The global mining industry's fight for value and free cash flow has descended into a brawl, after 2014 saw the world's 40 largest miners ramp up production, slash capital spending, and rein in costs, according to PwC analysis released today.
According to PwC's 12th annual global report, Mine 2015: The gloves are off, the industry heavyweights delivered a mixed scorecard in 2014, with overall market capitalisation falling by 16% and net asset values declining for the first time. Dividend values, however, reached a record high - with yields increasing to 5%, up from 4.3% in 2013.
Free cash flow improved from $3 billion in the red in 2013 to $24 billion in the black in 2014, due in large part to a decrease in capital expenditures - a result which supported the record dividend flows.
The results were driven by continued pressure on commodity prices, with iron ore, coal, and copper prices falling 50% 26%, and 11% respectively throughout 2014. This slide continued into 2015, with a 12% drop in the price of iron ore in the first third of the year, and a 5% and 6% drop for coal and copper respectively. Gold remained relatively stable.
PwC Australia's Energy, Utilities & Mining leader Jock O'Callaghan said 2014 was the year that intention became reality, as efforts to control costs and reduce capital spending started to materialise in reported results.
"Last year was the year the industry really turned the screws to increase efficiencies, and that's been borne out by a 5% reduction in operating costs," he said. "Expenditure on significant projects declined 20% and exploration spend was wound back 53% to a miserly $4.9 billion."
"Capital velocity - a proxy for measuring a company's growth agenda - slowed to just over 12%, a trend we expect will continue throughout 2015."
Mr O'Callaghan believes the focus on costs and spending control will be a boon for yield-hungry investors in the short-term, but miners will ultimately need to address the 'growth question' to arrest sliding market values.
"You can't cut your way to growth and this is the second consecutive year of sliding market values, albeit at half the total decline we saw in 2013," he said. "The total market capitalisation of the top 40 is now sitting at the same level as it was back in 2004, and only about half the value of four years ago."
"The lower commodity prices show no signs of abating so industry participants will eventually need to grasp the nettle and deploy strategies that put them back on the path to sustainable growth."
In the meantime, some will walk a fine line, balancing a desire for stable dividends with the need for a healthy balance sheet. Eight of the top 40 had credit rating downgrades during 2014, and a further ten were placed on negative outlook.
Oversupply driving iron ore slump, compounded by Chinese slowdown
While decreasing commodity prices drove lower revenues, the report found this was partially offset by increased volumes, particularly in iron ore where supply has increased on the back of large expansion programs.
According to Mr O'Callaghan, the slump in iron ore prices is a combination of oversupply and slowing demand, and while the slowdown in China is a factor, it needs to be put in perspective.
"China still accounts for 40 to 50% of global commodity demand and despite slower growth will still add over $1 trillion to its GDP in 2015 - more than the combined market capitalisation of the world's 40 largest miners," Mr O'Callaghan said. "So demand will continue to grow, albeit at a slower pace."
However, in an Australian context, Mr O'Callaghan believes the Government will need to manage its response to the iron ore slump carefully, or risk placing further burdens on the industry.
"The lower-than-forecast iron ore price is the largest contributor to the decline in expected tax-receipts over the next four years, accounting for $20 billion or nearly 40% of the total write-downs in the federal budget," he said.
"A bright spot will be the finalisation of the free trade agreement with China this year which should provide a boost for producers of coal, copper, zinc, aluminium and others who will see their tariffs removed or reduced."
"The increase in the threshold for scrutiny from the Foreign Investment Review Board (FIRB), from $252 million to $1,049 million, will also make it easier for Australian mining projects to attract capital from overseas."
BRICS holding steady, OECD miners on the ropes
The report found, for the second year, the majority of the largest mining companies came from BRICS, rather than OECD markets.
The composition of the top 40 also shifted to include another spot for the BRICS miners, with the decline in their market capitalisation also faring much better, down only 7% compared to 21% for companies in the OECD.
59% of BRICS companies saw their market value improve in 2014, compared to only 22% of companies in OECD markets. Three domestically focussed Chinese companies - Zijin Mining (gold); China Coal; and Yanzhou Coal - led the way, each with impressive gains of more than 30%.
2014 was the first year ever that a South African miner didn't make the top 40 - a stunning fall for this traditional mining heavyweight, and a far cry from the five companies in the 2004 top 40.
According to Mr O'Callaghan the disparity in growth reflects different areas of focus, with BRICS miners tending to pursue opportunities mainly in higher-risk destinations.
"BRICS mining companies tend to focus on mining in emerging markets whereas those in the OECD tend to have more diverse global portfolios," he said.
"This divide, coupled with the wealth of new development potential in emerging markets and differing shareholder expectations, will continue to create a divergence in these markets."