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Stop.
Think... Act
Mine 2017
www.pwc.com.au
Foreword Welcome to PwC’s 14th annual review of global trends in the mining industry – Mine. This analysis is based on the financial performance and position of the global mining industry as represented by the Top 40 mining companies by market capitalisation. 2 | PwC
Contents
Introduction............................................................................. 4
Industry in perspective............................................................. 6
Surveying the new terrain................................................. 13
Calibrated action............................................................... 19
Going digital .................................................................... 21
Exploration budgets – playing it safe................................. 23
CSR: Refining the story..................................................... 25
Coal without Fire.............................................................. 27
The new energy revolution................................................ 30
The Top 40............................................................................. 32
Financial analysis................................................................... 34
Income statement ............................................................. 34
Balance sheet.................................................................... 37
Cash flows......................................................................... 39
10 year trend..................................................................... 41
Glossary................................................................................. 42
Explanatory notes to the financial analysis.............................. 43
Key contributors to Mine 2017................................................ 44
Contacting PwC...................................................................... 47
Stop. Think... Act | Mine 2017 | 3
1.
Introduction
Recovering from 2015’s race to Stop Think
the bottom, the members of the
Top 40 paused and drew breath in In 2016, traditional players Where to next, we ask? Is the
2016. Rapidly rising commodities continued balance sheet bolstering strategy so defensive as to simply
prices promised a way forward to calm the market and stop the advocate repaying debt, preserving
and the valuations of the Top angst associated with financial cash, sustaining existing assets
40 responded. But, valuations distress. A heavy emphasis was and waiting for a sustained
aside, there is little to suggest that placed on shedding debt. The increase in prices?
the group made any substantial brakes were firmly applied to
In the short term, shareholders
advances throughout the year. exploration activities which
may appreciate the strengthening
continued to shrink, and what little
At first glance, the 2016 financial of balance sheets and increases
was undertaken was generally
data seems a little dull. The in share prices. But the industry
allocated to “safe” jurisdictions.
numbers, however, highlight the will need to execute a longer-
Capex fell dramatically again, by a
symptoms of a broader inertia. We term vision or it will remain
further 41 percent, to a new record
believe the industry is determining at the mercy of commodities
low of just $50 billion, and there
its next move. The poor results speculators. Shareholders will
was a lack of significant greenfield
of 2015 demanded a reaction demand performance from the
projects announced or commenced.
and short-term price rebounds existing asset base, culminating
provided the scaffolding to make Production was generally flat. in dividends, or they will simply
the Top 40 great again. However, While the Top 40 faced external reallocate their capital if the
restraint was the order of the day. headwinds in the form of mining sector cannot provide a
A price rise was welcomed but with increased oil prices, prudent long-term growth vision.
cautious optimism and warnings to cost control measures ensured
There is clearly a divergence
heed the lessons of the past. operating expenditure was
in thinking between Chinese
constrained. Traditional miners
The narrative of the Top 40 in companies and the rest of the Top
were rewarded with a strong
2016, therefore, reads like a 40 as their goals are different and
upswing in their market cap, and
mine site safety mantra: Stop. Chinese capital is more patient.
earned some breathing space.
Think… Act. The industry has Many planned disposals were China aside, the old guard have
stopped feeling so anxious and is called off in response to better donned hard hats, high viz jackets
now considering “Where to from market conditions. and steel-capped boots in a bid to
here?”. Some members of the Top protect themselves from the pitfalls
40 stated their intentions, but 2016 The exception to this was the
of the recent past. Praise should be
was not a year of action. We now 11 Chinese companies within the
given for the efforts to repay debt,
wait to see how the industry will Top 40. China defied conventional
innovate and adopt new efficiency
advance. industry behaviour and invested
measures – all of which have
at the bottom of the cycle.
helped to curb costs and restore
Indeed, the most significant asset
credit ratings and investor trust.
buyers among the Top 40 were
But where will this thinking take
Chinese companies.
the industry if a “playing it safe”
attitude to investment prevails
in future? We argue that it will
lead back to old habits of lavish
spending in a boom followed by a
wave of write-offs during the bust
that inevitably follows.
4 | PwC
Already well known is the rising
importance of battery technology
and its impact on coal and “new
Stop world” lithium, cobalt and
graphite. Our sole lithium player
from last year (Tianqi Lithium
Industries) remains in the Top 40,
Think and we know of other integrated
companies in these sectors that
qualify for inclusion if they
were pure-play miners. But the
Act future may be about integration.
Emerging market companies,
who are also focused on new
world minerals, are increasingly
integrated. In the traditional
markets, we are seeing new players
seeking to secure supply and even
calls by stakeholders for BHP to
get on board the battery train. It
remains to be seen if a major will
New opportunities and hazards Act pivot in this direction.
are on the horizon. Do we take it
seriously when Apple poses the Balance sheet clean-ups require What will be the results of this
question “Can we one day stop discipline and much hard work reflection for the remainder of
mining the Earth altogether?”1 has been done. We witnessed 2017? Will action come in the
or when Elon Musk puts forward the tailing-off of impairments, form of investment in greenfield
a 100-day guarantee to fix a the avoidance of any new projects, M&A or technology?
state’s energy crisis with battery bankruptcies, the absence of any The latter, we think, simply
technology?2 The industry must significant streaming transactions cannot be ignored.
carefully consider how it responds. and the general passing of distress.
