Mining sector back to the boom: PwC report

, June 17th, 2010

The beginning of 2009 saw commodity prices continuing to fall globally, tough price negotiations with customers and challenging market conditions. However, 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 Top 40 returning to the heights of 2007 and a cautious optimism returning to the industry, according to PricewaterhouseCoopers' (PwC) seventh annual review of global trends in the mining industry - Mine, Back to the Boom.

The report highlights that although the year 2009 saw the global top mining companies' overall revenues, net profit and cash flows decline, none of the Top 40 companies were subject to bankruptcy or voluntary administration provisions. This was largely due to their prompt action in removing debt overhang, strengthening commodity markets over the year, and the positive impact of government stimulus packages around the world.
On the other hand, the report suggests, the global industry had other challenges to face. Although about $200 billion of capital expenditure was committed over the past three years, production remained flat across most commodities.
The exploration-spend by the Top 40 also declined significantly given its discretionary nature. As reserve replacement becomes more challenging, cutting back on spend on exploration poses a future supply challenge. "In 2009, there were no significant transactions completed – pointing to a potential missed opportunity for Indian mining, metal and power companies who seek to expand and improve supply security and had the available financial resources to acquire them.
However, with the continuing demand for mineral resources in developing countries such as India in the near-term to the long-term it is safe to assume that we are in the next phase of the boom," said Kameswara Rao, India Leader for Energy, Utilities, and Mining PwC.

What's on the minds of industry CEOs?
While views may differ, almost without exception the number one on the cards is the global economy. Fundamental to success in this industry will be the ability to understand the lead demand indicators, particularly obtaining a good read on the 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 would look to the mining industry as a source of additional taxation. The industry has recently moved further up the political agenda, with focus on matters such as taxation, carbon and sovereign ownership. This poses a significant challenge to companies from the developing world, in particular India as the private sector has been at the forefront of overseas mining acquisitions.
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 and are losing younger experienced staff. There is a growing need to look at advanced and automated technologies to lower costs at mine sites and improve productivity in ways that would have been unheard of just a few years ago.
"The Indian mining industry, with growing entry of private and captive miners, needs to re-look and focus on the safety and health of its workers. It is desirable that proper regulatory framework develops that can facilitate new technologies but also ensure proper safeguards are taken," said Kameswara on the future of this industry.

Commodity prices
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 and beyond into 2010 in many cases. The turnaround in copper prices has been most notable, with the 2009 year-end spot price reaching $7,342 per tonne.
In both iron ore and metallurgical coal markets we have seen a recent trend towards short-term contracts, driven by the big miners. 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.
This has significant lessons from Indian power and mineral-based industries to more carefully evaluate geographies and assets, and appropriately structure the projects, so that they can fully extract the benefits of the global mining industry being back to the boom.