The world’s top 40 mining companies were in a race to the bottom in 2015, with falling market capitalisations and net losses leaving them slower, lower and weaker, according to PwC’s Mine 2016 report released this week.
PwC Australia’s mining leader, Chris Dodd, said the ‘higher, faster, stronger’ mantra of a only few years ago had “well and truly faded” and that 2015 was a “fight for survival for some of the top 40.”
“A 25 per cent year-on-year decline in commodity prices had the top 40 chasing even the most incremental productivity improvements, with many turning to asset sales in the fight for survival,” he said.
A number of records fell throughout 2015, with the top 40 miners experiencing their first ever collective net loss ($27b). Total impairments of $53b were also booked and the majors delivered their lowest ever return on employed capital (after adjusting for impairments) at 4 per cent.
Last year’s write-offs equalled 32 per cent of capital expenditure since 2010, and 77 per cent of 2015’s capital spend.
According to Dodd, there could be more pain to come on impairments, with 15 of the top 40 miners’ market capitalisations dipping below their book values, up from 12 the year before.
“We’ve seen more than $200b in impairments over the last five years, which would suggest that a large chunk of the value of the boom has been written off by the majors.”
Top 40 miners down…
The top 40’s collective market capitalisation dropped 37 per cent, effectively negating all of the gains from the commodity super-cycle.
“Investors punished the group for what they perceived to be poor investment and capital management decisions, and in some cases a feeling that the benefits of the boom had been squandered,” Dodd said.
“The focus was on production at a time when more rigorous investment assessments would have been prudent.”
The fall in market cap however was disproportionately greater than the fall in commodity prices, suggesting investors have taken a ‘spot mentality’ and are focussed on short-term returns.
“Mining is a cyclical game and different industries ultimately attract the investors they deserve,” Dodd said.
“Hopefully those investors who are getting on board now are taking a long-term view. However if the current short-term focus continues that will ultimately curtail the capital that’s available for investment, and constrain options for growth.”
…but not out
With marginal projects mothballed, capacity curtailed, a significant drop off in capex, and a stagnant investment environment, where will growth come from in the future?
According to Dodd, the major miners are “down but not out,” pointing to the recent rebound in market capitalisations and commodity prices.
“This might simply be a case of more volatility in the sector, but there’s a chance we are looking at the early stages of a rebound,” he said.
Another bright spot is lithium, with a miner of the key component in battery technology entering the top 40 for the first time.
“Lithium is what everybody is quite rightly talking about, with the price effectively doubling in the last 12 months and demand for advanced battery technology skyrocketing. This sector of the industry is most definitely one to watch.”
Whilst the industry continues to face significant market challenges and constraints, Mr Dodd maintains the outlook remains strong over the longer term.
“The industry is in a marathon, not a sprint, and with the trend towards urbanisation set to continue in the future, the rewards will flow to those that are patient and take a long-term view.”
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