The market rightly applauded Aside from the completion of new
Many in the Top 40 have reflected this, reinstating a positive gap projects, none of the majors has
on the qualitative aspects of their between market caps and net book signalled bold intentions for future
license to operate. The community values that was absent in 2015. growth. But who could blame them
increasingly demands exceptional Healthier price-to-earnings (P/E) when early 2017 has heralded
corporate social responsibility. multiples returned. And, even as further volatility in prices and the
In terms of safety standards and price growth slowed early this year, subsequent reversal of some of the
broader economic contributions, valuations continued to rise until 2016 gains. Few things are certain
the industry has long done some April. This provides a platform for in this industry, but we know that
heavy lifting. However, the the industry to act into the future. China is unwavering in its strategy,
story often fails to resonate with shareholder activism is rising,
governments and the broader What we failed to see was government interventions are
community. Some in the industry significant action on the future becoming more commonplace and
are now making bold declarations direction of the Top 40, at least new players are disruptive. Will the
on matters such as diversity and by the traditional players. We’ve industry also act, or simply react?
transparency, but they will need called the industry out in the past
to demonstrate action soon or risk for reacting to short-term price
becoming laggards in the broader movements, and thankfully this Jock O’Callaghan
corporate pack. did not happen in 2016. Is the Global Mining Industry Leader
pause an indication of longer- Liam Fitzgerald
While the sirens are not sounding, term thinking by the industry? Canadian Mining Leader
the warnings are ever-increasing to One major (Rio Tinto) may think
adapt to these challenges. so. Recognising the long-term, Maxime Guilbault
cyclical nature of the industry, it Mine Project Team Leader
has publicly stated that its new
CEO has a “10-year mandate”.3
1. https://www.apple.com/au/environment/
2. http://www.afr.com/technology/teslas-elon-musk-pledges-to-fix-sas-power-crisis-in-100-days-or-its-free-20170310-guvf1x
3. http://www.afr.com/business/mining/rio-offers-jacques-ten-years-at-the-top-20170503-gvy78c
Stop. Think... Act | Mine 2017 | 5
Industry in perspective
Miners saw the dust settle at long last in 2016, after a pulverizing downturn ground the industry to a virtual
halt. Today, after years of pulling back on investment, exploration and human resources, the world’s largest
mining companies are ready to move ahead. They have cut debt, strengthened balance sheets and taken
necessary impairments. In the process, these players have found themselves in step with an awakening global
demand for most commodities, and they have watched their credit ratings rise and valuations grow. This year
will be all about assessing options and making the right corporate decisions to sustain the market optimism
that these events have unleashed.
The first quarter of 2016 was While spot commodity prices Mining companies need to impose
a turning point as industry remain volatile, long-term analyst better capital discipline in the
fundamentals started to improve. consensus price forecasts held decade ahead and, indeed early
Through the year, we saw a rise in relatively stable throughout 2016. evidence suggests that they began
both spot commodity prices and the The key to a sustained recovery will to do so in 2016. The industry must
market capitalization of the Top 40, be to ensure that the industry does also consider the potential gain of
two markers which have historically not repeat the mistakes of the last bolder moves while costs are still
been strongly correlated. Though boom cycle: buying high, pumping relatively low.
prices have not yet rebounded to up production with marginally
Last year marked the return to
the pre-downturn levels reached in profitable and expensive projects,
profitability of the Top 40, with
2011, we do see evidence that they and then recording significant
an aggregate net profit of $20
have bottomed out. impairments when commodity
billion in 2016 as compared to an
prices decline.
aggregate loss of $28 billion in
2015. Valuations also climbed,
especially for the traditional
Market cap of Top 40 vs adjusted price index ($ billion) miners, with the trend continuing
1,800
through Q1 2017 even as
commodity prices remained flat.
1,600
1,600 The mining industry remains a
1,481
long way off the peaks of previous
1,400 1,314 cycles, but it has regrouped and
1,259 1,200 1,234 begun to rise again.
1,200
1,065
1,226 958
957 1,222
962
1,000
1,010 791 871 875
791 839
800 936 748
563 714
637
600
461 494
565 595
400
450
200
0
2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 April
2017
Market cap Price index
Source: PwC Analysis
Market capitalization of the Top 40 companies against an adjusted price index for a basket of
commodities including copper, coal, nickel, zinc, gold, silver and iron ore.
6 | PwC
Reclaiming investor Top 40 price to earnings ratio
confidence 60
The clearest sign that there is 50
renewed confidence in the sector
40
is the willingness of investors to
pay more for the future earnings of 30
mining companies. 20
P/E ratios are not indicators of 10
future results, but they do reflect 0
the market’s view of expected (10)
profitability. A higher P/E ratio
says investors are willing to pay a (20)
2012 2013 2014 2015 2016
greater price for a stock’s future
earnings and vice versa. PE ratio PE ratio (excluding impairment)
While the Top 40 racked up Source: PwC Analysis
significant losses in 2015, their
earnings excluding impairment
charges increased slightly between
2015 and 2016. During the same
period, however, investors proved
willing to pay more for these
companies as global commodity
prices improved. As a result, P/E
ratios returned to positive territory.
And today they are suggesting that
we may have witnessed the bottom
of the cycle and can expect profits
to further climb in 2017.
Stop. Think... Act | Mine 2017 | 7
Regaining Year wise Gap in Market cap and Net Book value ($ billion)
investor trust
$
As the last commodity downturn
took hold in 2012, nothing signified
the degradation of trust in the 600
industry more clearly than the
shrinking gap between the aggregate
net book value and market value.
The nadir occurred in 2015, when 400
net assets were collectively almost at
par against the market capitalisations
of the Top 40. This was the moment
when investors essentially concluded 200
that the outlook was so poor for
some companies that the businesses
were worth less than the carrying
Gap
value of their assets.
Last year marked a critical turning 2012 2013 2014 2015 2016
point as market caps once again
exceeded net assets. The positive
gap of approximately $220 billion
between the two in 2016 represents
the first increase since 2010; it is
supported by the $204 billion of
impairments booked in the last
five years, including $53 billion in
2015 alone. Source: PwC Analysis
Movement in Top 40 By the end of April 2017, valuations It is worth noting, however, that
had gained an additional the rise in valuations was distorted
market capitalization $34 billion during a period when by spot iron ore prices. Among
Overall the market capitalization spot commodity prices were the traditional companies, four
of the Top 40 increased in 2016 relatively flat. companies represented almost
by 45 percent to $714 billion, 50 percent of the increase in overall
This data suggest that the market is
approaching the 2014 level. Rising market capitalizations, and each of
valuing stronger balance sheets and
commodity prices played a driving them has exposure to iron ore:
solid management, suggesting that
role, but we need to ask, “How investor trust is on the rise and the • BHP Billiton Limited (BHP)
big a part?” Have companies been recovery is sustainable. • Rio Tinto Limited (Rio Tinto)
lucky or good? • Glencore Plc (Glencore)
• Vale S.A. (Vale)
Movement in top 40 market capitalisation $ billion
750
15 714
41 (1)
700
7 5
9
650 155
600
550
500 483
450
400
31 Dec 2015 Diversified Iron Ore Coal Copper Gold Rare earth Other 31 Dec 2016
Source: PwC Analysis
8 | PwC
The three largest increases as Market Cap vs Net Book Value of Traditional and
a percentage of the 2015 market Emerging Companies ($ billion)
capitalization were Anglo
American Plc (Anglo), Fortescue 700
Metals Group Limited (Fortescue) 600
and Teck Resources Limited (Teck).
