Insight
Mines strengthen balance sheets
According to PwC’ s Mine 2018 report, the world’ s 40 largest mining companies have delivered an impressive financial performance in 2017, increasing revenue by 23 % to USD600-billion.
Expectations are that the improved financial performance of the Top 40 will continue as companies continue to benefit from this upward momentum in the mining cycle. According to Michal Kotzé, energy, utilities and mining industry leader for PwC Africa, 2017 was a remarkable year for the world’ s Top 40 miners.
“ One of the risks currently facing the world’ s top miners is the temptation to acquire mineral-producing assets at any price to meet rising demand. While we expect capital expenditure to increase next year as companies implement their long-term growth strategies, miners must be careful to maintain discipline and transparency in the allocation of capital,” says Kotzé.
Miners continued to focus on strengthening their balance sheets in 2017, with USD25-billion being allocated to the repayment of debt, and capital expenditure at a record low of USD48-billion. As a result, gearing has fallen from 41 % to 31 %, which is back in line with the Top 40’ s 15-year average. With the liquidity concerns that were still lingering in 2016 now largely resolved, balance sheets are strong, and companies have the flexibility to act.
“ In 2018, we expect that favourable market conditions, higher commodity prices, and strong internal discipline will produce increased liquidity and balance sheet strength. While we expect to see an increase in value and growth opportunities in 2018, we anticipate that this will be tempered by a continued focus on maintaining a robust and flexible balance sheet,” says Andries Rossouw, assurance partner at PwC.
Tax expenses increased 81 % in 2017, with cash taxes paid to governments rising by 67 %, despite the fact that corporate tax rates remained relatively stable across most key markets.
The jump in tax expenses was driven mostly by increased profit and the impact of US tax reforms, which saw a one-off 4 %
( or USD2.8-billion) rise in the effective tax rate due to a revaluation of deferred tax. It is expected that US tax reforms will ease the tax burden on US operations going forward.
Last year saw a range of new entrants active in the mining sector. Private equity( PE) investors took a keen interest in mining investment opportunities, for example, and were active participants in almost every quality coal deal brought to market in Australia during the year.
There are also examples of non-mining companies partnering or merging with miners to secure access to commodities. For example, Agrium, a Canadian fertiliser and chemical wholesale and retail company, merged with the world’ s largest potash producer, PotashCorp, while Tesla continued to invest in lithium supplies, including their recent transaction with Kidman Resources in Australia.
There was a 36 % reduction in the number of fatalities among the 28 companies( of the Top 40) that disclosed safety statistics in 2017. Of the 22 companies that disclose injury statistics, 15 reported that the number of injuries had either fallen or remained consistent compared to the previous year. While an improvement in the safety record of the Top 40 is welcome news, there is clearly more work to do to ensure a safe working environment for all employees.
Bulk commodities such as coal, copper, iron ore, zinc, manganese, and chrome also showed remarkable price increases over the past two years. Miners of these commodities in Africa will reflect similar trends to those explained for the global mining industry.
Unfortunately, precious metals haven’ t done as well. The US-dollar gold price has remained relatively flat and platinum prices are at extreme lows. With higher input costs driven by input cost inflation, miners of these commodities are not experiencing the same growth as other commodities. They are still faced with the challenges of the bottom of the commodity cycle and job losses and mine closures are real risks. b
[ 40 ] MINING MIRROR AUGUST 2018