’s net profits plunged 72% to a decade low of $20 billion in 2013.
Gold miners endured another particularly bad year, losing $110 billion off market capitalization, accounting for almost 40% of the overall reduction in market capitalization last year. ‘Five gold companies fell out of the
Top 40 in 2013, exacerbating this drop in value,’ PwC noted.
Gold reserves fell 8% in 2013 to 431 million ounces. ‘The gold miners most significantly impacted were
Barrick and Goldcorp which together de-recognized 22 million ounces in reserves as a result of lower price assumptions,’ according to the report.
The Top Five diversified miners remained stable, however, remaining at a collective market capitalization of half a trillion dollars over the past three years.
The changing global mining landscape also includes a sharp difference in the collective profits between emerging market mining companies and their developed market counterparts, PwC noted. Last year’s net profits from emerging market mining companies totaled $24 billion, compared to an aggregate net loss of $4 billion for developed market companies, which were substantially impacted by impairments.
Emerging markets also account for 60-80% of the new reserves added globally during the past decade to 2013, the report observed. ‘These markets bring enormous opportunity for the industry, but such opportunity is tempered by complexity and risks due to the relative differences in political, legal and business practices.’
Only four of the Top 40 mining companies showed an increase in market capitalization last year, according to the report. This group included Freeport-McMoRan Copper & Gold, iron ore miner Fortescue, copper and gold producer First Quantum Minerals, and Polyus Gold. Emerging market companies, Saudi Arabian Mining and Russian diamond miner Alrosa, joined the Top 40 for the first time last year.
Exploration spending was down more than 30% in 2013 and capital expenditures are expected to decline by more than 10% this year. Net debt increased 42% during 2013 as miners extended their repayment periods, according to the report.
In its analysis, PwC observed that the world’s top 40 mining companies were comprised ‘of more companies from emerging markets than traditional mining centres, and this trend looks set to continue’.
New CEOs have also been installed in nearly half of the top 40 mining companies over the last two years.
Maintaining dividend levels, exercising more selective capital allocation and active portfolio management are just some of the tools being used by the global mining industry to restore investor confidence in the sector, said PwC.
Traditional quick-fixes such as idling a mine equipment fleet, reducing employees, slashing costs, and deferring capital expenditure were also utilized last year, said the report.
Among the more fundamentals shifts in strategy emerging in the mining industry is a push to simplify structures and focus on extracting value from higher quality assets; a move to sharing mining infrastructure to reduce operating costs, realize efficiencies and spread capital and risk; and a commitment to addressing lower productivity levels, said PwC.
‘Despite diminished profitability and shrinking cash, underlying performance in the industry as represented by adjusted EBITDA, withstood the tough conditions, only down 8% in 2013, said PwC Global Mining Leader John Gravelle. ‘Dividend yields also contribute to increase with gross dividends paid up 5% and dividend yields slightly up to 4%.’
Nevertheless, Gravelle observed, ‘The question remains as to who will be bold enough to thrive in these difficult times.’
‘M&A activity which was surprisingly subdued in 2013 seems to have started to pick up in early 2014,’ he noted. ‘And backed by a stronger U.S. economy and continued strength demand from China, the market is impatient to see demonstrable returns from recent strategic choices to deliver against the mantra of lower costs and higher productivity.’
‘2014 has seen some traces of calm return to mining markets with market capitalization for the largest 40 mines stable, evidence that some level of confidence may be returning,’ said Gravelle.
Measuring the success of cost-saving initiatives will become more apparent this year, as operating costs were up 4% in 2013 while free cash flow entered into negative territory for the first time in PwC’s Mine series. Deferred capex expenditure was commonplace, ‘particularly in light of current returns of capital employed against targeted project hurdle rates’, PwC observed.
This year’s projected capex for the 40 major mining companies surveyed by PwC totals $116 billion, down 11% from 2013.
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