Anglo and Fortescue hold major 500
iron ore assets. Teck, meanwhile, 400
has significant exposure to
steelmaking, coal and copper. 300
200
Traditional companies had larger
gains in value, representing 100
86 percent of the total increase 0
in market capitalization. Chinese T E T E T E T E
companies did not receive much of 2013 2014 2015 2016
a lift from rising commodity prices;
Market Cap Net Assets Note: T (Traditional) and E (Emerging)
this may be because they have
Source: PwC Analysis
less sensitivity to price changes
and their investor base has fewer
liquidity options (and limited
investment alternatives) as the
ability to invest outside of their Balance sheets Asset sales in 2016 were largely
country is limited. strategic and most transactions
strengthened appeared to be value accretive
Miners put a strong effort into to shareholders rather than fire
strengthening their balance sheets sales. Miners, especially diversified
in 2016. Debt repayments totalled players, sold minority stakes in
$93 billion, up from $73 billion non-mining businesses. Most
a year earlier. Repayments were of the debt that was issued was
funded from three sources: used to refinance, rather than for
acquisitions or mine development.
1. Increased cash flow from
operations; With the reduced borrowing,
the Top 40 closed the year with
2. $8 billion of asset sales and
a gearing ratio of 41 percent, a
$14 billion of minority stake
significant improvement from the
divestments;
2015 record of 49 percent, but still
3. Issuance of fresh debt. well above the average of the last
10 years of 29 percent.
Top 40 gearing ratio (%)
%
50
40
30
20
10
0
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Gearing ratio (net borrowings/equity) Average (10 years)
Source: PwC Analysis
Stop. Think... Act | Mine 2017 | 9
As result of debt reduction, paired Impairments Impairments per commodity
with the increase in market 2016 $ billion
capitalization, overall net debt as a significantly reduced 2
proportion of market capitalization After hitting a near-record in 2015, 3
for the Top 40 decreased impairment charges tumbled last
1
significantly, down from 45 percent year to a less-alarming $19 billion. 1
in 2015 to 28 percent. Encouragingly, most of the recent
Credit ratings agencies rewarded impairments have related to non-
miners for their debt management core assets. Sixty-three percent
strategies by upgrading a number of the 2016 total involved energy
of players. The average rating rose assets. Mining assets impaired
from just-above-junk BBB– to BB+, included $2 billion worth of
and some major miners, such as manganese, $1.5 billion of nickel
Anglo American restored their and $1 billion of coal. This is a far 11
investment-grade status. cry from the $36 billion write down
Manganese Coal Nickel
of core mining assets in 2015.
First Quantum’s successful debt Energy Products Other Metals
management strategy helped bring Notable 2016 impairments:
the company back into the Top • BHP $7.4 billion
40. Similarly, Anglo and Freeport- Impairments per commodity
• Freeport $4.3 billion 2015 $ billion
McMoRan (Freeport) jumped
up the rankings (to 9 and 10 • Balance of $7.3 billion is made 8
6
respectively) as a result of drastic up by Glencore, Vale, Anglo
debt retirement and the avoidance American, Newmont and 5
of any new debt issuances in 2016. South32.
17 9
9
1
Iron Ore Coal Nickel Gold
Copper Energy Products Other Metals
Source: PwC Analysis
10 | PwCAlthough the impairment charges Capex vs impairment (value $ billion)
tumbled in 2016, miners also
$ billion
scaled down on capital expenditure
160
in 2016. Hence, impairments taken
138 132
by miners were still almost 40% of 140
the capital expenditure incurred 120
104
in 2016. This percentage is close 100
to the average of the impairment 83
80
as a percentage of capital 57 56
expenditures. 60
45 49
40 27
As part of the focus on the capital 19
allocation and the under-pinning 20
of their balance sheets, the Top 40 0
reduced the outflow related with 2012 2013 2014 2015 2016
capex. Closer inspection of the Capex (PP & E + Exploration) Impairment
Top 40’s 2016 capex revealed that
approximately 50 percent of capex Source: PwC Analysis
was related to sustaining activities,
implying that only half of the $49
billion was growth capital, with
the remainder used to maintain
operations.
Stop. Think... Act | Mine 2017 | 11Impairment losses also were Top 40 adjusted return on capital employed (ROCE)
reduced, mainly due to the
%
significant impairments recognized
16
in the prior year and more stable
business conditions. Although 14
both indicators were below the 12
prior year’s level, it is important 10
to highlight that the proportion of
8
impairments/capex (2016: 39%)
has reduced to a level that is similar 6
to 2012 (33%) from the peak of 4
2015 (77%) which indicates that
2
miners are responding to messages
around capital discipline. 0
2012 2013 2014 2015 2016
Adjusted ROCE
Source: PwC Analysis
12 | PwCSurveying the new terrain
The improving market has finally Iron ore prices doubled to end of The story of coal prices in 2016
given miners more options to the year, reaching a high of $80 proved equally dramatic. Thermal
consider this year. It is now time for a tonne (CFR spot Australia). coal prices doubled, reaching
management to assess conditions, This trend continued in early a peak of $100 per tonne in
locate and understand the market’s 2017, with prices peaking at a November, before beginning a
pressure points and map out where 30-month high of $89 a tonne retreat in December that knocked
the next opportunities lie. in mid‑February, only to suffer a 20 percent off prices and did not
sharp reversal thereafter. settle until after February 2017.
