Revenues under pressure and operating costs continue eroding profit margins, the going is tough say PricewaterhouseCoopers report.

London, 2 JUN 2009—This sixth edition of Mine, the annual report reviewing global trends in the mining industry, says that despite the impact of the downturn, the results for the year to 31 December 2008 were strong, but operating costs continue to erode profit margins which presents a tough road ahead, requiring companies to control costs and be flexible.  This report provides a comprehensive analysis of the financial performance and position of the global mining industry as represented by the largest Top 40 mining companies by market capitalisation.

Last year PricewaterhouseCoopers posed the question whether it was ‘as good as it gets?’  This year started where 2007 left off and threatened to answer the question with a resounding ‘no’.  Companies in the industry benefitted from strong commodity prices. Despite the strong financial results, 2008 was definitely a year of two parts with the good times quickly turning bad as the global economic crisis took hold in the last quarter and commodity prices went into freefall.

Tim Goldsmith, Global Mining Leader, PricewaterhouseCoopers, says:

“Despite another record year for the industry, the Top 40 mining companies have seen their market capitalisation slashed by 62% from 2007, due to the fall in commodity prices and the drop in shareholder confidence.  While the long term fundamentals still look favourable for the industry, companies with high debt levels have been particularly hard hit by investors who are increasingly focussed on short term cash generation” 

The rapid fall in market capitalisation and increased debt levels for some of the Top 40 has created two distinct groups; the ‘haves’ and the ‘have nots’.  Nothing is currently more valuable than cash and for cash rich companies, opportunities exist as asset values fall for acquisition or organic growth, indeed, potential to ‘bag a bargain’ is high if quality assets come up for sale.  For those without cash, opportunities are limited and the focus is on managing through the downturn. 

Tim Goldsmith, Global Mining Leader, PricewaterhouseCoopers, comments:

“We have witnessed a unique deal environment that has reshaped much of the sector’s ownership. The rapidity of commodity and equity price falls, combined with the immense financing constraints stemming from the financial crisis, has left the sector polarised between the strong and the weak.” 

Q1 2009 also saw 14 of the Top 40 announce mine closures, production cuts or moves to place mines on care and maintenance.  $13bn of capital expenditure has also been deferred or cancelled.  Combined, this has led to more than 40,000 planned redundancies across the industry. 

Investors of mining companies have ridden the boom over the past five years, experiencing high levels of returns, both through capital growth, dividends and share buyback programmes.  While 2008 TSR returns are in negative territory with gold outperforming the sector, long term investors have still been rewarded when looking at historic comparisons.

The boom encouraged the industry to invest heavily in capital projects and grow the top line.  In these more cautious times, the ability to turn the cost tap on and off quickly may be the difference between success and failure.

Notes to Editor: 

• A copy of ‘Mine – as tough as it gets’ can be downloaded from Tuesday 2^nd June at: www.pwc.com/mine.
• Methodology: We have analysed 40 of the largest mining companies by market capitalisation. Our analysis includes major companies in all parts of the world.  The results aggregated in this report have been sourced from the latest publicly available information, primarily annual reports and financial reports available to shareholders. Where 2008 information is unavailable, these companies have been excluded. Companies have different year-ends and report under different accounting regimes, including International Financial Reporting Standards (IFRS), US Generally Accepted Accounting Practice (US GAAP), Canadian GAAP, and others.
•  Information has been aggregated for the financial years of individual companies and no adjustments have been made to take into account different reporting requirements and year-ends. As such, the  financial information shown for 2008 covers reporting periods from 1 April 2007 to 31 December 2008, with each company’s results included for the 12-monthfinancial reporting period that falls into this timeframe.
• All figures in this publication are reported in US dollars, except when specifically stated. The results of companies that report in currencies other than the US dollar have been translated at the average US dollar exchange rate for the financial year, with balance sheet items translated at the closing US dollar exchange rate. Some diversified companies undertake part of their activities outside the mining industry, such as the petroleum business of BHP Billiton and parts of the Rio Tinto aluminium business. No attempt has been made to exclude such non-mining activities from the aggregated financial information.  Entities that are controlled by others in the Top 40 and consolidated into their results have been excluded, even when minority stakes are listed.

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