Johannesburg, South Africa — MININGREVIEW.COM — 17 September 2010 – After a hiatus, the future is looking bright again for the mining industry, although significant short-term volatility remains. The 2009 results suggest that there may well be other dips, but that long-term demand fundamentals will drive this cycle.
Making this prediction in its seventh annual review of global trends in the mining industry “’ “Mine; Back to the Boom” “’ PricewaterhouseCoopers (PwC) says that the CEOs of the top 40 mining companies by market capitalisation point to strong fundamentals on the demand side supporting the next phase of the mining boom.
They also express concern that governments facing challenging budget deficits will look to the mining industry as a source of additional taxation revenues—with the potential to kill the goose that lays the golden eggs.
“It is essential that lessons from the past are learned and organisations are prepared for the inevitable new uncertainties, so that the industry can fully extract the benefits of being back to the boom,” the report emphasises.
The recent volatility has inevitably brought a focus on risk, and PwC asks the question whether companies now understand the risks they face, and whether they have the processes in place to respond to the type of unpredictability the market has experienced.
Also looking to the future, exploration spend by the Top 40 declined significantly, not surprising given its discretionary nature. “But 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?” the review asks.
It also points out that, despite approximately US$200 billion (R1.3 billion) of capital expenditure over the past three years, production has remained flat across most commodities, with companies shutting down higher cost operations in response to market conditions, and longer-term assets remaining under construction.
The review says that 2009 ended with the market capitalisation of the Top 40 returning to the heights of 2007, and a cautious optimism returning to market releases. Despite this, however, the aggregated financial results showed the impact of a challenging 2009 on the Top 40: Revenues declined 15% year-on-year; net profit was down 26%; cash flow from operations dropped 27%; and net debt decreased by 21%.
“It is notable that through the global economic crisis none of the Top 40 companies were subject to bankruptcy or voluntary administration provisions,” says the report. “This was largely due to their ability to remove their debt overhang, strengthening commodity markets over the year, and the positive impact of government stimulus packages around the world.”
On the other hand, PwC makes the point that 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. “It was a very short window of opportunity, but it was open,” the review stresses.