Core strength The rally was sparked by a
Coking coal prices proved even
more volatile, with monthly
Last year’s Mine noted the strong mix of stimulus in the Chinese
averages for Premium Hard Coking
rebound in commodities prices that steel manufacturing sector and
coal starting the year around $80
commenced in Q1 2016. This trend speculative trading off the back of
per tonne and reaching a peak
broadly continued throughout international news, such as the US
of $300 per tonne in November.
the year, but it was a bumpy ride presidential election in November.
This rise followed China’s
across commodities. Sentiment turned abruptly when
announcement that it would
concerns emerged that China’s
Gold (up 15%), copper (up 27%) reduce the number of coal mining
port stocks of iron ore had risen
and nickel (up 13%) were solid days for the year. But when the
dramatically. Fears of a glut crept in
performers, but the real story of government backpedalled on the
on the back of increased production
2016 was the brawn of coal and initiative, prices quickly reversed,
from existing projects (the Top
iron ore prices, both of which were falling back to $150 per tonne.
40 were up 9% in 2015 and 6%
battered the prior year and took In 2017, supply disruption caused
in 2016) and the commencement
investors on a wild ride in 2016, by Cyclone Debbie in Australia
of production at new large scale
Q1 2017, and even up to the date temporarily pushed prices back
projects, most notably Vale’s
of this report. up to $300.
behemoth S11D mine.
Price indices, selected commodities (January 2016 = 1)
2.5
2.0
1.5
1.0
0.5
0
Jan-16 Mar-16 May-16 Jul-16 Sep-16 Nov-16 Jan-17 Mar-17
Coal Iron ore Copper Nickel Gold
Source: The World Bank
Stop. Think... Act | Mine 2017 | 13Volatility, selected commodities
70.00%
60.00%
50.00%
40.00%
30.00%
20.00%
10.00%
0.00%
May 2015
May 2016
May 2017
Nov 2015
Nov 2016
Nov 2017
Aug 2015
Sep 2015
Dec 2015
Aug 2016
Sep 2016
Dec 2016
Aug 2017
Sep 2017
Dec 2017
Mar 2015
Mar 2016
Mar 2017
Feb 2015
Feb 2016
Feb 2017
Jun 2015
Jun 2016
Jun 2017
Oct 2015
Jan 2016
Oct 2016
Jan 2017
Oct 2017
Apr 2015
Apr 2016
Apr 2017
Jan2015
Jul 2015
Jul 2016
Jul 2017
Nickel Copper Gold Silver Coal Iron Ore
Source: PwC Analysis
“Fake news” and The market volatility caused The “Trump bump” agitated
“really big” China by political events caused broader markets and appeared to
overexcitement among speculators offer significant promise to the
The world witnessed seismic and short-term traders alike. It was resources sector in the form of
developments in 2016, including easy to get preoccupied with the increased infrastructure spending
the Brexit vote, the election of daily reporting of commodity price and an end of the “war on coal”
US President Donald Trump and fluctuations and either baseless in the US. However, our data
the escalation of tensions on the overoptimistic sentiment or dire suggest that it had little effect
Korean peninsula. Historians predictions about the state of on prices other than in the short
will likely study the political term. Certainly coal prices did not
the industry.
significance of these events for receive a lasting lift from President
years, but in the mining business Trump’s election. Similarly, iron
the reality is that the fundamentals ore prices, which began Q2 2017
of supply and demand towered in in free fall, indicate that there
is no sustainable value despite
importance over every vote and
the early optimism regarding a
personality of 2016.
US infrastructure boom. Rather,
the story remains one of Chinese
financing, as well as demand and
concerns of excess supply.
14 | PwCWhat may be a more interesting Alleviating distress As a result, net borrowings
story to explore in Mine 2018 is (borrowings less cash) fell from
the effects of real policy change The rebound in prices provided $239 billion to $202 billion and
in the US, rather than the current miners with the opportunity to leverage ratios improved, while
rhetoric. At the time of writing, focus on debt repayment. Members liquidity ratios remained stable.
President Trump had scored his of the Top 40 diverted cash away Net borrowings to EBITDA fell
first major win with the planned from dividends and investments from 2.60 to 1.89. The five most
repeal of Obamacare passing the and used it instead to reduce leveraged companies in 2015
House of Representatives. If he liabilities. At the same time, the fire cut their debt ratio from 2.0x to
can begin to achieve traction on sale of assets reduced to a trickle 0.7x, although Vale and Yanzhou
other proposed measures, such (see “Balance sheets strengthened” remained among the five most
as significant tax reform and on page 9). leveraged companies in 2016.
infrastructure stimulus, then we
may see more lasting impact on
commodities prices through 2017,
and not just short-term volatility.
Net debt as % of Market Cap for Top 5 leveraged companies
as of 31 December 2016
%
250
200
150
100
50
0
YANZHOU SAUDI ARABIAN CHINA COAL VALE FIRST QUANTUM
2016 2015
Stop. Think... Act | Mine 2017 | 15Free cash flow
2016
$40bn
2015
$13bn
Net debt
2015
$239bn 2016
$202bn
The exception was a number of the Alternative financing Top 40 Market Cap
larger Chinese miners who were
never considered distressed in the Innovative use of alternative
first place, and who continued financing has helped relieve
issuing debt to fund growth. distress by allowing mining
With the significant rise in free companies to raise capital more
cash flow (up to $40 billion from cheaply, without diluting existing
$13 billion), miners were also able shareholders. During the worst
to avoid pressure to pay down debt of the cycle in 2015, alternative
using other, expensive sources of financing companies provided 2015 2016
capital. Total capital raising fell a lifeline to some of the Top 40.
from $94 billion to $74 billion, Four companies alone raised more $494,000 $713,500
and nearly half of this was due than $3 billion in capital from
to the dramatic drop in equity alternative financing companies.
raising (down to $3 billion from Source: PwC Analysis
$22 billion). Some would argue
that miners couldn’t raise equity Royalty Companies Market Cap Alternative financing companies
given the market environment, but that included Franco-Nevada,
there was a window for IPOs and Silver Wheaton, Royal Gold, Osisko
secondary issuances in 2016 for Gold Royalties and Sandstorm,
those who wanted it, for example have taken full advantage of the
on Canadian bourses. Rather, it commodity cycle, acquiring and
seems that the low P/E ratios at the investing in assets at the bottom
beginning of the year led miners of the cycle. Their business model
to avoid diluting and raising the has rewarded investors: with
ire of major shareholders who had 2015 2016 EBITDA up more than 40 percent
bought in at the top of the cycle a in the year, the combined value of
few years prior. $14,551 $23,312 alternative financing companies
increased considerably more than
that of the Top 40 (58 percent
Source: PwC Analysis
versus 45 percent), with the top
three financiers enjoying a rise of
61 percent.
