VANCOUVER (miningweekly.com) – Increased cash flows, merger and acquisition (M&A) activity and new debt issues have helped many of the world’s top miners strengthen their balance sheets in 2016, reflecting miners’ response to investor messages around capital discipline, according to new analysis from PwC Canada.

"As the global mining industry is moving out of a challenging time into a period of recovery, it is very encouraging to see Canada as an international mining leader in a variety of areas. Having four Canadian-based companies among the largest metal streaming and royalty businesses in the world demonstrates Canada's leadership, not only in alternative financing, but in the sector as a whole," stated PwC Canada’s national mining leader, Liam Fitzgerald.

Miners put a strong effort into strengthening their balance sheets in 2016. Commodity prices rebounded last year, but mining companies opted to play it safe, deferring to investors’ demands and expectations rather than investing in exploration at a time when costs remain low, according to the professional services firm's 'Mine 2017’ report.

Debt repayments totalled $93-billion, up from $73-billion a year earlier. Asset sales in 2016 were mainly strategic – rather than fire sales – and most transactions appeared to be value accretive to shareholders, PwC said.

Miners, especially diversified players, sold minority stakes in non-mining businesses. Most of the debt that was issued was used to refinance, rather than for acquisitions or mine development.

With the reduced borrowing, the Top 40 closed the year with a gearing ratio of 41%, a significant improvement from the 2015 record of 49%, but still well above the average of the last ten years of 29%.

Because of debt reduction, paired with the increase in market capitalisation, overall net debt as a proportion of market capitalisation for the Top 40 decreased significantly, down from 45% in 2015 to 28%, PwC has found.

As a result, credit ratings agencies rewarded miners for their debt management strategies by upgrading several players. The average rating rose from just-above-junk BBB– to BB+, and some major miners, such as Anglo American, restored their investment-grade status.

First Quantum’s successful debt management strategy helped bring the company back into the Top 40. Similarly, Anglo American and Freeport-McMoRan jumped up the rankings (to 9 and 10, respectively) because of drastic debt retirement and the avoidance of any new debt issuances in 2016.

IMPAIRMENTS DOWN
After hitting a near-record in 2015, impairment charges tumbled last year to a less-alarming $19-billion.

Encouragingly, most of the recent impairments have related to noncore assets. Sixty-three per cent of the 2016 total involved energy assets. Mining assets impaired included $2-billion worth of manganese, $1.5-billion of nickel and $1-billion of coal. This is a far cry from the $36-billion writedown of core mining assets in 2015,” according to PwC.

Notable 2016 impairments included BHP’s $7.4-billion, Freeport’s $4.3-billion, and the balance of $7.3-billion made up by Glencore, Vale, Anglo American, Newmont and South32.

Despite impairment charges falling in 2016, miners also scaled down on capital expenditure (capex) in 2016. Hence, impairments taken by miners were still almost 40% of the capex incurred in 2016. This percentage is close to the average of the impairment as a percentage of capex, PwC explained.

As part of the focus on the capital allocation and the underpinning of their balance sheets, the Top 40 reduced the outflow related with capex. Closer inspection of the Top 40’s 2016 capex revealed that about half of capex was related to sustaining activities, implying that only half of the $49-billion was growth capital, with the remainder used to maintain operations.

Impairment losses were also reduced, mainly owing to the significant impairments recognised in the prior year, and more stable business conditions.

The report also found that, despite both indicators being below the prior year’s level, the proportion of impairments/capex (39% in 2016) has reduced to a level that is similar to 2012 (33%) from the peak of 2015 (77%), which indicates that miners are responding to messages around capital discipline.

CANADIAN LEADERSHIP
Last year, Canada received more exploration investments than anywhere else in the world, attracting 14% of the total global exploration budget. Australia came a close second with 13%, followed by the US with 7%. Africa accounted for about 13% of the global exploration budget, and all of South America combined saw about 22% of global exploration expenditure.

Canada also led the way on equity financing in 2016, with the TSX and TSX-V exchanges responsible for 57% of global financings during the year, according to the TMX Group and S&P Global Market Intelligence.

"By being the top destination for exploration in the world, Canada is able to stay active when it comes to major future global mining projects, keeping the country a preferred mining target from an operations standpoint, as well as displaying Canadian miners’ exploration skills and expertise,” noted PwC Canada senior manager for assurance in mining Maxime Guilbault.

Canadian companies’ rising valuations kept pace with those of their international counterparts, and six Canada-based miners made the global Top 40, as their aggregate market valuation soared by 46% last year.

Moreover, with four Canada-based companies ranked among the five largest metal streaming/royalty businesses in the world, Canada is at the forefront of alternative financing. These financial innovators were recently trading at an average price to net asset value of 1.3x, compared with a value of 1.0x for members of the Top 40.

Members of the Top 40 limited the number of new mining investments made in 2016, favouring geographies considered to be more politically stable for such investment. Even with commodity prices rebounding and operating costs at a cyclical low, miners are continuing to be cautious with new investments.

Continued financing and strong investment in the Canadian mining sector is a key driver in attracting a strong and diverse talent pool of industry professionals. In 2016, Canada-based members of the Top 40 demonstrated a leadership role in their commitment to diversity. Women filled 21% of the board of director seats in Canada, compared with 16% among the non-Canadian companies.

Meanwhile, Canadian mining companies are also leading the charge in early adoption of new technologies. Goldcorp recently began using a cognitive computing system, which can learn from interactions with data and humans. Barrick Gold has begun to work with Cisco Systems to embed digital technology, with the aim of improving decision-making and performance.