Despite the Top 40 global mining companies posting record profits of $133 billion and generating record operating cash flows of $174 billion in 2011, their market capitalization fell by 25% to about $1.2 trillion at year-end, as investors did not seem to buy into the industry’s long-term growth story, according Mine 2012: The growing disconnect, the tenth edition of PricewaterhouseCooper’s (PwC’s) annual report on the global mining industry.
“There was a growing divide in the mining industry last year, as company stocks significantly underperformed the broader markets and lost value despite record profits; and the disconnect between share values and many commodity prices widened,” Steve Ralbovsky, U.S. mining leader at PwC, said. “This disconnect was driven by a number of factors, including the fact that the mining industry is a bellwether for the global economy; and, with the European debt crisis and fears of a slowdown in global growth during the second half of the year, stocks have been highly volatile. In spite of these factors, we believe the demand story remains robust and long-term growth in emerging markets is more significant to the mining industry than short-term jitters in the developed world.”
The financial results for the Top 40 companies hit new heights in 2011. Revenues increased 26% to over $700 billion, and investing cash flows grew 92%. The companies returned 156% more to shareholders than in 2010, and total assets remained above $1 trillion and grew a further 13%. The Top 40 invested $98 billion in capital projects in 2011 and plan to invest $140 billion in 2012.
Production volumes in 2011 were on average 6% higher than in 2010; however, for gold and copper, production volumes remained at levels similar to those reported in 2005. Companies simply were not able to bring on new production for these two commodities, highlighting the shift from demand to supply as the major factor in today’s industry.
With price:earnings ratios for the Top 40 companies at one of the lowest levels in years, PwC states that miners are faced with the challenge of winning back investor confidence. “In response to increasing shareholder demands, CEOs are exercising greater discipline and greater focus when making big investment decisions,” Ralbovsky said. “However, falling stock prices suggest investors feel the Top 40 are not doing enough. Investors are demanding capital discipline to increase shareholder returns, while miners are looking to use cash from record results to develop new projects, as they believe supply is critical to the future of the industry. Due to the competing demands for cash, CEOs are spending more of their time engaging shareholders and making sure their capital priorities are clear.”
PwC suggests that, while the industry’s headline story for the past five years was demand, the main story for the next five years will be supply. Among some of the key issues facing supply: structural changes to cost bases caused by decreasing grades and increasing input costs, changing fiscal regimes and resource nationalism, ongoing disruptions to production, remoteness of certain project locations, and increasing capital expenditure requirements to bring supply to market.
Composition of the industry: At year-end 2011, diversified companies dominated the market capitalization of PwC’s Top 40 companies. Of the Top 10, six are considered to be diversified: BHP Billiton, Rio Tinto, Vale, Anglo American, Glencore, and Xstrata. In total, companies considered to be diversified made up 42% of the Top 40’s market capitalization. At 21% of the Top 40’s market capitalization, primary gold companies such as Barrick, Newmont, Randgold, and Kinross represented the largest single commodity group, an increase from 16% at year-end 2010.
Emerging market companies constituted 38% of the Top 40’s market capitalization, up from 35% at year-end 2010 and the highest level seen for this group during the period 2002 to 2011.
(The full PwC report is available as a free download at http://download.pwc.com/gx/mining/pwc-mine-2012.pdf).