16 | PwCChina, India and ASEAN-5* GDP Growth China’s big shoes
%
China maintains its dominance over
15.0
14.0 the global demand for metals. Asone
13.0 of the world’s largest economies it,
12.0
11.0 it consumes more than 40 percent
10.0 of the world’s copper supply, and
9.0
8.0 it remains the leading importer of
7.0 iron ore.
6.0
5.0
4.0
But Chinese demand needs to be
3.0 monitored closely, as anticipated
2.0
1.0
declines will impact global bulk
0.0 and base metals commodity prices.
Iron ore prices, for instance, are
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
2019
2020
2021
2022
threatened by the possibility of
ASEAN GDP Growth India GDP Growth China GDP Growth % a looming decrease in Chinese
steel production.
Source: IMF
At this point, it is difficult to know
Alternative financing companies Although valuations for metal whether any countries will be able
have achieved premium valuations streaming transactions and to fill the demand gap that will
relative to the Top 40. By the end royalties may occur at a premium be left as China’s growth slows in
of 2016, they traded at 1.3x price to during the downturn, they can hurt the coming years. India and the
net asset value (P/NAV), whereas mining company shareholders over ASEAN-5 (composed of Indonesia,
the Top 40 traded at 1.0x P/NAV. the long term if they give away Malaysia, the Philippines, Thailand
Alternative financing companies too much future value. For this and Vietnam) offer the best
have been able to take advantage reason, we expect members of the opportunity. India’s GDP growth
of this valuation gap to purchase Top 40 to reduce the number of has exceeded China’s for several
royalties and metal streams at a these financial deals as conditions years and the economic expansion
substantial premium to the market, continue to improve. There will, of the ASEAN-5 is now almost on
creating a win–win, especially however, always be a role for par with China’s.
during market downturns. alternative financing companies The Chinese rate of growth has
to fund the development projects declined for a decade. Some
At the bottom of the cycle, both
of companies that have less expect it to settle at around 6
equity markets and debt markets
access to capital. percent however it’s difficult to
were closed to a large number of
pre-production miners, who turned Finally, companies such as find consensus on that figure. This
instead to alternative financing Glencore have used alternate remains a robust rate and means
companies that provided financing strategies, such as hedging, to that China will continue to play a
through metals streaming improve or at least secure their significant role in driving demand
and royalties. bottom line (refer to the income in the mining industry. The critical
statement analysis). In a similar question is how that demand will
vein, in 2016, we saw BHP re-enter be satisfied.
the hedging market (for off-shore
gas), a move which was well China: in the
received on the whole. driving seat
During the downturn, Chinese
companies demonstrated one
enormous advantage over other
miners in both traditional and
emerging countries: access to capital.
With deeper pockets than their
competitors, Chinese players were
able to fund more acquisitions than
their counterparts, either snapping
up assets at premium prices or
buying opportunistically.
Stop. Think... Act | Mine 2017 | 17We also witnessed an increase in
acquisitions by Chinese private
equity firms, and we expect
China to continue to be active in
acquiring global mining assets as
a way to reduce its dependency
on imports. $2.8 billion $1.5 billion
One variable worth watching,
however, is concerns restrictions
on capital outflows by the for Freeport’s stake in Tenke Mine for Anglo’s niobium and
Chinese government. We have phosphate assets
recently seen, for example, Material: Copper and cobalt.
tighter approval processes for Valuation: 0.9x P/NAV and 12.5x Valuation: 1.5x P/NAV and 6.4x
EV/Fwd EBITDA EV/Fwd EBITDA
foreign acquisitions by Chinese
companies, although these are not
specifically targeting. The Chinese
government said in February
that the new measures are only Fire sales dampened Anglo’s decision to keep these
assets proved that even in a
directed at reducing suspicious or One of the biggest M&A stories of declining market, companies will
fraudulent transactions. 2016 concerned the assets that did continuously reassess alternatives..
Valuations of Chinese companies in not sell. Numerous large deals that Instead of selling, Anglo was
the Top 40 are trading well above we were expected to be completed able to maximize cash flow from
the rest of their peer group (18.7x by early 2017 were withdrawn these assets and use the funds to
EV/fwd EBITDA versus the 8.5x from the market, possibly due to reduce debt.
EV/fwd EBITDA). This gap gives the rebound in commodity prices
Chinese companies additional and the improving prospects of the
capacity to pay substantial companies that owned them.
premiums for assets. Among the anticipated deals that
Most notable among Chinese failed to materialize was the sale
mergers and acquisitions during of Anglo’s Australian coal assets at
2016 were the deals by China Moranbah and Grosvenor mines as
Molybdenum Co., Limited (China well as Kumba Iron Ore in South
Moly), a new addition to the Top Africa. Analysts and market watchers
40 that moved quickly to acquire had expected Anglo to proceed
assets from other members of the with the divestitures as part of the
group. The company bought the company’s announced debt reduction
niobium and phosphate business strategy. They had expected the
from Anglo, as well as Freeport’s Moranbah and Grosvenor mines to
share of the Tenke mine that sell for more than $1.5 billion,2 and
produces copper and cobalt. the Kumba project to fetch more than
$1.0 billion.2
Notable transactions among Top 40 miners
$1.3bn $712m $500m
Newmont Mining Corporation sold First Quantum Minerals Inc. (First Glencore sold 100 percent of its
48.5 percent stake in Batu Hijau to Quantum) sold the Kevitsa mine to stake in the Antapaccay mine to
an Indonesian consortium. Material: Boliden. Materials: Nickel, copper, gold Franco-Nevada. Materials: Gold and
Copper. Valuation: 0.8x P/NAV and platinum. Valuation: 0.8x P/NAV silver. Valuation: 0.8x P/NAV.
