Global mining industry profits and shares went different ways in 2011: PwC

A new report by PricewaterhouseCoopers (PwC) says the financial performance of global mining companies and their stock prices headed in opposite directions last year.

The Toronto-based consulting firm says the top 40 global mining firms earned a record profit of $133 billion last year, however their market capitalization fell by 25%.

In Mine 2012: The growing disconnect, PwC adds that only six companies out of the top 40 firms saw their market capitalization increase in 2011, as a result of continuing global economic fears stemming from, among others, the ongoing European sovereign debt crisis and a projected slowdown of China’s economy.

“Investors have simply not bought into the industry’s growth story or are reacting to other short-term global economic concerns,” says John Gravelle, Canadian mining leader, PwC. “There is a growing disconnect between the two.”

Challenges with supply

Mining companies believe that increasing supply is critical to the future of the mining industry, says PwC.

The top 40 invested $98 billion in capital projects in 2011 and plan for a further $140 billion for 2012.  “However, given that market capitalization has fallen in a year of such high capital expenditures, investors don’t believe miners will execute their projects as planned or deliver returns as promised,” the study says.

“Compounded with calls to return more cash to shareholders, potentially at the expense of capital projects if they are deferred, it is unlikely that companies will be able to spend as planned. CEOs are faced with increasingly difficult capital allocation decisions as they try to balance growth with returns,” says Gravelle.

The executive adds that CEOs are exercising greater discipline and focus when making big investment decisions.

“They’re proceeding with caution as resource nationalism, rising costs, labour challenges and investor demands remain top of mind,” 

Gravelle says.

Iron ore a rock star

The price of iron ore hit record levels in 2011, at an annual average of $168/dmt, posting an annual increase of 29%.

PwC says iron ore is leading the way in terms of earnings before interest and taxes (EBIT), as well as revenue amongst other main commodities. As a percentage of revenue, iron ore has jumped from 20% to 42%, and EBIT has gone from 24% to 66% of the total.

As the most profitable commodity, iron ore is driving a number of international developments, says PwC. Global iron ore reserves expanded by 8% last year with multi-billion dollar capital projects underway in countries such as Australia and Brazil.

In its 10th annual edition, the report provides a comprehensive analysis of the financial performance and position of the global mining industry as represented by the biggest global mining companies by market capitalization.