The global mining industry's fight for value and free cash
flow has descended into a brawl, after 2014 saw the world's 40 largest miners
ramp up production, slash capital spending, and rein in costs, according to PwC
analysis released today.
According to PwC's 12th annual global report, Mine 2015: The
gloves are off, the industry heavyweights delivered a mixed scorecard in 2014,
with overall market capitalisation falling by 16% and net asset values
declining for the first time. Dividend values, however, reached a record high -
with yields increasing to 5%, up from 4.3% in 2013.
Free cash flow improved from $3 billion in the red in 2013
to $24 billion in the black in 2014, due in large part to a decrease in capital
expenditures - a result which supported the record dividend flows.
The results were driven by continued pressure on commodity
prices, with iron ore, coal, and copper prices falling 50% 26%, and 11%
respectively throughout 2014. This slide continued into 2015, with a 12% drop
in the price of iron ore in the first third of the year, and a 5% and 6% drop
for coal and copper respectively. Gold remained relatively stable.
PwC Australia's Energy, Utilities & Mining leader Jock
O'Callaghan said 2014 was the year that intention became reality, as efforts to
control costs and reduce capital spending started to materialise in reported
results.
"Last year was the year the industry really turned the
screws to increase efficiencies, and that's been borne out by a 5% reduction in
operating costs," he said. "Expenditure on significant projects
declined 20% and exploration spend was wound back 53% to a miserly $4.9
billion."
"Capital velocity - a proxy for measuring a company's
growth agenda - slowed to just over 12%, a trend we expect will continue
throughout 2015."
Mr O'Callaghan believes the focus on costs and spending
control will be a boon for yield-hungry investors in the short-term, but miners
will ultimately need to address the 'growth question' to arrest sliding market
values.
"You can't cut your way to growth and this is the
second consecutive year of sliding market values, albeit at half the total
decline we saw in 2013," he said. "The total market capitalisation of
the top 40 is now sitting at the same level as it was back in 2004, and only
about half the value of four years ago."
"The lower commodity prices show no signs of abating so
industry participants will eventually need to grasp the nettle and deploy
strategies that put them back on the path to sustainable growth."
In the meantime, some will walk a fine line, balancing a
desire for stable dividends with the need for a healthy balance sheet. Eight of
the top 40 had credit rating downgrades during 2014, and a further ten were
placed on negative outlook.
Oversupply driving iron ore slump, compounded by Chinese
slowdown
While decreasing commodity prices drove lower revenues, the
report found this was partially offset by increased volumes, particularly in
iron ore where supply has increased on the back of large expansion programs.
According to Mr O'Callaghan, the slump in iron ore prices is
a combination of oversupply and slowing demand, and while the slowdown in China
is a factor, it needs to be put in perspective.
"China still accounts for 40 to 50% of global commodity
demand and despite slower growth will still add over $1 trillion to its GDP in
2015 - more than the combined market capitalisation of the world's 40 largest
miners," Mr O'Callaghan said. "So demand will continue to grow,
albeit at a slower pace."
However, in an Australian context, Mr O'Callaghan believes
the Government will need to manage its response to the iron ore slump
carefully, or risk placing further burdens on the industry.
"The lower-than-forecast iron ore price is the largest
contributor to the decline in expected tax-receipts over the next four years,
accounting for $20 billion or nearly 40% of the total write-downs in the
federal budget," he said.
"A bright spot will be the finalisation of the free
trade agreement with China this year which should provide a boost for producers
of coal, copper, zinc, aluminium and others who will see their tariffs removed
or reduced."
"The increase in the threshold for scrutiny from the
Foreign Investment Review Board (FIRB), from $252 million to $1,049 million,
will also make it easier for Australian mining projects to attract capital from
overseas."
BRICS holding steady, OECD miners on the ropes
The report found, for the second year, the majority of the
largest mining companies came from BRICS, rather than OECD markets.
The composition of the top 40 also shifted to include
another spot for the BRICS miners, with the decline in their market
capitalisation also faring much better, down only 7% compared to 21% for
companies in the OECD.
59% of BRICS companies saw their market value improve in
2014, compared to only 22% of companies in OECD markets. Three domestically
focussed Chinese companies - Zijin Mining (gold); China Coal; and Yanzhou Coal
- led the way, each with impressive gains of more than 30%.
2014 was the first year ever that a South African miner
didn't make the top 40 - a stunning fall for this traditional mining
heavyweight, and a far cry from the five companies in the 2004 top 40.
According to Mr O'Callaghan the disparity in growth reflects
different areas of focus, with BRICS miners tending to pursue opportunities
mainly in higher-risk destinations.
"BRICS mining companies tend to focus on mining in
emerging markets whereas those in the OECD tend to have more diverse global
portfolios," he said.
"This divide, coupled with the wealth of new
development potential in emerging markets and differing shareholder
expectations, will continue to create a divergence in these markets."