Early in 2017, Shandong Gold Mining Co. Limited (Shangdong) acquired a 50 percent
stake in the Veladero gold mine from Barrick Gold Corporation (Barrick).
18 | PwCCalibrated action
The industry has confronted price Are we condemned to repeat It is also worth noting that,
demons in recent years, overcome history or will we remember beginning in the back half of
its production hangover and driven this time as a tipping point for the year, members of the Top 40
liquidity threats into retreat. the industry? reported a significant upswing
The rehabilitation process has in the number of positive project
The mining sector faces lengthy
involved the pain of write-offs, milestones and a decrease in the
development cycles and its
the shedding of discounted assets number of negative milestones.
investment horizon should
and the slashing of capex and Examples include the decision of
be equally long. The greatest
exploration budgets. Following Freeport to curtail mining and
opportunities may already have
management’s use of prudent cost milling operating rates and to
been missed, as the rising P/E
controls, alternative financing and operate at 75 percent in its Sierrita
ratios for companies and P/NAV
technological advancements, the open-pit copper and molybdenum
ratios for assets discussed on page
recovery process is well advanced mining complex located in Tucson,
7 for P/E ratios page 17 for P/NAV
and the industry now stands Arizona in response to lower prices.
ratios. But intuition would say that
at a critical juncture. How will Another example is Glencore
now, at this point in the cycle, is
it proceed? moving its Black Star mine in
often the best time to invest.
Queensland, part of the Mount
Looking back at this same point
None of the Top 40 companies Isa Mines complex, to care and
in previous cycles, one could
announced any new projects maintenance after mining out the
apply the benefit of hindsight
in 2016, although five of existing reserves. We expect this
and say miners made significant
their mines did commence trend to continue throughout 2017.
mistakes. The failure to invest in
commercial production.
exploration and capex in the last Parts of the industry have already
downturn added fuel to a super- We are certainly seeing a different invested in cost control measures
cycle fire, already lit by Chinese and more confident investment and technology (see page 19).
demand. The industry found itself behaviour by the emerging Hopefully, these initiatives will be
forced to buy high to keep up companies this time round, most maintained through the cycle and
with production aspirations and notably the prominence of China in we won’t see missed timelines and
meet voracious demand. By 2012 recent M&A deals. cost blow outs on capital projects
the cycle had begun to turn and as in the past.
we saw the beginning of record
write-offs of investments made at
the top of the cycle, excessive debt
relative to realistic asset values
“Those who cannot remember the past
and, ultimately, distress across are condemned to repeat it.”
the sector. George Santayana
Stop. Think... Act | Mine 2017 | 19But operating expenses will surely Should the industry take seriously
expand again this cycle, with Apple’s question, “Can we one day
factors such as currencies and stop mining the Earth altogether?”
wages nearly impossible to control. or Elon Musk’s 100-day guarantee
And, with a lack of investment in to fix a state’s energy crises with
exploration and new projects, the battery technology? Whether
Top 40 may again find themselves miners choose to put any faith in
with a diminished project pipeline, these ideas or not, it is essential
decreased reserves and out-dated that they recognize the forces
equipment and facilities when the of change now at play. Is the
cycle accelerates. This scenario mining industry doing enough
suggests that, excluding the China to show they are considering
effect, growth will again be driven all stakeholders, not just
by mid-caps and juniors, whose shareholders? They’ve shown
own valuations will temporarily they have strengthened their
soar and spark another round of balance sheets, but are mining
aggressive M&A by the Top 40. companies doing enough to show
they are strengthening stakeholder
It is easy to criticize, especially
value as well?
when investment choices are made
in real time and require the trust Will the industry stick to the
and confidence of investors in comfort of its roots? BHP is already
management to make long-term facing a case of shareholder
decisions. But will boards be bold activism demanding such a shift.
enough to resist short termism? To date, the Top 40 by-and-large
Do companies have the right have not signalled their intention.
diverse and talented management But given the growing strength
to take advantage of this reprieve of their balance sheets and
and move the companies into the rising valuations, they now have
future? Will they embrace rigorous, options and must begin taking
disciplined decision-making? informed action.
Let’s hope so. A possible indication While the traditional miners have
may be Rio Tinto’s recent maintained their hold on the Top
announcement of a “10-year 40 listing they need to ensure
mandate” for its current CEO. What they have the agility to adapt. It is
is certain is that the mining sector important to realize that the rules
needs to be more compelling with are changing. Of the emerging
its story to the market, so that it is companies in the Top 40, more
able to resist shareholder pressures, than half are owned in part by their
for example, to pay dividends at local governments and as such
the bottom of the cycle. have access to financing outside of
traditional capital markets.
We expect that China will continue
to be the main driving force The Top 40 have done well to move
behind commodities prices and cautiously past the market cave-in.
subsequently the fortunes of the Now, as they gear up for action,
Top 40. But we also have our it is essential that management
eye on the newly-empowered apply the lessons learned from
players in the consumer sector the past, focus on sustainable
whose presence is growing on long-term growth and avoid
the sidelines. repeating history.
20 | PwCThe benefits of asset optimization When Vale cut the ribbon late last
tools are significant. Separate year on its S11D project in Brazil –
Going analysis by PwC estimates that
they can help companies lower
one of the world’s largest iron
ore mines – the project boasted
digital maintenance costs by as much as
20 to 40 percent, increase asset
one of the lowest cash costs per
tonne, partly because of increased
utilization by up to 20 percent, operational efficiency achieved
reduce capital expenses by between through investments in innovation
5 and 10 percent, and also improve and technology.
Conventional mining today has environmental health and safety.
