Mining looks good worldwide

The net profits reported by the world’s 30 largest listed mining companies increased by 95%, to US$11.5 billion from US$5.8 billion, in 2003, according to a report by PricewaterhouseCoopers.

Mine — Review of Global Trends says the global market capitalization of the mining industry doubled between September 2002 and March 2004, to more than US$390 billion. Contributing to the increase was the impact of higher demand from China.

The industry has also seen longer-term consolidation. A simple comparison of market capitalization of the 10 largest companies in 1990 and 2004 shows that while the top three have remained intact and expanded their mining operations, the only other company to remain in the top 10 is Newmont Mining.

Another boon for mining was that returns on equity increased to more than 10% in 2003 from less than 7% in 2002. The report suggests 2004 could prove to be even better.

“We seem to be at the start of the first mining boom of the 21st century,” says PricewaterhouseCoopers spokesman Paul Murphy. “Canadian companies have contributed to this trend and rank third in terms of total market capitalization globally. This trend has been bolstered in Canada in the area of exploration, particularly in British Columbia, where federal and provincial improvement of flow-though-share arrangements, combined with activity in the diamonds sector, has positioned the country well for future growth.”

The surge in the gold price over the past two years, together with increases in the prices of base metals, has re-invigorated the industry. As most mining companies have operations outside of the U.S., much of the positive impact of these price increases has been eroded by the weakening of the U.S. dollar.

Historically, the exchange rates for major mineral regions such as Australia, Canada and South Africa have provided a natural hedge, such that local denominated commodity prices have not changed substantially. The structural change of global demand, whereby Asia is increasingly the key driver rather than the U.S., may have implications for the long term in the U.S. dollar. But so long as commodities are priced in U.S. dollars, the most important aspects of the natural hedge should persist.

The safety performance of the industry has improved in recent times. However, China’s official record of 6,000 fatalities in 2003 remains deplorable. The reports says the industry must continue to focus on improving the safety of the work environment.

There has been an upswing in exploration, and capital expenditure has also increased. However, the report advises the industry to proceed with caution. History has shown that bringing too much new production on-stream in response to such a favourable environment has exacerbated the start of the decline of the global cycle. This boom-and-bust cycle has led to capital destruction and driven investors away from the industry. The recent concentration of ownership (an outcome of the extensive industry consolidation over the past five years) should lead to better-informed decisions on development and expansion opportunities, which, in turn, should enable the industry to manage the supply-demand cycle.

PricewaterhouseCoopers’ 2003 research highlighted some significant gaps between what companies are reporting and what stakeholders perceive to be important. The publication shows that there is still scope for companies to increase transparency in such areas as mineral reserves, hedging, and environmental obligations.

The report also highlighted the gap that exists, in the area of sustainability reporting, between companies in the Southern Hemisphere and those in North America. In particular, the report notes that Australia has been a model of success in this area and that many companies, including some in British Columbia, have taken steps toward adopting a more sustainable model for their operations.

The full report is available to download at www.pwc.com/ca/mining