Australia’s mid-tier miners face a challenging future despite impressive financials achieved from strong commodity prices, according to a new PricewaterhouseCoopers report.
The analysis of the Australian and global mining sectors for the year ended 31 December 2007, shows that Australia’s Mid-tier 50 had another spectacular year with revenues up 51 per cent, and profits rising 42 per cent. The world’s top 40 resource giants displayed similar results, posting revenue gains of 32 per cent and profit growth of 21 per cent.
Tim Goldsmith, Australian and Global Mining Leader for PricewaterhouseCoopers said, "Australian and global miners continued to perform strongly in 2007. High commodity prices and sustained growth in emerging economies helped buffer miners from the impact of the global credit crunch”.
Australia’s mid-tier 50 significantly increased its market capitalisation too during 2007, outperforming the ASX All Ordinaries Index by a factor of 10 to 1 (68.5 per cent versus 6.4 per cent). This group’s aggregated market capitalisation rose from US$38.4 billion to US$64.7 billion. Similarly, market capitalisation for the global top 40 grew by 54 per cent to reach an astounding US$1.388 trillion.
As good as it gets?
"While it seems the industry will continue the strong run of the past five years, several indicators suggest that the rate of growth may slow. Declining margins caused by rising costs, procurement constraints, power shortages and ongoing skills shortfalls have made the environment far more challenging,” Mr Goldsmith says.
Operating costs for global miners reached a staggering US$51 billion in 2007 up from US$37 billion in 2006. Escalating energy, labour, materials, and transportation costs combined to drive down net profit margins from 28 per cent in 2006 to 26 per cent in 2007 - the first fall in profit margins since 2003.
"For some industry participants, it seems the best years may be behind them. For established players with low cost long, life operations, the future outlook is very positive. Global demand for resources remains robust, and commodity prices continue to soar - conditions are still highly profitable,” he says.
According to the report, the strain on resources to support the mining industry continues to be a critical issue. To capitalise on rising mineral prices, companies are rushing to expand operations, revitalise previously abandoned assets, and aggressively pursue acquisition opportunities.
"Securing supply will be a key battle among miners. Investing in initiatives that bring new supply to the market will become a priority. We are likely to see M&A activity in the sector intensify as players rush to secure supply producing assets.” said Mr Goldsmith.
Resource windfall
Shareholders of Australia’s Mid-tier 50 were rewarded with a 24 per cent increase in dividend payouts in 2007. However pay-out ratios decreased as a result of companies re-investing some earnings into development and exploration initiatives to drive future production growth.
Equally impressive was the total shareholder returns of the global top 40. On average, investors in these companies each received a return of 119 per cent compared to 55 per cent for the prior year. The high yield was largely driven by the performance of companies in emerging nations such as China.
Chinese investment
Chinese companies increased their interests in Australian mining companies, particularly in the iron ore sector in 2007. For Australia’s Mid-tier 50, the highest profile of these proposed investments is Sinosteel Corporation’s $1.3 billion bid for Midwest and its West Australian iron ore assets. The Chinese steelmaker already owns 40 per cent of the iron ore group.
Other Chinese interests include Anshan Iron and Steel’s 12.9 per cent stake in Gindalbie Metals; MCC’s imminent purchase of Cape Lambert’s iron ore project, and the recent Sinosteel purchase of a stake in Murchison Metals.
"China’s growing resource presence comes at a time of increased scrutiny of investments of sovereign wealth funds and other state-owned organisations. Chinese investment in Australian industry is significant and continues to grow”, Mr Goldsmith says.
"While some have concerns these investments pose a threat to the national interest, a significant portion of the resource sector is foreign owned which has generated substantial returns for the economy”.
"Foreign investment is vital for Australia. Ownership concerns and other issues should be assessed on a case-by-case basis, determined by commercial considerations”.
"The significant change to the global commodities outlook has largely been due to Chinese demand. It is certainly fair to allow them ownership of Australian mining assets, particularly when they want to open mines that might not otherwise have been developed,” said Mr Goldsmith.
Key commodities
Copper remains the dominant source of revenue for the world’s top 40 mining companies, accounting for 28 per cent of total revenue (US$87.36 billion). Coal and iron ore (12 per cent each) rounded out the top three commodities for revenue generation. Margins for these commodities remain strong.
In contrast to the strong performance of the top three commodities, the gold sector was relatively weak. Despite large in-flows of speculative money from depressed equity markets, margins on gold were down in 2007. To address this, a number of gold companies have commenced exiting their hedging commitments to receive greater exposure to rising gold prices.
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