The S11D mine uses an array
become increasingly expensive, as
A number of miners have of technologically advanced
miners reach deeper into the earth
announced or implemented digital processes, including a truckless
to find profitable ore bodies and
innovations that are enhancing system for conveying ore, which
work their way through decreasing
performance. Rio Tinto, for Vale says cuts fuel costs by
grades of ore. This cost challenge
example, has built a remote 77 percent and also reduces waste
is exacerbated for miners with
monitoring and control facility that and greenhouse gas emissions.
large and/or remote asset bases
can connect with mines all over the A natural humidity process,
who are often struggling with basic
world in real time. which uses humidity in the
performance issues, including high
ore itself to remove impurities,
maintenance costs, low reliability, By using the technology to
reduces water consumption by
reactive fixes, low utilization rates collect data from trucks and
up to 93 percent. In addition, an
and safety incidents. processing plants and then analyze
advanced automation and control
the information for efficiency
In response, companies are system regulates the supply
opportunities, the company says it
focusing on improving productivity. of raw materials according to
has reduced costs by $80 million.
To truly achieve performance process demands and simulators
breakthroughs, however, they will Barrick last year announced that assist with the training of
need to rethink how mining itself it would work with Cisco Systems wagon‑loads operators.
works, a process that demands on the “digital reinvention” of
digital innovation. its business. The plan will see
Barrick embed digital technology
New technologies promising
in every dimension of its Cortez
a boost for the sector include
mine in Nevada to deliver better,
software to optimize asset
faster and safer mining. Advanced
utilization, devices to remotely
sensing technology and real-
monitor and control activities,
time operational data will be
and robotics for the automation
used to inform decision-making.
of repetitive tasks.
Equipment will be automated
for increased productivity, while
predictive algorithms will enhance
the precision and speed of
maintenance and metallurgy.
Stop. Think... Act | Mine 2017 | 21BHP has improved both safety Understanding that artificial Today’s cutting-edge innovations
and profitability by using drones intelligence has become an may not even exist in five or
fitted with military-grade cameras essential tool for improving 10 years. The speed of change is so
and are able to transmit real-time processes and outcomes, great that companies must build
aerial footage and 3D maps. The Goldcorp recently began using flexibility into their plans and
company estimates that it is saving IBM’s cognitive computing their workforce to accommodate
$5 million a year at its Queensland system, known as Watson. Unlike the disruptive force of technology
sites alone by replacing planes with traditional computer systems, during the long life of a mine.
drones for some survey work. The which are programmed to perform
While new technologies can be
remotely-operated devices are also specific tasks, cognitive computing
costly to acquire, implement
employed to ensure areas are clear systems have the ability to “learn”
and maintain, the payoff can be
before blasting and to track fumes through their interactions with
significant. Mining companies that
after a blast. both data and humans. The
genuinely understand technology,
technology has the potential to
In addition, maintenance teams use and leverage it strategically, will
transform every facet of the mining
drones to help inspect overhead benefit the most.
process, according to Goldcorp.
cranes, towers and roofs of tall
With the digital world presenting
buildings, removing the need for Of course, innovation is not all
so much potential risk, opportunity
individuals to work at height. about the upside; digitization
and disruption, mining companies
presents its own set of challenges
need to be agile when thinking
for the industry, including
about how to align technology
costs, cyber risks, the lack of a
with business needs, and they
digital culture within mining
must make the right choices on
companies and the need for
partnerships and implementation.
technology training.
While new technologies can be costly
to acquire, implement and maintain,
the payoff can be significant.
Mining companies that genuinely
understand technology, and leverage
it strategically, will benefit the most.
Sources:
Rio Tinto – From PwC slides Industry 4.0 – From Vision to Reality/From Facility to Mine November 3rd, 2016 – PwC
Barrick – http://www.barrick.com/investors/news/news-details/2016/Barrick-and-Cisco-Partner-for-the-Digital-Reinvention-of-Mining/default.asp
Vale – http://www.vale.com/en/initiatives/innovation/s11d/Pages/technological-progress.aspx
BHP – http://www.bhpbilliton.com/media-and-insights/prospects/2017/04/how-drones-are-changing‑mining
Goldcorp – http://www.goldcorp.com/English/blog/Blog-Details/2017/IBM-Watson-Gaining-New-Exploration-Insights-Through-Artificial-Intelligence/default.aspx
22 | PwCGold remained the most sought- Canadian stock exchanges continue
after asset, attracting 48 percent to be a leader in the global mining
Exploration of exploration dollars, followed by markets. In 2016, approximately
budgets – looking base metals at 31 percent. 57% of the global mining
financings were raised though the
We don’t expect that the
for safety budget for coal [refer to section
TSX and TSX-V according the TMX
Group and S&P Global Market
XX] or iron ore will increase
Intelligence.
significantly in 2017. Several
of the iron ore advanced stage The belt-tightening occurred across
Commodity prices rebounded last
projects initiated during the the sector, from the exploration
year but mining companies opted to
boom that were subsequently departments of majors such as
play it safe, deferring to investors’
shelfed in recent years have been Freeport, Vale and Barrick, to the
demands and expectations rather
revived; but will not warrant offices of aspiring junior miners.
than investing in exploration at a
significant expenditures. Among the few exceptions within
time when costs remain low.
the Top 40 was China Moly, which
With respect to iron ore, Australian
For the fourth straight year, the boosted its exploration budget by
is the clear leader with 47% of
industry reduced spending on approximately $14.5 million.
the $454 million global budget
exploration, bringing expenditures
for the commodity. Consistent Among the companies surveyed
to barely one-third of the record
with the prior year trend for other by S&P, however, the median
$21.5 billion allocated in 2012 to
non-ferrous metals, this was a exploration budget in 2016 was
$7.2 billion in 2016, according to
significant decrease to 2015 (by the smallest amount in more than
research according to research by
approximately 47%). Reasons a decade. Juniors accounted for
S&P Global Market Intelligence.
are various for the decrease but 39 percent of the overall decrease
The firm’s annual Corporate
with significant reserves and and majors 36 percent.
Exploration Strategies report
without strong and long-term
looked at the budgets of 1,580 As the mining industry seeks to
demand there is not much room for
companies worldwide. It found reassure nervous and discontented
investment.
that spending in 2016 amounted investors, it is not providing them
to just $6.9 billion, 21 percent less with organic growth options
than in 2015, as the sector placed for which many experts pay.
projects on hold and favoured less Not surprisingly, less funding
risky, later-stage assets. unearthed fewer discoveries.
