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4th July, 2009
Tough Road Ahead Of Mining Industry
Mining companies have some difficult decisions to make if they are to reduce costs and protect margins in the prevailing economic environment, professional services group Pricewaterhouse-Coopers (PwC) said in a report published this week.
“There is no doubt that the industry is facing a tough road ahead,” said PwC US mining leader Steve Ralbovsky.
“Reducing capital and operating expenditures and managing production levels to ensure they operate at the lowest possible cost will be crucial for mining companies wanting to combat the current economic conditions.
“However, given the long-term nature of mining projects and associated capital commitments, it may be difficult for companies to drastically reduce costs in the short term.”
In Ghana, for instance, the Managing Director of AngloGold Ashanti’s Obuasi Concession, Keith Faulkner, was reported to have said last month that even though 300 million dollars has been pumped into the company in the past five years to meet the challenges in the gold business, it continues to find itself in dicey financial situation.
Currently, the production level of the Obuasi mine is between 370,000 and 400,000 ounces of gold per annum, but Faulkner said, “that’s woefully insufficient; we need to increase production at a reduced cost”.
He said even in the face of financial difficulties, the company would need injection of more capital to build infrastructure and acquire additional equipment to turn its fortunes round.
In the report, titled ‘Mine — When the going gets tough’, PwC analysed the financial performance of the global mining industry and examined current trends in the industry, looking at the top 40 global mining companies by market capitalisation.
Interestingly, despite the economic downturn in the fourth quarter of 2008, mining companies still increased revenue by 23 per cent year-on-year in 2008, in what PwC calls “a year of two parts”.
However, operating costs continued to rise at a greater rate than revenue and net profit fell 14 per cent compared with 2007.
The market capitalisation of the top 40 mining companies plunged a whopping 62 per cent in 2008 compared to the S&P 500, which declined by 38 per cent over the same period.
“Shareholders lost confidence in the economy and the industry and share prices plummeted,” PwC said.
Still, despite the sharp decline, the overall level of market capitalisation is still above that recorded in 2005, which, at the time, was seen to be a ‘spectacular year’.
Further, while the mining sector may not have anticipated the sharp decline, “the response has been rapid and decisive,” the report said.
Overall, 14 of the top 40 announced mine closures, production cuts or moves to place mines on care-and-maintenance during the first quarter of this year, while another $13 billion of capital expenditure has also been deferred or cancelled.
Combined, this has led to more than 40,000 planned redundancies across the industry.
However, it is likely that companies will need to take further steps to put a lid on costs.
“The short-term outlook for mining looks bleak, and without management intervention margins will be quickly eroded,” PwC said.
“Most indicators point toward a tough period for the industry as the short-term issues dominate the agenda.”
Ultimately, success in the long term will depend on how the mining industry reacts “when the going gets tough”.
Predictably, gold companies fared the best during 2008, with market capitalisation in the sector only decreasing 20 per cent, as investors, seeking a safe haven, pushed the price and demand for the yellow metal upwards.
Gold miners now comprise 26 per cent of the total market capitalisation of the top 40, more than double the 2007 level.
Four gold companies are now in the top 10, with Goldcorp and Newmont up from fifteenth and seventeenth respectively, while Kinross Gold’s market capitalisation remained steady over 2008, moving the Toronto-based company from twenty-fifth to tenth place, making gold the most represented commodity in the top 10.
The biggest gold producer by market capitalisation and production is Canada’s Barrick Gold.
Overall, at December 31, 2008, diversified Anglo-Australian giant BHP Billiton was the biggest miner by market capitalisation, followed by Brazil’s Vale, Chinese group Shenhua and Rio Tinto, Barrick, Anglo American, Goldcorp, Newmont, India’s NMDC and Kinross, respectively.
“There is no doubt that the industry is facing a tough road ahead,” said PwC US mining leader Steve Ralbovsky.
“Reducing capital and operating expenditures and managing production levels to ensure they operate at the lowest possible cost will be crucial for mining companies wanting to combat the current economic conditions.
“However, given the long-term nature of mining projects and associated capital commitments, it may be difficult for companies to drastically reduce costs in the short term.”
In Ghana, for instance, the Managing Director of AngloGold Ashanti’s Obuasi Concession, Keith Faulkner, was reported to have said last month that even though 300 million dollars has been pumped into the company in the past five years to meet the challenges in the gold business, it continues to find itself in dicey financial situation.
Currently, the production level of the Obuasi mine is between 370,000 and 400,000 ounces of gold per annum, but Faulkner said, “that’s woefully insufficient; we need to increase production at a reduced cost”.
He said even in the face of financial difficulties, the company would need injection of more capital to build infrastructure and acquire additional equipment to turn its fortunes round.
In the report, titled ‘Mine — When the going gets tough’, PwC analysed the financial performance of the global mining industry and examined current trends in the industry, looking at the top 40 global mining companies by market capitalisation.
Interestingly, despite the economic downturn in the fourth quarter of 2008, mining companies still increased revenue by 23 per cent year-on-year in 2008, in what PwC calls “a year of two parts”.
However, operating costs continued to rise at a greater rate than revenue and net profit fell 14 per cent compared with 2007.
The market capitalisation of the top 40 mining companies plunged a whopping 62 per cent in 2008 compared to the S&P 500, which declined by 38 per cent over the same period.
“Shareholders lost confidence in the economy and the industry and share prices plummeted,” PwC said.
Still, despite the sharp decline, the overall level of market capitalisation is still above that recorded in 2005, which, at the time, was seen to be a ‘spectacular year’.
Further, while the mining sector may not have anticipated the sharp decline, “the response has been rapid and decisive,” the report said.
Overall, 14 of the top 40 announced mine closures, production cuts or moves to place mines on care-and-maintenance during the first quarter of this year, while another $13 billion of capital expenditure has also been deferred or cancelled.
Combined, this has led to more than 40,000 planned redundancies across the industry.
However, it is likely that companies will need to take further steps to put a lid on costs.
“The short-term outlook for mining looks bleak, and without management intervention margins will be quickly eroded,” PwC said.
“Most indicators point toward a tough period for the industry as the short-term issues dominate the agenda.”
Ultimately, success in the long term will depend on how the mining industry reacts “when the going gets tough”.
Predictably, gold companies fared the best during 2008, with market capitalisation in the sector only decreasing 20 per cent, as investors, seeking a safe haven, pushed the price and demand for the yellow metal upwards.
Gold miners now comprise 26 per cent of the total market capitalisation of the top 40, more than double the 2007 level.
Four gold companies are now in the top 10, with Goldcorp and Newmont up from fifteenth and seventeenth respectively, while Kinross Gold’s market capitalisation remained steady over 2008, moving the Toronto-based company from twenty-fifth to tenth place, making gold the most represented commodity in the top 10.
The biggest gold producer by market capitalisation and production is Canada’s Barrick Gold.
Overall, at December 31, 2008, diversified Anglo-Australian giant BHP Billiton was the biggest miner by market capitalisation, followed by Brazil’s Vale, Chinese group Shenhua and Rio Tinto, Barrick, Anglo American, Goldcorp, Newmont, India’s NMDC and Kinross, respectively.
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