PwC Annual Review of Global Trends in Mining Sector – Mine 2011: The game has changed

07 Jun 2011 

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For a copy of the report click here: Mine 2011: The game has changed

Excutive Summary

Welcome to PwC’s eighth annual review of global trends in the mining industry—Mine. These reviews provide a comprehensive analysis of the financial performance and position of the global mining industry as represented by the Top 40 mining companies by market capitalisation.

Last year we highlighted the growing optimism in the mining industry and demand fundamentals that were driving the industry back to boom times. The 2010 results have delivered on this expectation, but it is clear that the game has changed.

The mining industry has entered a new era. Demand continues to be stoked by strong growth in emerging markets. Supply is increasingly constrained, as development projects become more complex and are typically in more remote, unfamiliar territory. The cost base of the industry has permanently changed as lower grades and shortages of labour take effect.

To keep up with demand, the Top 40 have announced more than $300 billion of capital programs with over $120 billion planned for 2011, more than double the total 2010 spend.

While not all will be completed, the sheer size and volume of the announced capital projects demonstrates an industry where fulfilling seemingly insatiable demand is the top priority.

In 2010, despite tones of cautious optimism from CEOs and short-term fluctuations in the market caused by instability across many areas of the globe, the financial results for the
Top 40 were spectacular:

• Revenues increased 32% – breaking $400 billion for the
first time
• Net profit was up 156% to $110 billion
• Operating cash flows grew 59%, leaving more than $100
billion cash on hand at year end
• Total assets approached $1 trillion
• Net debt reduced to $46 billion, resulting in gearing of
only 8%

However, while commodity prices have increased the margins achieved in the past year are still below the highs of 2006 and 2007.

Investment in new supply is increasingly focused on emerging markets, and by new faces, as customers and governments enter the industry with the primary goal of securing supply.

Vertical integration into mining by customers that prioritise certainty of supply over cost, will bring additional supply online from non-Tier one assets. The cost curve has shifted
and commodity prices have permanently moved higher.

Production for 2010 increased by 5% overall with the benefits of expansion through the global financial crisis being realised by those who continued to invest through the cycle.

Emerging markets continue to change the face of the mining industry. One sign is the average Total Shareholder Return (TSR) of companies from emerging markets in the Top 40
more than doubling the return from the ‘traditional’ mining countries over the past four years.

Overall the market capitalisation has increased by 26%. While some have expressed concern that the market capitalisation of the industry has increased too fast and too much; the jump is attributable largely to balance sheet growth following 2010’s stellar results.

The outlook expressed by industry leaders is increasingly positive, with companies taking definitive action on capital projects, as well as mergers and acquisitions. In a view from the top, the CEOs note their continuing belief in emerging markets, particularly the ongoing growth in China and the nation’s ability to achieve or exceed the 7% growth target outlined in the 12th Five Year Plan. Resource nationalism and stakeholder management occupy a higher degree of attention from the CEOs, as does the ever increasing complexity and sophistication in the industry.

With mining continuing to climb up the political priority list at a time of budget deficits and changing economic and social priorities, many governments are looking at reforms to their
mining codes, grappling with sustainability issues and revisiting their approach to taxation and royalties. In what’s mine is mine we are joined by Eurasia Group, which has provided an overview of a number of the key drivers for these trends in light of a growing focus on corporate transparency and the interplay between corporates and society.

These are interesting times for the mining industry, with ever increasing scrutiny from governments, customers and other stakeholders. Growing demand for its products, driven by
emerging markets, highlights that supply will be the most significant challenge it will face. The shift in balance is a positive one for the mining industry, but it will not be simple and will take some managing. All of this highlights that the game has changed.

We trust you will find this year’s publication informative and encourage you to send us your feedback.

Tim Goldsmith
PwC Global Mining Leader
Mine Project Leader