There were 55 initial resource
Raised in the Canadian stock market (USD) announcements last year, up from
just 44 a year earlier, but still a long
8,000 way from the peaks recorded in
2012 of 168 announcements.
7,000
6,000
5,000
4,000
3,000
2,000
1,000
-
2012 2013 2014 2015 2016
Equity Capital Raised – TSX (USD) Equity Capital Raised – TSX-V (USD)
Source: TMX Website and PwC Analysis
Stop. Think... Act | Mine 2017 | 23Top Destinations for Mining Exploration
Canada
14%
5%
Russia
United States Europe
5%
7% 1% FSU 6%
China
6%
Mexico Other Latin Pacific/SE Asia
America 5%
6% 2% 5%
West Africa East Africa
2% DRC
6% 4% Brazil
Peru
4% 13%
Southern Africa
6% Australia
Chile
Other locations account for 3%
The US showed the sharpest pullback in exploration last year, with its budgets falling more than 30%, although gold and copper exploration
helped the country account for a 7% share of the global total. Nevada had the largest share (47%) of the US budget, with two other states,
Arizona and Alaska, together accounting for a further 22% of the total.
Source: S&P Global
This guarded, frugal mindset Improving economic conditions What will trigger the next cycle of
means mining companies will suggest that large mining investment remains unclear, but
continue to set their sights on companies will begin to reverse the it is unlikely to match the lasting
brownfield projects, where the spending decline this year, but S&P force of China’s economic boom
risks and potential payoffs are expects the exploration budgets of that launched the last spending
fewer. The industry is also relying junior explorers to slip further in spree beginning in 2003. We do
heavily on resources from the 2017 – even though many of them believe, however, that companies
safest political geographies. have found it increasingly possible that fail to take advantage of
Canada and Australia attracted to raise funding since March 2016. today’s opportunities and low costs
more of the global exploration will eventually find themselves
Rather than moving boldly to take
budget than any other country, riding the same boom–bust cycle
advantage of today’s relatively
at 14 percent and 13 percent that has defined the industry
cheap supply of labour, equipment
respectively. for so long.
and services, almost all players are
In contrast, Africa suffered one of standing on the sidelines, watching
the largest pullbacks in investment to see who will move first.
of any region. The entire continent
absorbed only 13 percent of global
spending in 2016, according to
the report.
24 | PwCThere is an increased need GRI compliance requires reporting
for information that is clear, on a wide range of metrics,
CSR: Refining transparent, timely and assured. including: governance standards;
This is key to building investor ethics & integrity; anti-corruption
the story confidence and improving and procurement; energy, GHG
future results. and other emissions; water
pollution; biodiversity; health
There are many major
& safety; non-discrimination,
sustainability reporting initiatives,
diversity and indigenous rights; and
such as the Global Reporting
The industry has faced a number of local communities.
Initiative (required reporting for
sustainability challenges over the
International Council of Metals GRI compliance is significantly
past few years, often manifesting
and Mining members (ICMM)) higher among Traditional
themselves as roadblocks, social
and the Extractive Industries companies (see chart), while
protests against big projects and
Transparency Initiative (EITI), Emerging companies are either
difficulty in accessing finance for
but the industry still has a mixed using other standards or not
perceived ‘dirty’ projects. In 2016,
record. Approximately 90 percent creating Sustainability standards
a new challenge emerged from
of the Top 40 report to GRI and (illustrated by “other” in the
the industry’s more consumer-
40 percent are EITI members1 chart below).
facing customers. Both Apple and
(although actual EITI reporting
Samsung announced their intent Some companies find such
takes place by country and may
to increase metals recycling and tasks complex and onerous and
include non-members, corporate
reduce reliance on mined minerals. stakeholders can be overwhelmed
membership signifies a broader
by long reports with irrelevant
These threats may seem remote, commitment to transparency).
information that is not designed for
but public support may speed Of the 23 companies that are
their sectors or needs.
their adaptation of manufacturing International Council of Metals
process to incorporate more and Mining members, nine (or
recycling. Mining companies would 39%) independently assured
do well to get on the front foot their GRI Reports in 2015 (or
– understanding, managing and Integrated Report).2
reporting their impacts and selling
their successes. A lost license to
operate is the biggest impairment
of all, and the industry must
protect its valuable ‘brand’ with
all stakeholders.
Traditional markets Emerging markets
GRI-Comprehensive-compliant Sustainability Report GRI-Core-compliant Sustainability Report Other No Sustainability Report
Source: GRI 2016 report (based on 2015 Annual Reports)
1. https://eiti.org/supporters/companies
2. https://www.icmm.com/en-gb/members/member-reporting-and-performance
Stop. Think... Act | Mine 2017 | 25% reporting Safety Water Use Carbon/GHG Value Added Diversity
quant. KPI emissions and/or
for 2016 Distributed
Emerging 42% 42% 33% 17% 42%
Traditional 82% 73% 68% 59% 68%
Total 68% 62% 56% 44% 59%
Source: PwC Analysis
Note: Excludes certain companies for which annual reports were not available.
To try and cut through the The results show that around
reporting burden, we performed half of companies produce
a review of the Top 40 Annual timely, quantitative data on key
Reports and CSR Reports, looking sustainability metrics. Traditional
at which companies reported data miners report around twice as
in a timely manner. often as Emerging miners. Across
both groups, companies are
The guiding principles were that
most focused on safety, followed
the information should be:
by diversity and environmental
• Timely; only reports that were issues, with economic contribution
released alongside the most coming last.
recent financial information
were considered Given mining companies’
substantial GDP contributions
• Focused; only 5 of the most in many countries, including
common mining indicators infrastructure spending and
were considered general CSR investment, this again
–– safety, points to the industry underselling
–– water use, their contribution. With increased
global social activism, it is more
–– carbon/GHG (greenhouse important for miners to tell their
gas) emissions, story in a compelling way, to
–– reporting on economic value connect with stakeholders and
added to stakeholders, and avoid losing their license to trade.
–– diversity.
• Measurable; only quantitative
data, linked to the entities’
key performance indicators,
was considered.
12% 16% Representation of women
Representation of women on
executive management on Board of Directors of
team of Top 40 Top 40
Source: PwC Analysis
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