For the world’s Top 40 miners, 2017 was a remarkable year. The continuing recovery in commodity prices saw revenues rise dramatically.
Source: PwC analysis
For the world’s Top 40 miners, 2017 was a remarkable year. Thanks in large measure to the continuing recovery in commodity prices, fueled by general economic growth, revenues rose dramatically by 23 per cent. At the same time, the cost saving strategies of the past few years delivered, with margins and cash generating ability improved as well, leading to a sharp increase in profits.
Capital expenditures remained flat. With liquidity concerns that were still lingering in 2016 mostly resolved and balance sheets strengthened, companies have the flexibility to act. Across the board, a heightened focus on safety in operations, reducing leverage, and avoiding aggressive investments in new capacity indicates that management is proceeding in a measured and deliberate way.
The Top 40’s performance confirms the upswing in the cycle. In a declining price environment, with a corresponding drop in revenue, EBITDA dropped significantly. A focus on cost saving, productivity and the impact of lower commodity prices on input costs resulted in a recovery in EBITDA even aside from the recovery in revenue. Recent price increases have further improved operating profitability.
The lag between capital expenditures and financial performance is evident and typical in cyclical industries. Significant investments made during the previous boom resulted in a substantial overhang in production capacity and weak balance sheets. So it is not surprising that the industry has been slow to ramp up investment significantly; capital expenditures in 2017 remained at a more than 10-year low.
Top 40 performance trends ($ billions) Source: PwC analysis
In 2018, we expect that favourable market conditions, higher commodity prices and strong internal discipline will produce increased liquidity and balance sheet strength. That in turn will tempt the Top 40 to reinvest in the business, pursue investment or growth opportunities and enhance shareholder returns.
While we expect to see an increase in value and growth opportunities in 2018, we anticipate that this will be tempered by a continued focus on maintaining a robust and flexible balance sheet
Over the last few years, companies and improved their financial positions through various strategic actions. The result is that gearing is now back to the 15 year Top 40 average of 31%. The repayment profile of debt for the Top 40 has also improved significantly and will continue to reduce over time in the absence of significant new debt.
Companies’ net debt to EBITDA ratio dropped to 1.5 from 2.2 in the previous year and only five companies had a ratio above four.
While Top 40 Miners are enjoying a bounce back, vigilance is key. Temptations loom in many guises for miners and their stakeholders. Miners will need to stay focused and deliberate towards the long term goal of creating sustainable value for all stakeholders. In particular, a watching brief will be on the following issues: