TOTAL net profits of the top 40 global mining companies last year plunged 72% to their lowest point in a decade, at $20bn, after they made massive write-downs of assets bought at the height of the boom.
Global advisory firm PwC’s 11th annual “Mine” survey, released on Thursday, shows these companies’ profits were dragged down by $57bn of impairments.
This was the second consecutive year of substantial impairments, after $40bn was written off in 2012. That year, most of the impairments were against goodwill (on acquisitions) and intangible assets, whereas last year they were taken on hard assets such as property, plant and equipment.
PwC energy and mining assurance partner Dion Shango says that when sentiment towards mining improves, some of the impairments on hard assets could be reversed.
South African companies ranked in the world’s top 40 by market capitalisation took R22.5bn of impairments, but only R5bn of this related to their assets in South Africa. The rest were write-downs of their assets in other countries.
The top 40 companies include several with operations in Southern Africa, such as Anglo American, BHP Billiton, Glencore, Impala Platinum, Rio Tinto, Randgold Resources and Vale. Mr Shango says most of the write-downs were taken by global gold miners and the top five diversified miners. Gold miners also wrote down their reserves by 8% to 431-million ounces, assuming lower gold prices. Among key commodities (coal, iron ore, copper, nickel and gold), gold fell the most, by 28%, which was its biggest annual price decline in 30 years.
This year, gold and nickel prices have picked up but the prices of iron ore, coal and copper have continued to weaken.
But Mr Shango says that iron ore remains an important global commodity.
“You have to take a view on whether there will be a significant slowdown in China’s urbanisation rate,” he says. “The future of Africa, with its young populations, will also see a lot of development and urbanisation. I believe iron ore will remain an important commodity going forward and play a crucial role in developing the world.”
Even though mining companies’ profits were under pressure, and net debt among the top 40 companies rose 42%, dividend payments continued to increase. PwC found that over the past five years the top 40 companies’ dividends had almost trebled to $41bn last year. At this level, dividends were twice as much as net profit.
PwC energy and mining assurance partner Andries Roussouw says that maintaining dividends at this level is not sustainable. Many companies, sitting on large amounts of cash, are returning it to their shareholders instead of reinvesting in their businesses.
Mining companies have adopted a number of strategies to survive during the downturn. Productivity, in particular improving the efficiency of equipment, is an important focus for management but despite their efforts, PwC’s mining equipment productivity index has continued to decline.
Another focus is for companies to manage their portfolios, for example by diversifying geographically. While this is a familiar theme among South African gold miners, it is also a strategy for Russian, Indian and Chinese companies, including Coal India and Zijin Mining.
The top miners are also shedding noncore assets, with Billiton and Rio Tinto both announcing or completing divestments.
Companies are also seeking joint ventures to share risk and capital costs. PwC says Glencore and Rio Tinto are rumoured to be discussing a joint venture for their coal assets in Australia’s Hunter Valley.
PwC also identifies an increasing focus on innovation among the world’s top miners. Miners still lag in this area: in a recent survey of the world’s 2,000 top companies by investment in research and development, there were only nine mining companies.
“In the years to come it is going to get harder and more expensive to mine, and companies need to innovate and do things differently,” according to the PwC report.
Mr Roussouw says long-term fundamentals for the sector remain strong, as emerging markets continue to drive global growth. China is leading with an expected 6.8% growth rate by 2018, according to International Monetary Fund estimates. From next year, growth rates in developed markets are expected to increase as confidence returns.