Market capitalization fell by 25 per cent
Despite record profits of US$133 billion in 2011, market capitalization of the Top 40 global mining companies fell by 25 per cent, according to the latest PwC report – Mine 2012: The growing disconnect.
Six companies out of the Top 40 global mining companies saw their market capitalization increase in 2011.
Mining industry stocks significantly underperformed in the broader equity markets, losing value by year-end as a result of continuing global economic fears stemming from, among others, the ongoing European sovereign debt crisis and a projected slowdown of China’s economy.
“Investors have simply not bought into the industry’s growth story or are reacting to other short-term global economic concerns,” says PwC Canadian mining leader John Gravelle. “There is a growing disconnect between the two.”
In 2011, the Top 40 global mining companies’ price-to-earnings ratio fell below 10, which is lower than the dismal PE ratio seen in 2008 during the global financial crisis.
“The 2011 PE ratio alludes to the market’s lack of confidence in the Top 40 and their ability to grow or even sustain profitability. Despite this, I believe the demand story remains robust and long-term growth in emerging markets is more significant to the industry than short-term fears in the developed world,” explains Gravelle.
Mining companies believe that increasing supply is critical to the future of the mining industry. The Top 40 invested US$98 billion in capital projects in 2011 and plan for a further US$140 billion for 2012. However, given that market capitalization has fallen in a year of such high capital expenditures, investors don’t believe miners will execute their projects as planned or deliver returns as promised.
“Compounded with calls to return more cash to shareholders, potentially at the expense of capital projects if they are deferred, it is unlikely that companies will be able to spend as planned. CEOs are faced with increasingly difficult capital allocation decisions as they try to balance growth with returns,” said Gravelle. “CEOs are exercising greater discipline and focus when making big investment decisions. They’re proceeding with caution as resource nationalism, rising costs, labour challenges and investor demands remain top of mind.”
The price of iron ore hit record levels in 2011, at an annual average of US$168/dmt, posting an annual increase of 29 per cent. It leads in terms of earnings before interest and taxes, as well as revenue amongst other main commodities. As a percentage of revenue, iron ore has jumped from 20 per cent to 42 per cent, and EBIT has gone from 24 per cent to 66 per cent of the total.
“Diversified producers are adding more iron ore to their portfolio,” says Gravelle. “Iron ore being the most profitable commodity is driving a number of international developments. Global iron ore reserves expanded by eight per cent last year with multi-billion dollar capital projects underway in countries such as Australia and Brazil.”
In its tenth annual edition, the Mine report provides a comprehensive analysis of the financial performance and position of the global mining industry as represented by the Top 40 global mining companies by market capitalization.