In its review of global trends of the mining industry, Price WaterhouseCoopers predicts that 2008 will reflect production growth that reflects growing cost pressures.
Commodity prices will remain volatile; however, recent significant price rises for bulk commodities will positively impact the bottom line, according to PwC's fifth annual review of the global mining industry.
Consistent with the prior year, the industry leaders will continue to spread out from their geographical homes to operate assets globally, the PwC global mining team forecast in their report, Mine-As good as it gets?
Price WaterhouseCoopers' global mining team said diversified global miners fared better last year than gold companies who have experienced the weakest margins.
Emerging market companies have shown especially high growth with these companies now comprising 36% of the Top 40 miners' market capitalization.
The total market cap of the global mining industry achieved 54% growth as measured by the HSBC Global Mining Index. Vale recorded the fastest growth of the top 3 mining companies by market cap, surpassing Anglo American, which fell from third to fifth position as it continues to divest non-mining assets. BHP Billiton remains in the top position.
The top four by revenue were BHP Billiton at $40 billion, Vale at $35.7 billion, Rio Tinto at $29.7 billion, and Xstrata at $28.5 billion, according to PwC.
The average one year Total Shareholder Return through December 2007 for companies in the Top 40 was 119% compared to 55% for 2006. This year's TSRs ranged from a high of 595% to a low of negative 22%, according to PwC.
Industry net profit increased 21% from $66 billion in 2006 to $80 million in 2007. Revenue grew 32% from $237 billion to $312 billion industry-wide last year. Nevertheless, net profits margins decreased from 28% in 2006 to 26% in 2007 - the first time this as happened since PwC began their analysis in 2002.
However, production marginally increased for most commodities with zinc and gold recording the highest growth increasing 11% and 9% respectively in 2007. Platinum production declined 9%. Copper remained the dominant source of revenue for the Top 40, accounting for 28% of total revenue.
All mining companies need to remain vigilant in their efforts to manage spiraling costs and investigate innovative ways to keep them in check, PwC warned. Compared to the oil and gas industry, mining companies typically take on greater risk and reward profiles via sole ownership of projects. A number of mining companies are investigating more joint venture structures or establishing shared service functions to reduce costs. Companies with mature operations are even starting to investigate sharing infrastructure such as mills, where capacity is available.
PwC's analysis also revealed:
· Market capitalization of the mining industry grew by 54% last year with strength from diversified mega-miners and emerging market companies.
· Top 40 mining companies' revenue increased 32%, but was overshadowed by a 38% rise in cost increases, thereby eroding net margins.
· For the first year since the initial year of the MINE analysis began in 2002, cash flows from operations were insufficient to cover the increased levels of investment activities; significant international financing has been obtained to fund growth; and
· Total shareholder returns for the top 40 miners averaged 119% in 2007, compared to 55% in 2006.
MINING CEOS YOUNGER
PwC's research found that gold continues to be a higher cost sector. Nevertheless, despite its relative weaker performance, gold companies typically have a higher price earnings multiple than other miners.
The study found that the average length of tenure of the CEO of the Top 10 mining companies is two years with an average age of 50. Not only are the mining leaders increasingly younger, they have skills sets different from the traditional chief executives. ...Of the top 10 company CEOs this year, more than half of them have a commercial background, although almost the same proportion continue to have specialization in mining and earth sciences.
Mining CEOs told the PwC global mining team that they believe that analysts have been too conservative in their valuations of miners due to the usage of commodity prices that do not fully take into account future potential. This has lead to significant premiums being put on the table when a transaction occurs...
Indeed the credit contagion has a silver (or maybe golden) lining for the big miners, PwC's global team asserted. Many of the projects that were on the development table of juniors will be much harder to finance. Consequently, forecasters' supply expectations may not be met, driven by project delays from a lack of finance or labour, maintenance and other issues (such as weather, water and power), negatively impacting production.
While analysts include interrupted supply expectations in their forecasts, this remains an unrealistic assumption, particularly in an industry that been flat out delivering the maximum product possible over recent years, PwC asserted.
The other big positive that the CEOs point to is the level of cash that is generated at the top of the industry, PwC noted. This provides the leaders with many options. Another great sign of their confidence is the increase in ordinary dividends that have been declared. Industry leaders expect progressive dividend policies and when they increase the dividend, there is every expectation that it will be sustainable and, indeed, will be able to grow in the future.
In summary, CEOs remain extremely confident in the future of the industry, PwC said.