High debt, economic uncertainty to continue to pain global miners

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Uncertain global economic conditions and high levels of debt will continue to impact the big mining companies this year, a new report on the sector has warned.

The end of the boom in China, and the subsequent crash in commodity prices, has left global mining companies in a race to the bottom, consulting firm PwC said in its annual review of the sector.

The report counted the first collective net loss ($27billion) in the Top 40’s history and said the market capitalization was down 37 per cent, in some cases below net book value, effectively wiping out all gains during the commodity super cycle.

“Last year was undoubtedly challenging for the mining sector. A 25 percent year-on-year decline in commodity prices meant mining companies had to ratchet up their productivity efforts, while some found themselves in a fight for survival, with asset disposals and closures to follow,” said Jason Burkitt, UK mining leader, PwC.

He said the response of the Top 40 miners has been two fold. Firstly to continue their cost cutting measures which has already delivered substantial savings and secondly, to offload non-core assets. “We expect 2016 to be very busy on the deal front.”

The report Mine 2016 also found:

  • Investors punished the Top 40 for poor investment and capital management decisions and, in some quarters, for squandering the benefits of the boom.
  • Concerns over the ‘spot mentality’ from shareholders focussed on fluctuating commodities prices and short term returns rather than the long term investment horizon required in mining.
  • A focus on maximising value from shedding assets as well as mothballing marginal projects or curtailing capacity by Top 40 miners. This is further evidenced by a significant drop off in capex signalling an almost stagnant investment environment.
  • A positive focus on cost reduction resulting in a 17 percent drop in operating costs against a backdrop of higher production volumes and lower input costs – an impressive achievement given the production increases seen during 2015.

With a further $53 billion of impairments in 2015, miners have now collectively wiped out the equivalent of 32 percent of their actual capex since 2010, a stark reminder of the value that has already been lost. This also represents a hefty 77 percent of this year’s capital expenditure.

The report said that whilst China is still critical to the success of the industry, accounting for approximately 40 percent of overall commodity demand, it can no longer be relied on to supercharge returns.

As the country moves from a manufacturing based economy to a services-based economy the previously rampant demand for commodities will not resume with the same intensity. Despite this shift, the number of Chinese mining companies in the Top 40 continued to increase from nine to 12, the report said.

It said debt management has moved to the top of the business agenda for many of the Top 40 miners. For some, the driver was maintaining access to capital at reasonable rates. For others, it was simply crucial to survival.

 

 

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