PwC's annual review of the aggregated financial results of the world's 40 largest mining companies as measured by market capitalization suggests that in 2013 the global mining industry endured one of the most difficult operating environments in recent memory. The review, titled Mine 2014: Realigning Expectations and released on June 5, noted that a crisis of confidence prevailed within the industry throughout the year, and no company seemed to be immune.
Evidence of tough times can be seen in the number of mining companies that changed CEOs over the past two years. In 2012, a quarter of the top 40 companies saw a new CEO take the helm, while in 2013, another seven companies (18%) changed leaders. "This means almost half of the companies that have been in the top 40 over the past two years have hired a new CEO since 2011-an incredible statistic," PwC stated.
The report noted that, "Traditional quick-fixes to falling commodity prices were widely adopted: park your fleet, reduce head count, slash costs, defer capital expenditure. However, we are also starting to see some more fundamental shifts in strategy emerge, namely:
Active portfolio management with a push to simplify structures and a focus on extracting value from higher-quality assets;
With capital constrained budgets, a move to sharing mining infrastructure as a means to reduce operating costs, realize efficiencies and spread capital and risk; and
A commitment to addressing diminishing productivity levels."
Maintaining dividend levels, exercising more selective capital allocation, and active portfolio management also are among the levers being pulled to restore investor confidence in the sector.
During 2013, the market value of the top 40 mining companies fell by $280 billion to $958 billion, a 23% reduction on the prior year. Gold companies were particularly hard hit, and diversified companies and coal companies did not fare much better.
Only four of the top 40 showed an increase in market capitalization during the year: Freeport-McMoRan, Fortescue Metals, First Quantum Minerals, and Polyus Gold. Each of these companies had unique circumstances during the year, including the impact of acquisitions and debt restructuring, that caused their share prices to trend differently than the overall mining market.
Early 2014 saw some semblance of calm return to mining share markets, with market capitalization for the top 40 stable, evidence that some level of confidence may be returning, Mine 2014's Executive Summary stated.
Metals prices fell significantly in 2013, with gold prices suffering their greatest annual decline in more than 30 years. Lower commodity prices, along with record impairments of $57 billion, led to a 72% fall in net profitability among the top 40 to $20 billion, the lowest level in a decade.
Ten of the top 40 companies recorded impairments of more than $1 billion in 2013. Almost all of these were either gold companies or among the top five diversified companies.
Mine 2014 found that for the first time in 2013, the majority of the 40 largest mining companies were from emerging market countries. Given these companies' current performance and greater recent appetite to invest capital, this trend is set to continue. Also in 2013, net profits from emerging market companies were $24 billion in aggregate, compared with an aggregate net loss of $4 billion for developed market companies, which were particularly impacted by impairments.
PwC said CEOs of the top 40 are aware of the need to be seen amongst their peers as low-cost producers and to deliver on realigned strategies.
"Against this backdrop, the license to operate in all corners of the globe is becoming more challenging, with governments increasingly eager to expand their share of taxes and royalties, and local communities expecting more and more for operating in their backyards. Governments continue to lean on mining companies at a time when they can least afford it, and elections in Brazil, India, Indonesia and South Africa have driven greater uncertainty on fiscal stability," PwC reported.
Mine 2014's Executive Summary concluded: "The question remains as to who will be bold enough to thrive in these difficult times. M&A activity, which was surprisingly subdued in 2013, seems to have started to pick up in early 2014. This is not surprising with company valuations at relative lows. We can expect to see some moves toward consolidation-friendly or otherwise-if only to seek out synergies to reduce costs in this low price environment, consistent with the new mantra of lower costs and higher productivity.
"Further into 2014, after cleaning house and backed by a stronger U.S. economy and continued strong demand from China, investors will grow impatient for demonstrable returns from the strategies adopted by the top 40 to lift the industry off the bottom."