PwC Reports on Australian and Canadian Miners
The countries and the industry sectors covered in the two reports differ, but the two groups of companies share a common problem. Their aggregate market capital-izations fell sharply in the year to June 30, 2012. The market capitalization of the Top 50 ASX Mid-Tier mining companies dropped 26% from A$69.8 billion to A$51.8 billion, while the market capital-ization of Top 100 TSXV mining compa-nies plunged 43% from C$20.6 billion to C$11.7 billion.
However, “The mid-tier miner who remains agile and stays the course will reap the rewards for its shareholders over the longer term,” the Australian report sug-gests, while the Canadian report urges jun-ior companies to “Hold on, don’t give up. If you can survive this tough financial mar-ket, chances are you’ll thrive. The long-term fundamentals for mining remain strong, providing miners with many promising years to come.”
PwC’s Australian report, Aussie Mine 2012—Staying the course, notes that the Mid-Tier 50 posted respectable growth in revenues of 21% over the year under review, and cash flows from operations rose 36%. However, net profit took a battering, falling 44% to A$1.6 billion, “primarily as a result of impairment charges of A$1.2 billion as commodity prices took their toll.”
Pressures confronting the Australian industry include rising production costs, a strong Australian dollar, productivity chal-lenges, a tight labor market, and the propen-sity for government to tap the mining indus-try for additional tax revenues. However, the report states, “the Mid-Tier 50 is well placed to benefit from the continued growth of China and other emerging economies, pro-vided they are able to navigate the multitude of risks on the supply side.”
The most notable change in composi-tion of the ASX Mid-Tier 50 was an increase in the number of gold producers, which rose from 11 in 2011 to 19 in 2012, a shift driven by the fact that gold was the only commodity to see prices rise during the year. Thirteen of the 19 gold producers reported increases in operating cash flows; however, share prices did not reflect the positive operating statistics. The PwC report includes an in-depth analysis of factors influencing the gold price and the values of gold company shares.
Eight coal producers came off the Mid-Tier 50 list, three eliminated due to acqui-sitions and the others due to falls in their market capitalizations.
PwC’s Canadian report, Junior Mine 2012—Must survive before you can thrive, identifies financing as the key challenge for companies operating in the junior sec-tor. In an uncertain market, the report states, investors are not looking to add risk to their portfolios, and high risk-reward ratios are junior mining’s “sweet spot.”
Also, “Investors are demanding more, seeking to get more out of their invest-ments. And we literally mean more— they’re showing investment bias toward companies who have strong dividend poli-cies or are announcing creative ways to give shareholders increased exposure to high commodity prices. Juniors don’t pay dividends. Only one company in this year’s Top 100 paid a dividend.”
The 27-page PwC report concludes with a four-page discussion of the financ-ing dilemma confronting junior companies. Its headline: “Financing: Making it out of this financing slump alive…”
The report is available at www.pwc.com/ca