Mine 2015: Gloves are off

Analysis of the Top 40 global mining companies

  • Overall market values plummeted $156 billion due to commodity price declines
  • Free cash flow moved positive again to $24 billion; but net profit down 9%
  • Capital velocity declined for the first time since 2010 and continues to slow
  • Dividend yields at an all-time high of 5%
  • Government intervention and conflict abound with strategy debates as impact of lower prices felt by many

2014 was expected to be a tough fight for the global mining industry with commodity prices down and short-term volatility increasing. The initial scorecard for the largest 40 miners was mixed and now the gloves are off for the industry with widespread government intervention, internal industry conflicts and rising shareholder activism, according to PwC’s annual Mine report.

According to new analysis of the largest 40 miners from PwC, the industry trimmed spending and largely managed expectations through higher production and unexpected help from currency devaluations and lower input costs, despite continued headwinds from weak commodity prices.

Improved capital management resulted in capital velocity declining for the first time since 2010 to just over 12% and helped the mining companies generate free cash flow and reward shareholders. While market values declined a further 16%, shareholders also benefitted from an all-time high dividend yield of 5%.

The success of cost-saving initiatives became more apparent in 2014 as operating costs decreased 5%. While the mining industry had been indicating for the last two years their intention to reduce capital spending, such reductions were actually realised in 2014 as expenditures on significant projects declined 20%.

A key measure of the industry’s investment agenda, capital velocity, slowed to just over 12% with further decreases expected in 2015 and for the first time, the total asset base shrunk 1%.

While commodity prices decreased across a number of commodities and drove lower revenues, the report found this was partially offset by increased volumes, particularly in iron ore where supply expanded on the back of large expansion programs of the past few years.

The decline in the iron ore price is having a significant impact on the top 40 miners. While slower demand from China is making headlines, the price declines are more related to the current oversupply in the market.

With few exceptions, market supply and demand trends result in miners operating on the assumption that lower commodity prices will continue and the focus will therefore remain on containing operating costs and maintaining capital discipline.

Mine also found, for the second year, the majority of the largest mining companies came from BRICS, rather than OECD markets¹, with another two top 40 BRIC entrants and a lower overall decline of only 7% - compared to an OECD drop of 21% - in market capitalisation. This was in despite of a lower adjusted profit contribution from the BRICS companies.

BRICS mining companies tend to focus on mining in emerging markets exclusively whereas those in the OECD tend to have more diverse global portfolios. This divide, coupled with the wealth of new development potential in emerging markets and differing shareholder expectations, continues to create divergence.