Record results but it’s clear the game has changed for the mining industry

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  • Combined net profits hit $100 billion in 2010.
  • Operating cash flows up 59%, leaving more than $100 billion cash on hand.
  • Emerging market miners outperform traditional players.
  • Capital expenditure of $300 billion announced.
  • Supply and cost management key challenges.

Kyiv – 28 July 2011 – Revenues for the world’s 40 largest miners in 2010 leapt 32% to a record $435 billion, driven by surging commodity prices and a 5% increase in production output in 2010.The strong top-line result catapulted the miners’ net profits to an impressive $110 billion – a 156% increase over the previous year, according to a new report from PwC, Mine: The game has changed.

Tim Goldsmith, global mining leader, PwC, said:

“Following the strong 2010 result, the mining industry has entered a new era with fundamental changes.

“Looking forward, growing demand for products - led by the emerging markets - will drive the industry and supply will be the most significant challenge it will face. The need to explore more remote locations and project complexity might compound this issue.”

To keep up with demand, the Top 40 mining companies have announced more than $300 billion of capital programmes, of which more than $120 billion is planned for 2011, doubling 2010 capital expenditure.

Despite the challenges, the Top 40 is well positioned to capitalise on the upside.  Collectively, they own nearly $1 trillion in assets, including $100 billion of cash.  They are also largely debt free with net gearing of just 8%.

The report also highlights the growing trend of emerging market producers outperforming those from ‘traditional’ locations such as Australia, US, Canada, South Africa and the UK.  Over the past four years, the average total shareholder return of companies from emerging markets more than doubled that of those from traditional mining locations.

The composition of the Top 40 has changed over the past eight years, with 45% of companies now from emerging markets, reflecting the continued shift in the players and power base of the mining industry.

According to the report, cost inflation has kept a lid on the Top 40’s combined return on equity (RoE), which reached 22% in 2010.  This result was well below the 31% and 28% achieved in the highs of 2006 and 2007 respectively.

Tim Goldsmith said:

 “Despite benefiting from record high commodity prices, the Top 40’s cost base has risen considerably as lower grade assets and labour shortages take effect. Like RoE, profit margins are still below their historical peak.

“With no sign of inflationary pressures easing, maintaining cost discipline in a volatile global and financial environment remains extremely important for the industry.

“The real challenge now is addressing ever rising costs with huge forecast capital expenditure programmes compounding already tight labour and materials supply – and increasing complexities in operations, as sourcing new supply continues to move into more remote and challenging locations. With vertical integration into mining by metal producers and customers, and with the priority of supply certainty over cost, further supply will come online from non-Tier 1 assets.

“While not all of these projects will be completed, the sheer size and volume demonstrate an industry whose biggest priority is ‘can we supply enough to our customers’, rather than ‘will demand continue to support current growth plans’.”

Almost all major metals saw higher average prices than in previous years, with increases on average between 26% and 49% in 2010.

The price of gold has been on a constant upward trend since the average of $364 per ounce in 2003, reaching $1,421 at the end of 2010, with further increases seen through the first part of 2011 despite some price volatility.

 

Note to the Editor:

  1. For a copy of Mine: The game has changed, PwC’s quarterly analysis of M&A activity in the global metals sector, please visit: http://pwc.com/mine.
  2. PwC firms provide industry-focused assurance, tax and advisory services to enhance value for their clients. More than 161,000 people in 154 countries in firms across the PwC network share their thinking, experience and solutions to develop fresh perspectives and practical advice. See www.pwc.com for more information.
  3. *«PwC» is the brand under which member firms of PricewaterhouseCoopers International Limited (PwCIL) operate and provide services. Together, these firms form the PwC network. Each firm in the network is a separate legal entity and does not act as agent of PwCIL or any other member firm. PwCIL does not provide any services to clients. PwCIL is not responsible or liable for the acts or omissions of any of its member firms nor can it control the exercise of their professional judgment or bind them in any way.