CEOs of global mining companies are on the acquisition trail as they believe mining companies are still being undervalued by a market that has not fully grasped the story of China and other fast developing countries.
Hugh Cameron, African Mining Leader at PWC, said today the company's Review of global trends in the mining industry 2008 found a new generation of mining CEOs believe demand for metals will outstrip supply by far in the near future as they have learnt that bringing on new supply is difficult and costly.
The CEOs believe the market and analyst still don't fully comprehend the story of China and other fast developing countries that will lead to the increase in demand to occur over the next decade. The mining leaders believe the gap between supply and demand will continue and potentially grow, leading to high commodity prices over time.
The CEO's believe that analysts haven't understood the China and India story and that the future prices they are using in their models are out of date, said Cameron.
He said the sub prime crisis also carried a silver lining for big miners as it has led to lower stock prices, while it would now also be more difficult to finance projects owned by juniors.
Against this background, the high level of cash generated at the top of the industry, implied that large companies did have the cash to make acquisitions.
Cameron said he didn't know when acquisitions would be made, but one thing was certain - they would take place.
He said the views of company leaders drove corporate activity last year that saw BHP Billiton making a bid for Rio Tinto and Vale and Xstrata seriously talking about a merger.
The industry - or top 40 mining companies surveyed - grew 54% in market capitalisation due to growth in diversified majors and BRIC companies last year, but net profit margins fell from 28% in 2006 to 26% in 2007. Total shareholder returns for the top 40 companies averaged 119% in 2007 compared to 55% in 2006.
The drop in net profit came as revenues in the industry grew by 32%, but costs increased by 38%. Cameron warned that some companies could get under pressure if they didn't keep a close watch on cost.
Last year was the first year since 2002 that cash flows from operations were insufficient to fund higher investment to realise growth ambitions. Significant external financing was obtained to fund growth plans.
Interestingly, companies based in emerging markets are expanding globally and mining CEOs recognise the top end of the industry is not the domain of western companies any longer.
The top three companies by market capitalisation in 2007 were BHP Billiton, Rio Tinto and Vale, while Anglo American moved down from third to fifth place.