The global mining industry went through one of the most difficult operating environments in recent memory last year, says PwC’s annual Mine report.
Commodity prices, led by gold’s greatest annual decline in over 30 years, decreased significantly and mining values fell 23%. Along with record impairments of $57 billion, this means net profitability in the industry—down 72% to $20 billion—was at its lowest level in a decade.
The first time, the majority of the 40 largest mining companies come from emerging markets. Given their current performance and greater recent appetite to spend on capital, this trend is set to continue, PwC says.
The change in the global mining landscape also saw a divergence in the collective performance between emerging market companies and their developed market counterparts. Net profits from emerging market companies in 2013 were $24 billion in aggregate, compared to an aggregate net loss of $4 billion for developed market companies, which were particularly impacted by impairments.
It’s also more difficult for multinational mining companies to operate with impunity worldwide. Governments are increasing royalties and taxes. Election results in 2014 in Brazil, India, Indonesia and South Africa may further alter the influence of emerging markets on mining.
Meanwhile, the success of cost-saving initiatives will become more apparent this year, as operating costs did not slow in 2013 (up 4%) and free cash flow entered negative territory for the first time in the Mine series. Deferring spending on significant capital projects was commonplace, particularly in light of current returns on capital employed against targeted project hurdle rates. There is a forecast capex of $116 billion in 2014, 11% lower than 2013 as capital velocity slows.
Maintaining dividend levels, exercising more selective capital allocation and active portfolio management are amongst the levers being pulled to restore investor confidence in the sector.