Despite record profits at US$133 billion in 2011, market capitalization of global mining companies fell by 25%, says PwC.
Further, global mining companies’ price-to-earnings (PE) ratio fell below 10 in 2011, which is lower than the dismal PE ratio during the financial crisis. The industry’s stocks significantly underperformed in broader equity markets, losing value by year-end as a result of ongoing economic fears.
“Investors have simply not bought into the industry’s growth story, or are reacting to other short-term global economic concerns,” says John Gravelle, Canadian mining leader, PwC.
Even though the top 40 global mining companies invested US$98 billion in capital projects in 2011 and plan for a further US$140 billion for 2012, investors don’t believe miners will execute their projects or deliver returns as promised.
“[CEOs are] proceeding with caution as resource nationalism, rising costs, labour challenges and investor demands remain top of mind,” says Gravelle.
Meanwhile, iron ore is leading the way in terms of earnings before interest and taxes (EBIT), as well as revenue. As a percentage of revenue, iron ore has jumped from 20% to 42%, and EBIT has gone from 24% to 66% of the total. The price of iron ore hit an annual average of US$168/dmt, posting an annual increase of 29%.
“Diversified producers are adding more iron ore to their portfolio,” adds Gravelle. “Global iron ore reserves expanded by 8% last year with multi-billion dollar capital projects underway in countries such as Australia and Brazil.”