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Capital expenditure to continue downward trend

29th November 2016

By: Henry Lazenby

Creamer Media Deputy Editor: North America

  

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VANCOUVER (miningweekly.com) – Despite a modestly more buoyant outlook for key metal prices, mining capital expenditures (capex) are expected to continue on a downward slide over the next three years as miners seek further cost cuts and to improve operational margins, according to analysis by Fitch Group research arm BMI.

Capex has been in decline since 2012, with miners focusing on a strategy of retrenchment, project cancellations and divestment of high-cost assets to balance books and improve margins.

“We expect this trend to continue as miners will continue to pursue a strategy of greater capital and supply discipline, which will result in further capex cuts to rein in global supply,” analysts stated in a recent industry trend analysis.

They added, however, that cancellations and a retrenchment strategy would offer limited additional gains, prompting miners to increasingly focus on maximising revenue at existing assets and increasing efficiency overall.

This will be done by focusing on streamlining mine processes and targeting innovation to improve operational efficiency.

BMI states that capex will continue its decline, albeit at a far slower pace, as miners continue to pursue a strategy of greater capital and supply discipline in the years ahead.

There will not be one uniform capex trend as investment in metals, including tin, gold and zinc, will fare better than minerals, such as coal and iron-ore, owing to a more resilient price recovery over the coming years, according to BMI.

FOCUS ON DISCIPLINE
BMI's analysts pointed out that the operating environment for miners had changed drastically in recent years, and industry players have had to reassess their strategy and investment plans. Since 2012, miners have struggled to cope with falling mineral prices and declining revenues.

“After four years of severe decreases, we have turned modestly positive towards metal prices for the coming years. Despite this, we do not expect a full recovery to heights seen in 2011 over our forecast period to 2020."

The analysts hold a modestly positive view on metal prices as additional infrastructure spending by China and developed markets is expected to provide a boost to prices over the coming quarters. "We expect capex to continue its decline over the next three years in terms of absolute value, as we continue to expect greater capital and supply stabilisation in the years ahead,” they added.

While BMI forecasts total spending to fall in the quarters ahead, there will not be one uniform trend. Several majors have scaled back significantly on their capex plans, as evidenced by BHP Billiton slashing more than $2-billion of expected capex year-on-year for 2017.

Copper, zinc, tin and gold will see strong mining project pipelines on the back of relatively strong investment into brownfield and greenfield projects. Meanwhile, iron-ore and coal capex will see a slowdown in project investment as prices will remain at or below costs of production over the coming years, says BMI.

Major miners will increasingly direct capex towards innovation, using technology and automation to improve efficiency and increase output at existing mining operations.

Edited by Samantha Herbst
Creamer Media Deputy Editor

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