According to the recent report from PwC, “Mine 2012: The growing disconnect,” there is a growing disconnect between mining companies and shareholders, despite the fact that the Top 40 global mining companies posted record profits of $133 billion and generated record operating cash flows of $174 billion in 2011.
The PwC report found that market capitalization fell by 25 percent to about $1.2 trillion as investors don’t seem to buy into the industry’s long-term growth story.
“There was a growing divide in the mining industry last year as company stocks significantly underperformed the broader markets and lost value despite record profits, and the disconnect between share values and many commodity prices widened,” said Steve Ralbovsky, U.S. mining leader at PwC. “This disconnect was driven by a number of factors, including the fact that the mining industry is a bellwether for the global economy and, with the European debt crisis and fears of a slowdown in global growth during the second half of the year, stocks have been highly volatile. In spite of these factors, we believe the demand story remains robust and long-term growth in emerging markets is more significant to the mining industry than short-term jitters in the developed world.”
According to the report, the 9th edition of PwC's annual report on the global mining industry the financial results for the Top 40 hit new heights; revenues increased 26 percent to more than $700 billion, investing cash flows grew 92 percent, the Top 40 returned 156 percent more to shareholders than in 2010, and total assets remained above $1 trillion and grew a further 13 percent.
Production volumes in 2011 were on average six percent higher than in 2010, but for gold and copper in particular, production volumes remained at similar levels to those reported in 2005. Companies simply were not able to bring on production for these two commodities, highlighting the shift from demand to supply as the major factor in today’s industry.
With the price earnings ratios for the Top 40 at one of the lowest levels in years, the report states that miners are faced with the challenge of winning back investor confidence.
“In response to increasing shareholder demands, CEOs are exercising greater discipline and greater focus when making big investment decisions,” added Ralbovsky. “However, falling stock prices suggest investors feel the Top 40 are not doing enough. Investors are demanding capital discipline to increase shareholder returns while miners are looking to use cash from record results to develop new projects as they believe supply is critical to the future of the industry. Due to the competing demands for cash, CEOs are spending more of their time engaging shareholders and making sure their capital priorities are clear.”
The report states that, while the industry’s headline story for the last five years was demand, the main story for the next five years will be supply. Among some of the key issues facing supply: structural changes to cost bases caused by decreasing grades and increasing input costs, changing fiscal regimes and resource nationalism, ongoing disruptions to production, and remoteness of certain locations and increasing capital expenditure requirements to bring supply to market.