Race to the Bottom

According to the PwC Mine 2017 report, the world’s Top 40 miners recovered from a race to the bottom, with bolstered balance sheets and a return to profitability in 2016.

The PwC Mine 2017 report was released at the Junior Indaba conference held in Johannesburg on 7 & 8 June.

The report analysed 40 of the largest listed mining companies by market capitalisation. The financial information for 2016 covers the reporting periods 1 April 2015 to 31 December 2016, with each company’s results included for the 12-month financial reporting period that falls into this time-frame.

The number of emerging companies included in the Top 40 has decreased by two and now totals 17. There were seven new entrants from the previous year, five of which had made appearances on previous rankings in either 2014 or 2015.

The PwC Mine 2017 report recognises a return to profitability in 2016, with an aggregate Top-40 net profit of US$20 billion; after an aggregate loss of $28 billion in 2015. The improved fortunes of the industry were then directed to strengthening balance sheets.

Gearing ratio

Overall the market capitalisation of the Top 40 increased in 2016 by 45% to $714 billion, approaching the 2014 level, which was mainly due to rising commodity prices.

Revenue from the Top 40 remained relatively flat, up just 1% from the previous year’s sum of $491 billion despite a rebound in commodity prices, particularly coal and iron ore in the second half of the year.

Accordingly to the report, capex fell dramatically again, by a further 41%, to a new record low of just $50 billion. Impairment charges tumbled last year to a less-alarming $19 billion.

Debt repayments totalled $93 billion, up from $73 billion a year earlier, with most of the debt issued to refinance, rather than fund acquisitions or mine development. “We see an improved gearing ratio of 41%, down from the 2015 record of 49%,” comments Michal Kotzé, energy, utilities and mining industry leader for PwC Africa.

“But this is still well above the 10-year average of 29%. Interestingly, we also found that around half the capex figure was invested in sustaining activities, so the growth capital portion was strikingly small compared with previous years.”

Market optimism

The report highlights that rapidly rising commodity prices sparked renewed market optimism and improved credit ratings across the Top 40 firms. Valuations also climbed, especially for the traditional miners, with the trend continuing through the first quarter of 2017 even as commodity prices remained flat.

But, valuations aside, there is little to suggest that the group made any substantial advances throughout the year. For the fourth consecutive year, the industry reduced spending on exploration. $7.2 billion was invested in 2016, barely one-third of the record $21.5 billion allocated in 2012, with the funds cautiously targeted at less risky, later stage assets, typically located in politically stable countries.

Limited M + A activity

Interestingly, the report records that one of the biggest merger and acquisition stories of 2016 concerned the assets that did not sell. Numerous large deals, expected to be completed by early 2017, were withdrawn from the market, possibly due to the rebound in commodity prices and the improving prospects of the companies that owned them.

More broadly, asset sales in 2016 were largely strategic rather than fire sales. Mines, especially diversified players, sold minority stakes in non-mining businesses.

China in the driving seat

China remains the exception to the dominant investment behaviour within the Top 40. During the downturn, Chinese companies demonstrated one enormous advantage over other miners from both traditional and emerging countries: access to capital. With deeper pockets, Chinese players were able to fund more acquisitions than their counterparts, either confidently buying assets at bullish prices or moving quickly on assets made available at the bottom of the price cycle.

The report also indicates an increase in acquisitions by Chinese private equity firms, and PwC expects China to continue to be active in acquiring global mining assets as a way to reduce its longer term dependency on imports.

Moving into action

Balance sheet clean-ups require discipline, which has resulted in a tailing-off of impairments, the avoidance of any new bankruptcies, the absence of any significant streaming transactions and a general passing of distress. The market rightly applauded this, reinstating a positive gap between market caps and net book values that was absent in 2015.

All of this provides a platform for decisive action in the future. While many will be willing to ride the waves of industry sentiment, others will see the conditions as ripe for value accretive moves, with market differentiation their immediate goal.

Action might also come in the form of commitments to greenfield projects, mergers and acquisitions or technology, or a combination of these, while others may realign their strategy in response to external forces such as recycling and substation, shareholder activism and government intervention.

Digital revolution

New technologies promising a boost for the sector include software to optimise asset utilisation, devices to remotely monitor and control activities, and robotics to automate repetitive task. The benefits of asset optimisation tools are significant. According to an analysis by PwC, it is estimated that maintenance costs can be reduced by 20 to 40%, asset utilisation increased by up to 20%, capital expenses reduced by 5 to 10%, while also delivering improved environmental, health and safety outcomes.

A number of Top 40 miners have announced or implemented digital innovations that are already enhancing performance.

“Mining companies need to combine engineering excellence and know-how with a new open-mindedness to learn from advanced analytics and a need to embrace robotics and platforms that fundamentally challenge decades of doing things the same way…it is as much about behaviour as technology,” Michal concludes.

PwC, www.pwc.com