Confidence Crisis Hits Mining Iindustry

AngloGold Ashanti Limited.The mining industry has outperformed the broader equity markets over the past 10 years; however, this trend has changed in recent times.

“While mining stocks fell slightly in 2012, during the first four months of 2013, mining stocks were hammered, falling nearly 20 per cent,” a new analysis from PricewaterhouseCoopers (PwC) said.

According to the report, the industry faces a confidence crisis: confidence over whether costs can be controlled, return on capital will improve and commodity prices will not collapse, among others.

Although it was a turbulent year for commodity prices, PwC’s analysis of the largest 40 miners, including AngloGold Ashanti, Gold Fields and Newmont,  shows total market capitalisation was roughly the same at the end of 2012 as the start – $1.2 trillion – but not for gold miners.

Titled, “Mine: A confidence crisis,” the report said the gold miners in the top 40 lost $29 billion in 2012, while in the first four months of 2013, they lost a further $58 billion in value.

This, according to the analysis, followed a major sell-off in April after the largest one-day percentage drop in gold prices since the 1980s.
Meanwhile, since April 2012, half of the CEOs have been replaced at the largest 10 mines.

Tim Goldsmith, global mining leader, PwC, said: “On the demand side, long-term fundamentals are still there but regaining investor confidence depends on how the mining industry responds to its rising costs, increasingly volatile commodity prices and other challenges such as resource nationalism and that new CEOs can deliver on promises.”
Despite this drop in confidence, it’s not all bad news as production volumes and dividend yields are up and while prices have fallen, they have not crashed — long-term fundamentals are positive.

“It’s important to recognise that the industry’s emphasis continues to shift. For the first time ever, half of the top 40 mines are from non traditional markets. China continues to be the industry’s most important customer. While Chinese growth rates are slowing, they are coming from a bigger base, so future demand for commodities still looks healthy,” Mr. Goldsmith said.

To help restore confidence, shareholders have called for increased capital discipline and higher returns. Eight of the top 10 have announced that they will maintain or increase current dividend levels.

Mr. Goldsmith said: “Miners are trying to rebuild the market’s confidence — capital expenditures have been scaled back, hurdle rates are being increased and non-core assets are being disposed of.

“Across the board, there is a shift from the days of maximising value by solely increasing production volumes, to a renewed focus on maximising returns from existing operations through managing productivity and improving efficiency, both of which have suffered in recent years.”
PwC is the largest and leading professional services firm that provides industry-focused assurance, tax and advisory services for public and private clients.

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