According to a new report titled “Mine-Back to the Boom” from PricewaterhouseCoopers, it was a tale of two halves in 2009 for the global mining industry. The trends seen at the end of 2008 continued into the beginning of 2009, with commodity prices continuing to fall, tough price negotiations with customers an issue and challenging market conditions overall. As the year went on, however, companies responded by restructuring their balance sheets, closing mines and cutting production to reduce costs. As a result, the market capitalization of the top 40 global mining companies increased 118%, returning to the heights of 2007.
While small transactions dominated the M&A mining landscape in 2009 and short-term volatility remains a sticking point, PwC believes the global trends in the mining industry indicate the industry’s future is looking bright and is ripe to go “back to the boom.”
“The mining industry was faced with a challenging market in 2009 with overall revenues declining, a drop in net profit and a decrease in cash flow,” said Steve Ralbovsky, U.S. mining leader at PricewaterhouseCoopers. “Yet the top 40 companies were able to weather the storm and avoided distressed situations—in large part because they were able to remove their debt overhang and were buoyed by strengthening commodity prices in the second half as the global economic recovery began to take hold.”
“It was a recovering year for commodity prices and global mining giants had to contend with improving their financial strength and operating results—all while managing around a very challenging economic environment that spanned the globe,” Ralbovsky said. “For success moving forward, it is essential that lessons from the past be learned so that the industry can identify potential uncertainties and respond accordingly, allowing the industry to fully extract the benefits of being back to the boom.”
The report notes that although the total number of mining deals increased 16% from the prior year, activity was largely focused on smaller scale deals of less than $250 million, with average deal values of $52 million, down nearly $72 million from 2008. And while some companies had the resources to execute potential transactions, opportunity gave way to caution and no major deals were consummated.
“With no significant transactions completed during the year, we believe some companies that had the financial resources available may have potentially missed opportunities to acquire assets,” said Ralbovsky. “Although the window was small, it was open. As a result, Chinese investment was at the forefront of transactions and made up 22% of all global mining M&A activity and 30% of the Top 10 deals by value.”
The report indicates that despite approximately $200 billion of capital expenditure over the past three years, production remained flat across most commodities—and exploration spending by the top 40 declined significantly, given its discretionary nature. As reserve replacement becomes more challenging, the lack of spending on exploration poses the question of when and where the next world-class mines will be found. Add to that the strong fundamentals on the demand side over the medium and long-term, largely attributed to continued growth from China and other developing nations, and the industry may be in the next phase of the boom, the report found.
Among mining CEOs, the report notes that while views may differ, almost without exception the number one agenda item is the global economy. Fundamental to success will be the ability to understand the lead demand indicators, particularly obtaining a good read on China and other developing nations. Today’s CEO is more focused on other macroeconomic factors, such as foreign exchange rates, the cost of energy and the impact potentially unsustainable government budget deficits will have on interest rates, tax regimes, and the global economy. However, operating cost remains a key value differentiator.
Metal prices continued on a downward trend for the first six months of 2009, but recovered sharply along with most commodities in the second half. The upward trend in commodity prices continued into 2010 in many cases. The turnaround in copper prices has been most notable with the 2009 year-end spot price reaching $7,342/ton. In both iron ore and metallurgical coal markets there has been a recent trend toward short-term contracts, driven by the big miners. Gold, on the back of 7% production increases and a 12% increase in average price, saw its share of total industry revenue increase from 10% to 14% in 2009.
The report concludes, after a hiatus, the future is looking bright again for the industry. Although significant short-term volatility remains, the long-term demand fundamentals will drive this cycle.
To compile the report, PwC said it analyzed 40 of the largest listed mining companies by market capitalization. The analysis included major companies in all parts of the world whose primary business is mining. PwC said the results aggregated in the report were sourced from the latest publicly available information, primarily annual reports and financial reports available to shareholders. Information was aggregated for the financial years of individual companies and no adjustments were made to take into account different reporting requirements and year-ends. As such, the financial information shown for 2009 covers reporting periods from April 1, 2008 to December 31, 2009, with each company’s results included for the 12-month financial reporting period that falls into this timeframe.