Top miners squandered $200 billion during boom
There are many startling statistics in PwC's latest report into the performance of the world's 40 largest mining companies which the management consultants called a "race to the bottom".
The Mine 2015 report shows the top 40 companies suffering their first collective net loss in history of $27 billion, a loss in collective market capitalization of 37% (to below half a trillion dollars) with some companies now trading below net book value, the lowest return on capital ever and record high leverage of 46%.
Some of the dismal metrics can be explained by low commodity prices, a weak operating environment and shareholders revolt, but the report also found that poor investment and capital management decisions squandered the benefits of the boom.
The significant drop-off in capital expenditure as miners focus on shedding assets, mothballing marginal projects or curtailing capacity signals an almost stagnant investment environment
With a further $53 billion of impairments in 2015, miners had wiped out the equivalent of just under 32% of their actual capex since 2010 offering "a stark reminder of the value that has already been lost," says PwC.
These asset writedowns amount to a stomach-churning $199 billion in lost value of the collective $632 billion in capital spending from 2010 – 2015 and represents a hefty 77% of this year’s capital expenditure.
“While it is unfair to focus on the charges incurred this year as price assumptions were adjusted down, a longer-term perspective indicates a lack of capital discipline commented Andries Rossouw, assurance partner at PwC.
The significant drop-off in capital expenditure as miners focus on shedding assets, mothballing marginal projects or curtailing capacity, "signals an almost stagnant investment environment," says PwC. The report raises concerns over the ‘spot mentality’ from shareholders focused on fluctuating commodities prices and short term returns rather than the long term investment horizon required in mining.
PwC says debt management has moved to the top of the business agenda for many of the top 40 miners as liquidity metrics has begun to trigger alarms: "For some, the driver was maintaining access to capital at reasonable rates. For others, it was simply crucial to survival."
While the Top 40 trimmed a slither of their overall debt in 2015, liquidity metrics have begun to trigger alarms. Leverage is at an all-time high and cash used to repay debt was broadly equal to cash from borrowings according to the report.
“The response of the Top 4o miners has been twofold: an even greater focus on cutting expenditure, whether operational or expansionary, and an acceleration in asset sales. It will be interesting to see if these efforts can continue and the subsequent knock-on effects,” says Rossouw.
The report analysed 40 of the largest listed mining companies by market capitalization and four new entrants in this year’s top 40 were Chinese companies. AngloGold Ashanti has reemerged in the top 40 for the first time since 2013.
The number of emerging companies included in the Top 40 has increased by two and now totals 19. For the first time, a lithium company has made the top 40. While this must be viewed in the context of the much larger traditional energy sources, there is no doubt that the energy landscape is changing and new world disrupters will have a role to play, says the report.