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TABLE OF CONTENTS Jun 16 - 22, 2014 Volume 100 Number 18 - 0 comments

Annual mining profits tumble 72% to lowest point in a decade

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VANCOUVER — It’s no secret that 2013 was a rough year in the mining business, but PwC’s eleventh annual global trends analysis — entitled Mine 2014: Realigning Expectations — shed some light how just how grim things have gotten for the industry’s top players. The report studies the financial performance of the top-40 mining companies by market capitalization, and the results reveal a year marked by steep impairment charges and high turnover in senior management positions.

Miners were again hit hard by falling commodity prices, with “double-digit decreases not uncommon across commodity prices.” Gold companies felt the biggest strain, as bullion prices dropped 27% during the year. Not surprisingly, equity prices followed suit, with the overall HSBC global mining index declining 23% year-on-year, though PwC notes it could have been worse, as in June 2013 the index was down 34% against December 2012.

The Top 40’s aggregate net profit sank 72%, or US$52 billion, to a decade low of US$20 billion, with gold companies accounting for US$20 billion in net losses. Only seven of the Top 40 increased profits year-on-year. Operating costs remained the major hurdle despite being a priority for most producers, as costs jumped 4% during the year.

Market values declined US$280 billion in 2013 — a 23% reduction from 2012 — down to US$958 billion in December 2013, with gold particularly hard hit. The gold segment lost US$110 billion off its market capitalization, which accounts for 40% of the Top 40’s overall decline. Diversifieds and coal reportedly “didn’t fare much better, as the sector took a beating.”

Writedowns were a buzzword during the year, with record US$40-billion impairments during 2012 and US$57 billion in assets wiped off balance sheets in 2013. Gold companies again felt the sting, impairing US$27 billion in assets.

“The industry is adjusting to tough times in the short-term, with strategies in place to regain confidence. For example, we’ve seen new faces at the helm of almost half of the largest 40 mining companies in the last two years,” wrote PwC global mining leader John Gravelle.

Some of the world’s most prominent miners saw new people step into top management roles. BHP Billiton’s new CEO Andrew Mackenzie said he planned to make cutting costs and boosting productivity a priority, while Rio Tinto’s incoming CEO Sam Walsh expressed similar views when he said the company would be “taking steps to rein in capital expenditure.” Anglo American’s Cynthia Carroll departed in April, with her replacement Mark Cutifani saying that the industry needed to “regain shareholder trust through capital discipline.”

Other CEO appointments include Inmet Mining alumnus Jochen Tilk at Potash Corp. of Saskatchewan and Jamie Sokalsky at Barrick Gold, who noted in April that “Barrick is a considerably different company today than it was a year ago — leaner, stronger and more financially flexible.”

Gravelle says that “the question remains as to who will be bold enough to thrive in these difficult times. [Mergers and acquisitions] activity, which was surprisingly subdued in 2013, seems to have picked up in early 2014. And backed by a stronger U.S. economy and continued strong demand from China, the market is impatient to see demonstrable returns from recent strategic choices to deliver against the mantra of lower costs and higher productivity.” 

PwC also notes a trend in portfolio management, with almost a quarter of the Top 40 divesting what they considered non-core assets. Rio announced or completed US$3.3 billion of divestments, which included selling the Clermont coal mine for US$1 billion and the Northparkes copper–gold mine for US$820 million. Barrick sold almost US$400 million in energy assets, while Newmont Mining disposed of its stake in Canadian Oil Sands for US$578 million in July 2013.

In addition to the portfolio shuffle companies are also exploring joint-venture opportunities, which could help share risk and capital requirements.

PwC notes that “Vale and Glencore began talks in 2013 on creating a single unit consortium to jointly operate nickel mines, mills and smelters in the Sudbury basin of Canada.” In addition, Glencore and Rio are reportedly discussing a joint venture to strengthen their coal mining operations in Australia’s Hunter Valley.

PwC says 2013’s results may be near “rock-bottom.” The report notes that the mining industry moved “in line” with the performance of broader markets during mid-year, and that the trend continued into the first four months of 2014.

PwC contends that the industry “is still supported by overall long-term demand fundamentals, specifically from emerging markets, particularly China,” and that “the recent stabilization of the mining index since the second half of 2013 may indicate that the confidence crisis is finally over, and investors are starting to contemplate a return to the mining sector.”

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