The beginning of 2009 saw commodity prices continuing to fall, tough price negotiations with customers and challenging market conditions. However, mining companies responded swiftly and decisively: funding was restructured, mines were closed and production cut as margins declined.
However, in contrast, the year ended with the market capitalisation of the world’s top 40 companies, three of which are South African, returning to the heights of 2007 and a cautious optimism returning to market releases, according to PwC’s seventh annual review of global trends in the mining industry.
Hein Boegman, PricewaterhouseCoopers’ Africa mining leader says, “Although 2009 saw overall revenues decline, a drop in net profit and a decrease in cash flow in the industry, none of the top 40 companies were subject to bankruptcy or voluntary administration provisions. This was largely due to their ability to remove or restructure their debt overhang, strengthening commodity markets towards the second half of the year and the positive impact on demand partly resulting from government stimulus packages around the world. “On the other hand, there were no significant transactions completed during the year, pointing to a potential missed opportunity for those that may have had the available financial resources.”
Despite approximately US$200 billion of capital expenditure over the past three years, production remained flat across most commodities. Exploration spend by the top 40 declined significantly given its discretionary nature. As reserve replacement becomes more challenging, the lack of spend on exploration poses the question – when and where will the next world-class mines be found?
“This will only continue the supply challenge. Add to that the fundamental demand strength over the medium and long-term, driven by continued growth from China and other developing nations and I firmly believe we are back to the boom.”
While views of mining CEOs may differ, almost without exception the number one agenda item is the global economy. Fundamental to success will be the ability to understand the lead demand indicators, particularly obtaining a good read on China and other developing nations. Today’s CEO is more focussed on other macroeconomic factors, such as foreign exchange rates, the cost of energy and the impact potentially unsustainable government budget deficits will have on interest rates, tax regimes, and the global economy. However, cost remains a key value differentiator.
Industry CEOs have expressed concern that governments facing challenging budget deficits could look to the mining industry as a source of additional taxation. The Australian government recently announced a resources super profits tax, as well as royalty increases flagged in several other jurisdictions. The industry has certainly moved further up the political agenda, with focus on matters such as taxation, climate, carbon and sovereign ownership.
While some of the pressure may have been taken out of the labour market generally, the mining labour market is starting to tighten again, particularly in certain hotspots where miners are competing with other resource companies and infrastructure projects for skilled labour. However, the advent of remote, automated technology is creating opportunities to remove costs from mine sites and move people to lower cost centres in ways that would have been unheard of just a few years ago.
Metal prices continued on a downward trend for the first six months of 2009, with a sharp recovery in the second half for most commodities. The upward trend in commodity prices continued to the year-end price and beyond into 2010 in many cases. The turnaround in copper prices has been most notable, with the 2009 year-end spot price reaching US$7,342 a tonne. In both iron ore and metallurgical coal markets we have seen a recent trend towards short-term contracts, driven by the big miners. Gold, on the back of 7% production increases and a 12% increase in average price, saw its share of total revenue increase from 10% to 14% in 2009.
Boegman says, “After a hiatus, the future is looking bright again for the industry. Although significant short-term volatility remains – the 2009 results show there was a dip and there may well be other dips (such as the impact of the sovereign debt contagion in Europe) – the long-term demand fundamentals will drive this cycle. However, it is essential that lessons from the past are learned and new uncertainties are quickly identified and responded to, so that the industry can fully extract the benefits of being back to the boom.”