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Productivity efforts fail to flow through to midtier bottom line

25th November 2014

By: Esmarie Iannucci

Creamer Media Senior Deputy Editor: Australasia

  

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PERTH (miningweekly.com) – A new study by advisory firm PwC has revealed that despite the Australian mining industry’s efforts to boost productivity, there has been little impact on the bottom line of midtier miners.

In its eighth yearly analysis of the 50 biggest Australian mining companies with a market capitalisation of less than A$5-billion, PwC noted that the outlook for the top 50 midtier miners remained clouded, with the recent iron-ore sell-off yet to be balanced by the fall in the Australian dollar.

PwC energy, utilities and mining leader Jock O’Callaghan said on Tuesday that efforts to boost productivity have so far failed to flow through to the bottom line, with $1.6-billion in combined losses reported in 2013/14 despite 10% revenue growth to $24.5-billion.

He pointed out that volume growth accounted for nearly all the revenue improvement and followed the 30% increase in volumes last year.

“Since PwC started this research in 2007, net assets have grown almost 4.5 times on the back of some A$30-billion in capital investment. In contrast, revenue has grown just 2.8 times, or less than A$16-billion.”

O’Callaghan said that the numbers indicated why boosting capital and operating productivity had become the number one preoccupation for investors and the industry.

“Unfortunately, when looked at as a whole that focus has yet to reap any discernible bottom-line benefit, and we expect the year ahead to be another punctuated with red ink.

“In fact, the worst may be yet to come, at least for iron-ore and coal miners,” he warned.

The report warned of a painful 2015 for midtier iron-ore and coal miners, with large write-downs expected and some miners likely facing the risk of failure unless they were able to curb costs.

PwC noted that miners able to assert control over costs, productivity and innovation were more likely to prosper during the economic downturn.

“This report shows that those miners that can wrestle control over the things that can be controlled are standing out from the crowd,” O’Callaghan said.

The PwC analysis noted that overall, the market value grew 5%, equal to a A$1.9-billion rise, to A$36.8-billion – a big improvement on the 33% wipe-out the year before but still less than half its March 2011 peak of A$75.3-billion.

But with the drastic drop since June 30 in commodity prices – most notably iron-ore - the sector’s value slumped 10% to October 31, wiping out all 2013/14’s gains.

However, despite the dire predictions, O’Callaghan noted that the merger and acquisition market was showing signs of life among the 50 top midtier miners, noting that 14 deals were completed or announced by the end of September, worth about A$3.5-billion.

This was up from the A$900-million worth of transactions recorded last year.

“The strong pick up in deal activity is a good indication that many in the industry believe the market’s hit rock bottom. Not only are we seeing more deals and bigger deals but the buyers from the mid-50 were funding their deals out of sheer balance sheet strength.”

However, he added that the absence of debt and equity raisings to fund deals was notable.

“The austerity of recent years may not have led to higher productivity, but it has helped restore balance sheets. Also of interest is the way the big miners’ unloved assets have fed the midtier’s appetite for growth.”

Meanwhile, the analysis of the top 50 midtier miners also revealed a worrying trend regarding exploration, with O’Callaghan warning that if the continued decline in exploration expenditure was not reversed, it could have a material impact on the future prosperity of the Australian miners.

“Broadly speaking we maintain that the critical long-term trends like global resource scarcity, urbanisation and shifts in economic power should continue to underwrite the mid-50s' future – but with one critical caveat – this continued decline in exploration,” he said.

He pointed out that in the past year, exploration spend fell between 20% and 30%, a fall from about A$1.1-billion last year to about A$800-million this year.

This compared to a fall of about 10% the year before.

“This is an issue not only for the midtiers, but also for the majors and ultimately, for a commodity-based economy such as ours, for all of Australia. The midtier is the traditional source of the industry’s most valuable projects, but it will lose that mantle without significant change,” O’Callaghan said.

Edited by Mariaan Webb
Creamer Media Senior Deputy Editor Online

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