Last year was undoubtedly challenging for the mining sector. A 25% year-on-year decline in commodity prices meant mining companies had to ratchet up their productivity efforts, while some found themselves in a fight for survival, with asset disposals and closures to follow.
Shareholders are persisting with a short term focus, impacting the capital available for investment and, as a result, constraining options for growth. Investors punished the Top 40 for poor investment and capital management decisions and, in some quarters, for squandering the benefits of the boom. There are also concerns over the 'spot mentality' from shareholders focused on fluctuating commodities prices and short term returns rather than the long term investment horizon required in mining.
Capital discipline and impairment levels
With a further $53 billion of impairments in 2015, miners have now collectively wiped out the equivalent of 32% of their actual capex since 2010, a stark reminder of the value that has already been lost. The level of impairments since 2010 points to a lack of capital discipline in the boom years. The focus was on production at the expense of more rigorous investment assessments
China no longer the industry hero
Whilst China is still critical to the success of the industry, accounting for approximately 40% of overall commodity demand, it can no longer be relied on to supercharge returns. As the country moves from a manufacturing based economy to a services-based economy the previously rampant demand for commodities will not resume with the same intensity.
Debt burdens will mean some heavy lifting ahead
Debt management has moved to the top of the business agenda for many. For some, the driver was maintaining access to capital at reasonable rates. For others, it was simply crucial to survival.
Down…but not defeated
We’ve been encouraged by some recent recoveries in market capitalizations and commodity prices – but with high volatility still in play, hopes of a sustained rebound are tempered.
Whilst the industry continues to face significant market challenges and constraints, many of the world’s biggest mining companies appreciate what is required for the marathon of mining and have their eyes firmly fixed on the long term rewards.