Commentary: The game is changing for global miners

When the world asks mining companies to jump, they say how high. Thanks to ever-growing emerging market demand and steadily rising commodity prices, the financial prowess of the world’s largest mining companies seems to know no bounds.

How high you may ask? According to PwC’s latest annual mining report, Mine 2011: The Game has Changed, the top 40 global mining firms’ total assets could break through the US$1-trillion mark in 2011. The top 40 – including nine headquartered in Canada – increased their total assets to US$943 billion in 2010, driven by record levels of cash, and property and equipment on company balance sheets.

The financial results of the top 40 in 2010 are nothing short of spectacular. Total revenues increased 32% to a record US$435 billion. Net profit rose 156% to US$110 billion and operating cash flows grew by 59%, leaving more than US$100 billion cash-on-hand at year-end.

The report also found the top 40’s total year-end market capitalization increased 26%, driving up the market capitalization of the smallest company on the list to US$11 billion in 2010 from US$6.5 billion in 2009.

The top Canadian-based mining firms significantly contributed to the overall top 40 financial totals. Together, the nine Canadian companies increased revenues by 38%. Their net profit increased a staggering 1,536% to US$8.9 billion and operating cash flows grew 224%. It’s important to note, however, that the 2009 base for comparison is low as a result of Barrick Gold settling gold sale contracts that year.

Contributing to these impressive numbers are record-high commodity prices coupled with an overall 5% rise in production in 2010. Some are wondering if these results are the new normal.

We believe the mining industry is ushering in a new era where demand will continue to be stoked by emerging markets whose thirst for resources seems insatiable. A case in point is China’s 7% GDP growth target in its recently released 12th Five Year Plan. This supports the viewpoint that continuing high demand for base metals is here to stay.

Yet, with a new era comes new challenges. On one hand, external forces are placing heightened demand on mining companies for their resources. But on the other, challenges within the sector are creating obstacles. Supply is increasingly constrained as development projects – many in remote territories – become more complex.

Ironically, we’re also seeing miners financially able to build new mines, but skill shortages both within and outside of the sector mean they can’t find the people to physically build their desired projects. 

While debts are down, new sources of capital stem from state-owned entities, sovereign wealth funds and private equity. These sources, along with cash flow from operations, provide ample funding for new projects. 

The costs to mine have also skyrocketed due to lower grades, higher fuel prices and a low U.S. dollar. This will likely increase the overall cost base of mining, as well as commodity prices permanently.  

To keep up with demand, the top 40
have announced US$311 billion of capital expenditure programs, with over US$120 billion planned for 2011 – more than double the total spent in 2010. But the top 40 aren’t increasing their spending on exploration. Instead, they are relying on the juniors for this function.

With low debt loads and more cash-on-hand, we also expect that the deal market will continue to see heightened activity with more mining firms better equipped to finance mergers and acquisitions. In 2010 for instance, there was a 26% increase in cash payments for investments. 

This strong cash position, however, is resulting in greater shareholder scrutiny. More shareholders are asking what companies are doing with excess cash and whether they should return it. In the first half of 2011, a number of companies have responded with significant share buy-backs. We could see this continuing in the near term.

These are interesting times for the mining industry. Growing demand by emerging markets for resources highlights that supply will be the most significant challenge the industry will face. The shift in balance is positive for mining companies, but getting to production will not be without its challenges in this new era.

– The author is a chartered accountant and a Tax Services partner in the Toronto office of accounting firm PwC. He is also PwC’s Canadian tax leader for the mining industry.

The full Mine 2011 report is available for free at: www.pwc.com/ca/mining.