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Mining’s revival making slow and steady progress – PwC

3rd July 2014

By: Simon Rees

Creamer Media Correspondent

  

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TORONTO (miningweekly.com) – Despite the economic supercycle having reached its bottom, the mining sector will continue to feel pressure from the difficulties experienced over 2013, PwC mining practice partner James Lusby recently told an audience at the Canada-South Africa Chamber of Business’s ‘Innovative Financing’ symposium.

“We feel that we’re coming off the bottom; costs are generally getting under control, investors are starting to look at the sector again and valuations have stabilised, if not yet gone up,” he said.

TOP 40 TROUBLES

Lusby noted that last year’s economic headwinds had a significant impact on the industry, resulting in $57-billion in impairments recorded by the world’s top 40 mining companies. “And this was on top of $46-billion in impairments recorded in 2012. Of the $57-billion from last year, $27-billion related to gold companies,” he said.

Profits for the top 40 fell, with gold producers hit hardest for a cumulative net loss of $20-billion. “There’s been a small recovery [in the gold price] during the first quarter of 2014 and, while still volatile, it’s been in a much narrower band of [between] $1 250/oz and $1 300/oz,” Lusby noted.

“Gold production was up 2% [over 2013] and there’s still debate as to whether gold companies should have produced so much given the significantly lower prices, or whether they should have held off until prices increased in the future,” he added.

Nickel’s 2013 performance was “dismal”, although Lusby highlighted the support experienced so far in 2014, stemming from Indonesia’s decision to ban nickel ore exports. “Copper prices also saw a downward trend, partly driven by short-term supply factors as more supply is coming onto the market in the near term and also because of uncertainty over Chinese demand,” Lusby added.

For investors, mining’s performance had been poor when compared with the FTSE or the Dow. Effective December 2013, the year-on-year return on capital stood at 5%, he noted. “This compares with the fiscal crisis of 2008/09, when the return on capital employed was at 10%."

“But it’s always darkest before the dawn … and although prices took a beating, revenues only declined overall by 2% last year,” Lusby added.

The drive to reduce costs remains crucial too. “We’ve seen companies really start to realign their cost structures,” he said. “And with profits down, cost savings have been essential across the industry.”

BATTLING BEARS

Lusby highlighted the bear market effects on exploration investment and the junior mining sector. “There was a 20% reduction in exploration spending over 2013 and we expect this lower level to continue through 2014 as companies tend to drill nearer to hole and nearer to home on existing projects rather than on greenfield sites,” he noted.

“That said, emerging-market companies continue to expand drilling, although this is at a much lower percentage of the overall spend,” Lusby added.

“In thinking about the Canadian junior sector, each year we analyse the top 100 TSX Venture companies. In 2013, there was a 33% reduction in exploration from around $750-million to $500-million year-on-year,” he said.

The reduced level of mergers and acquisitions (M&A) had also been felt by the juniors. “The junior space has always been a breeding ground … to feed larger operations and we continue to see the pressure that reduced M&A by larger companies has had for juniors,” Lusby pointed out.

“And while the wave of delistings for juniors hasn’t occurred as we thought, many are at the minimum spend levels to survive at the bottom of the market. It’s unlikely they’ll be the first to recover once the markets do turn [around]; the expectation is that the larger companies will reap the benefits first,” he added.

Longer term, the outlook is nonetheless bright. “[Here’s] the good news: we believe the fundamentals are still strong from a long-term perspective. While reserves were reduced in some sectors, especially gold, which went down by 8% due to the lower pricing last year, the ore is still there in the ground,” Lusby said.

“Beyond 2014, growth in developed economies is projected to return, just as an overall broader economic confidence returns to the markets,” he noted. “And demand from China still leads the way.”

Certainly this is applicable in relation to gold’s physical demand. “China remains a net importer of gold notwithstanding the fact that it is the largest producer of gold globally, making up to 15% of the global supply,” Lusby said.

ENTER THE DRAGON

In considering China, the issue of growth and the changing face of its economy continue to spur debate. “The key question will be whether there’s a soft ... or a hard landing in China,” Lusby stated.

“There’s shift in focus as production growth in China moves to employment growth. But while the words may have changed, the story is still relatively similar and employment opportunities are seen as key for Chinese development,” he noted.

But concerns have mounted over issues surrounding corruption, red tape, shadow banking and the performance of the real estate market.

Offsetting some of the difficulties, ongoing support will come from increased urbanisation. “Greater movement of people is taking place, with more people moving to the new cities that have been built. Again this is a significant change over the past number of years as China continues to urbanise,” Lusby pointed out.

But increased pollution stemming from this growth will have to be contended with. “Growth creates pollution … and given that a large portion of China’s energy is from coal, greater energy requirements will mean further pollution.”

“The question is how [can] China generate energy in a more efficient manner or use other sources, with natural gas or nuclear as potential [alternatives],” he explained.

Away from China, the latent potential of India’s economy and commodities demand remains immense, with Lusby wondering about the ability of newly-elected Indian Prime Minister Narendra Modi to move the country forward. “If he can get the country urbanised and on track, we may yet see another supercycle,” he said.

Edited by Creamer Media Reporter

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