Although mining companies are doing their best to manage productivity and improve efficiencies to maximize returns, a confidence crisis still permeates among mining investors, says a new PwC study.
“Miners are faced with a confidence crisis and they’re focused on trying to restore confidence,” said Mining leader for Canada and the Americas, John Gravelle, in the latest PwC report, Mine: A confidence crisis.
The report observed that the market has lost confidence in mining’s ability to control costs, to exercise capital discipline, that new CEOs can deliver on their promises, and fear that commodity prices will collapse.
Investors also fear that the industry will pile back into too many new projects or expensive deals when commodities prices rebound.
Nonetheless, Gravelle suggests, “Across the board, there’s a renewed focus on [mining companies] maximizing returns from existing operations through managing productivity and improving efficiencies.”
“The importance of returning to a lower cost base rather than relying on higher commodity prices should be on every miner’s agenda,” Gravelle stressed. “Miners must deliver this while operating in an environment of intense resource nationalism where we see governments in traditional mining jurisdictions legislating substantial tax increases and emerging mining jurisdictions ignoring mining contracts after substantial investments are made.”
Among the report’s findings for 2012 is that global mining revenue was flat at $731 billion, while net profits were down 49% to $68 billion. “Decreased commodity prices, an escalating cost base, and $45 billion in impairment charges hit the bottom line,” PwC observed. “At only 8%, return on capital employed was the lowest it’s been for a decade.”
New Faces at the Helm
The good news was the top 40 mining companies increased dividends by 9% to %38 billion last year. However, shareholders are still unhappy and have demanded change starting at the top, the report said. Since April 2012, half of the top 10 mining CEOs have been replaced.
“The biographies of these CEOs reflect an industry that values operational know-how and mining experience over deal making and growth,” said the report. “New leadership is also a visible signal that changes are on the way.”
See also: Fallen mining CEOs scapegoats rather than villains
Nonetheless, PwC noted that the first four months of this year “have been rough across the board. Market capitalization fell for 37 of the top 40—losing over $200 billion or 17% of the year-end 2012 level. The Top 40’s gold miners lost a further $58 billion, particularly due to a significant sell-off in April following the largest one day drop in gold prices ever.”
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