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After years of superior returns, mining faces crisis in confidence
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5th June 2013
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PERTH (miningweekly.com) – Global mining net profit declined by some 49%, to $68-bilion last year, as lower commodity prices and higher costs hurt the bottom line, PricewaterhouseCoopers (PwC) reported.

In its tenth annual review of the global mining trends, PWC noted that the mining industry was facing a crisis in confidence, ending years of outperformance and superior returns.

“The first four months of 2013 have been rougher and tougher than at any time in the past decade, with market values plunging $220-billion, or 18%, for 37 of the world’s Top 40.

“After years of outperformance and superior returns, the industry is now facing a crisis in confidence,” PwC Australia’s mining leader Jock O’Callaghan said.

This crisis in confidence has also translated into board changes, with half of the top ten companies having their CEOs replaced in the last 12 months.

The PwC report stated that the market had, among others, lost confidence that costs could be controlled, that new CEOs could deliver on promises, that commodity prices would not collapse and that resource nationalism would not overwhelm the industry.

The 40 biggest mining companies bumped up production volumes by 6% in 2012, but softer commodity prices meant that revenue of $731-billion was only the second year in a decade that mining revenue did not increase.

Operating costs have grown faster than production, with cost inflation in double digits. Employee numbers rose 2% but average employee costs were up 13%. Higher costs to develop lower-grade assets in increasingly remote locations led to a 10% fall in return on capital to 8%.

The report noted that boards and management had heeded investor calls for greater returns, pushing dividends 9% higher to a record $38-billion on a payout ratio that grew from 25% in 2011 to 60% in 2012. Since 2009, dividends have improved more than 150% from $15-billion.

PwC noted that management also started to shift focus, with more attention now placed on managing productivity and improving efficiencies, rather than just increasing production volumes.

“CEOs have told us that now, more than ever, capital expenditure to meet long-term demand will be rebalanced with returns to shareholders. Eight of the top ten have publicly announced that they will maintain or increase current dividend levels,” PwC added.

It was expected that the Top 40’s capital spend would also drop from $140-billion last year to some $110-billion in 2013, as projects were being deferred or scaled back.

On the demand side, the long-term fundamentals were still in place, PwC said, adding that China consumed around 40% of global metal production and would continue to be the industry’s most important customer.

While Chinese growth rates were slowing down, they were coming from a bigger base. This, combined with the continued emergence of large developing economies such as Brazil, India and Indonesia, meant future demand for commodities was healthy.

“But regaining investor confidence depends on how the industry responds to its rising costs, increasingly volatile commodity prices, and other challenges such as resource nationalism.

“Now is the time to show that the industry can deliver in good times and bad. While currently there may be a confidence crisis, we have faith that the long-term fundamentals will ensure mining is a great industry to be in for many years to come,” the advisory firm said.

Edited by: Mariaan Webb

 

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