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Strong fundamentals positioning miners to adapt to changing shareholder expectations

STRUGGLING FOR FAVOUR According to PwC's 2019 report, there is an agreement that mining will continue to struggle for favour

REPORT LAUNCH (Left to Right) PwC partner Andries Rossouw, PwC director Sizwe Mtetwa and PwC Africa energy utilities and resources leader Michal Kotzé at the launch of the report

Photo by Creamer Media's Dylan Slater

5th July 2019

By: Simone Liedtke

Creamer Media Social Media Editor & Senior Writer

     

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Despite the world’s top 40 miners consolidating their performance over the past several years, they are “not getting the credit for it”, according to consultancy PwC’s ‘Mine 2019: Resourcing the Future’ report, which provides key trends for the mining industry and PwC’s view on what those trends hold for the future.

According to PwC partner Andries Rossouw, the market is affected by the impact of macroeconomic volatility in the form of a constrained global economic growth outlook and trade wars.

Despite these miners – as a group – having increased production, boosted cash flow, paid down debt and provided shareholder returns at near record highs, all while delivering significant value to stakeholders, “investors seem unimpressed”, the report notes.

Structurally, however, PwC finds that companies require a more-than-solid financial performance to attract investors.

“Our report states that investors and other stakeholders have concerns around the industry’s perception on vital issues such as safety, the environment, technology and consumer engagement. While the industry has done well to demonstrate change in these key areas, a lot more has to be done for that perception to change,” Rossouw tells Mining Weekly.

Investors and consumers seem to be down on the brand of mining, and question whether the industry can create sustainable value for stakeholders.

Rossouw says the report, released on June 4, has been received positively by the industry.

Minerals Council South Africa spokesperson Charmane Russell says the council agrees that far more than a good financial performance is required for the mining industry to continue creating and realising value sustainably.

The reasoning of the Minerals Council mirrors that of its global peers, where these issues have been receiving increased attention since the 1990s.

For example, Russell notes that the Minerals Council and several of its members have committed to adhering to the International Council on Mining and Metals’ (ICMM’s) ten principles for sustainable development.

The ICMM’s principles include applying ethical business practices and sound systems of corporate governance and transparency to support sustainable development, and implementing effective risk-management strategies and systems, as well as pursuing continual improvement in health and safety performance, with the ultimate goal of zero harm.

The Minerals Council followed the ICMM’s example in 2015, with all its members now required to, and having signed commitments to, adhere to a similar membership compact.

“The most important focus areas are ethical behaviour, respect for human rights, health and safety, good environmental management, as well as contribution to local economic development and respectful stakeholder relationships,” Russell tells Mining Weekly.

While PwC sees “a continuation of the strong operation performances and pockets of progress”, in the broader context, there is agreement that mining will continue to struggle for favour, especially when geopolitical issues and consumer demands continue to create industry volatility.

The Minerals Council says mining can expect to be the focus of critics.

More than most sectors, mining can potentially impact on climate change and other environmental areas, while also sometimes operating in countries with unstable governments and weak regulatory standards, Russell comments, adding that the industry should not expect this to change much in the short term.

PwC laments the unlikely scenario of the global mining industry experiencing a quantum shift that will enable it to keep pace with technological changes and opportunities, climate change requirements, as well as consumer demands.

“Without such a shift, we expect the awareness gap between the brand of mining and the benefits of mining to continue to widen,” the consultancy says.

Its report states that there is a window of opportunity for the mining industry – created by strong operating fundamentals – to adapt to growing and changing shareholder expectations over the next few years.

Steady Performance

The top 40 companies – including BHP Billiton, Rio Tinto, Glencore, Anglo American, Barrick Gold and First Quantum Minerals – showed continued steady growth in revenue and profitability in 2018, as predicted by PwC.

Combined, these companies’ revenue increased 8% year-on-year, buoyed by higher commodity prices and marginally improved production. Earnings before interest, taxes, depreciation and amortisation increased by 4% and net profit increased by 1%.

However, PwC says the top 40 companies did not get credit for the performance, judging by the 18% drop in market capitalisation. While total market capital increased in the first quarter of this year, it remains 8% lower than what it was at the end of 2017.

“In spite of the strong operating performance of the world’s top miners, there is still more room for improvement to continue to create and realise value in a sustainable manner,” PwC Africa energy utilities and resources leader Michal Kotzé said at the report launch.

In line with expectations, capital expenditure (capex) started to rise again during 2018, albeit from historical lows, PwC says. The 13% increase over the previous year to $57-billion suggests that miners continue to proceed cautiously, with about 48% of capex allocated for ongoing projects, with relatively few new projects approved or initiated.

Copper and gold dominated spending in 2018, attracting $30-billion of investment. Coal capex was consistent year-on-year, the report says, with PwC expecting miners to maintain current production levels while the coal price is high to maximise profits.

The report notes that, with the long-term coal price forecast to soften, it is likely that capex for new development will be delayed. Iron-ore also showed consistent capital spending over the past two years.

Further, the share of value distributed to governments as direct taxes and royalties increased from 19% to 21%, while employees received 22% of the total value distribution from these miners.

Rossouw says that mining, along with oil and gas, distributes a greater share of its value to governments than almost any other sector, as, in addition to income tax, it also pays royalties on resources exploited.

Most of the top 40 miners have also targeted further reductions in greenhouse- gas emissions of between 3% and 5% by 2020. While this is a positive step, the report states that miners do not appear to have kept up with peers in other sectors.

Rossouw adds, however, that several countries are implementing carbon taxes and/or emissions trading schemes, with mining companies gearing up for a low- carbon world.

The report says that, in formulating their actions on carbon reduction, miners need to consider the impact of their activities and the downstream uses of their commodities.

Meanwhile, amid regulatory and political challenges, Rossouw tells Mining Weekly that the industry will continue to see the impact of geopolitical issues and climate change in the short to medium term.

“Prioritising green and client- centric strategies, enabled by technology, will help earn the trust of stakeholders and enable miners to create sustainable value into the future.”

To restore faith, he suggests that leading miners prove that they are not only keeping abreast of change but also adapting to uncertainty.

Further, although the representation of women on the boards of the top 40 companies increased marginally from 19% in 2017 to 21% in 2018, there was no improvement in the number of women in senior management, which hovers at 11%.

Safety also remains a challenge, with fatalities in 2018 having increased from 96 to 102; this information was provided by the 20 companies in the top 40 that disclose safety statistics. Safety does, however, show an overall improvement, with fewer accidents reported, PwC says.

Critical Differentiators

Technology is becoming a critical differentiator for the world’s leading miners, which could use technology and automation to make risky activities safer, the report states.

It suggests that, with increased auto- mation and digitalisation, companies should focus on harnessing technology to reduce the cost of maintenance and extraction.

However, compared with other industries, mining’s level of technological maturity “is still relatively low”, as only seven of the top 40 companies have a chief technology officer, CIO or chief digital officer in their senior management teams, according to the report.

“Miners need to look beyond their backyard to learn from the best of the Fourth Industrial Revolution and apply that thinking to mining,” the reports states, highlighting that the benefits of becoming a “digital champion are significant”.

Outlook

In 2019, pressure on margins is starting to show and the outlook currently assumes flat revenue.

PwC suggests that mining companies should use their strong balance sheets and cash-generating abilities to make the difficult, yet essential, transformation towards a low-carbon, high-technology and consumercentric future: “With investor sentiment starting to turn, the time for miners to act is now.”

Edited by Mia Breytenbach
Creamer Media Deputy Editor: Features

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