Gloves are off as world’s big miners fight for market share
THE global mining industry's fight for value and free cash flow has become a brawl after 2014 saw the world's 40 largest miners ramp up production, slash capital spending and rein in costs, according to a PwC analysis released yesterday.
According to PwC's 12th annual global report - Mine 2015: The gloves are off - the industry heavyweights delivered a mixed scorecard in 2014, with overall market capitalisation falling by 16% and net asset values declining for the first time.
However, dividend values reached a record high, with yields increasing to 5%, up from 4.3% in 2013.
Free cash flow improved from $US3 billion in the red in 2013 to $US24 billion in the black in 2014, due in large part to a decrease in capital expenditures - which supported the record dividend flow.
The results were driven by continued pressure on commodity prices, with iron ore, coal, and copper prices falling 50%, 26% and 11% respectively in 2014.
This slide continued into 2015, with a 12% drop in the price of iron ore in the first third of the year, and 5% and 6% drops for coal and copper respectively.
Gold remained relatively stable.
PwC Australia's energy, utilities and mining spokesman Jock O'Callaghan said 2014 was the year that intention became reality, as efforts to control costs and reduce capital spending started to materialise in reported results.
"Last year was the year the industry really turned the screws to increase efficiencies, and that's been borne out by a 5% reduction in operating costs," he said.
"Expenditure on significant projects declined 20% and exploration spend was wound back 53% to a miserly $US4.9 billion.
"Capital velocity - a proxy for measuring a company's growth agenda - slowed to just over 12%, a trend we expect will continue throughout 2015."
Mr O'Callaghan said the focus on costs and spending control would be a boon for yield-hungry investors in the short term, but ultimately miners would need to address the "growth question" to arrest sliding market values.
"You can't cut your way to growth and this is the second consecutive year of sliding market values, albeit at half the total decline we saw in 2013," he said.
"The total market capitalisation of the top 40 is now sitting at the same level as it was back in 2004, and only about half the value of four years ago.
"The lower commodity prices show no signs of abating, so industry participants will eventually need to grasp the nettle and deploy strategies that put them back on the path to sustainable growth."
In the meantime, some would walk a fine line, balancing a desire for stable dividends with the need for a healthy balance sheet.
Eight of the top 40 had credit rating downgrades during 2014, and a further 10 were placed on negative outlook.
While decreasing commodity prices drove lower revenues, the report found this was partially offset by increased volumes, particularly in iron ore where supply had increased after large expansion programs.
According to Mr O'Callaghan, the slump in iron ore prices was a combination of oversupply and slowing demand, and while the slowdown in China was a factor, it needed to be put in perspective.