A PricewaterhouseCoopers report published today says the revenue of Australia's mid-tier 50 mining companies has stalled as sinking commodity prices have severely impacted top line growth.
PwC analysts, however, assert that the shining light may well prove to be the performance of gold.
One of the hardest commodities to predict, gold has seemingly return to its historical supply/demand role as a store of wealth in difficult times, the study, Aussie mine: A tale of two halves, noted.
The composition of the Mid-tier 50 saw 14 gold companies appear within its ranks, up from 10 gold miners last year.
The results of gold-producing companies in the mid-tier 50 do not yet reflect improved profit margins, but with this price increase arriving in more recent months, along with the AUD/USD foreign exchange rate falling back from near parity in the middle of the 2008 calendar year, gold could provide a real fillip for the mid-tier industry.
Key observations about this year's Mid-tier 50 miners include:
• Seven of the 15 new companies on the list have gold projects.
• Eight of last year's 50 companies have been acquired.
• Companies near the lower end of last year's Mid-tier 50 with exposure to relatively lower priced commodities in 2008, have been significantly impacted, particular those with exposure to nickel, zinc and lead.
Tim Goldsmith, PwC Global and Australian Mining Leader, said, The meteoric rise of Australia's Mid-tier mining sector was countered by an equally dramatic fall. Three years of incremental market gains were extinguished in three months.
At the end of December 2007, market capitalization for the Mid-tier 50 had a collective value of A$63.8 billion. This had been whittled away to $31.2bn at 31 December 2008. Out of the 50 companies, only four managed to increase their market capitalization year-on-year.
Noting that more than half the value of the Australian mining sector was wiped out in a period of less than six months, PwC analysts advised it is a time for mining companies to revisit internal decision-making and to realize that a new paradigm is essential for survival. We are no longer operating in a time when the focus was to maximize production at all costs.
The ability to either successfully re-negotiate debt or access new borrowings will be crucial for survival to many, the report warned.
The level of focus on costs, and each company's approach to cost management, will differ depending on the maturity of their operations and the existing business and governance structure in place, PwC said. It will be essential for companies to realize that a focus on costs is the responsibility of all levels within the organization and companies must quickly identify and act on activities that produce high cost outcomes.
A focus on costs will be essential for obvious areas such as capital budgeting and operational expenditures, the analysts advised. Recent changes to indirect taxation laws relevant to the industry may present mining companies with real cost savings if they perform a detailed assessment of their existing indirect tax practices and policies.
The study also noted that asset write-downs ballooned nearly 4,000% from A$69 million in 2007 to $2.7 billion in 2008. Goldsmith said, Slowing demand and lower commodity prices have compelled miners to scale-back projects and review the economic viability of new capital works. Diminished earnings expectations have resulted in significant value write-downs.:
He forecast that, with impairments reported for only nine out of the Mid-tier 50, we expect impairment volumes to further escalate during 2009.
The top five Mid-tier 50 companies by revenue are Straits Resources, OZ Minerals, Iluka Resources, and Centennial Coal. The top five Mid-tier 50 companies by profit are Aquarius Platinum, Centennial Coal, Energy Resources of Australia, Felix Resources and Alumina.
Meanwhile, the study noted, The Australian Government has been perceived by many to be sending mixed messages on foreign investment. On the one hand, significant foreign investment is welcomed for the broader economic impact of creating jobs and pouring money into the local economy.
However, protectionist concerns and the intervention of the FIRB are seen by some as impediments to obtaining much needed capital for the Australian mining industry, the document advised.
All things considered, this is an emerging story and we believe that Australia should continue to welcome foreign investment and address ownership concerns on a case-by-case basis, the analysts suggested.