The global mining industry is facing a growing disconnect as despite record profits for the world's 40 biggest miners in 2011 thanks to high commodity prices, investors proved fickle, demanding greater capital discipline and increased shareholder returns.
A lack of confidence in the sector's growth prospects saw market values plunge 25% to about $1.2 trillion and only six of the world's top 40 miners saw their market value increase, according to a new report from PwC, "Mine: The Growing Disconnect".
PwC's analysis of the top 40 largest miners showed 2011 to be a year of polarisation.
While the industry started the year strongly, company stocks significantly underperformed in the broader equity markets, losing value by year-end as a result of continuing global economic fears stemming from, among others, the ongoing European sovereign debt crisis and a projected slowdown of China's economy.
"The demand story remains robust and long-term growth in emerging markets is more significant to the mining industry than short-term jitters in the developed world," says Tim Goldsmith, global mining leader, PwC. "Investors have simply not bought into the industry's growth story or are reacting to other short-term global economic concerns. There is a growing disconnect between the two."
Of the top 40 miners in 2011, 19 are from emerging markets, comprising 38% of market value – another record.
"The onus is clearly on the industry to better articulate what is still one of the strongest investment stories in the world today. This story is being fuelled by emerging market nations where hunger for commodities remains strong. It is these markets that will decide the future of the global economy," notes Goldsmith.
The top 40's total assets remain above $1 trillion and grew a further 13% in 2011. They invested $98 billion in capital projects in 2011, falling short of the $120 billion in spending announced last year.However, despite dampened investor support, the top 40 announced a record $140 billion in capital expenditures for 2012 as they expect demand fundamentals to remain strong.
As the industry battles against a backdrop of the market's demands for heightened capital discipline, the report shows supply will be the story for the future. Some firms will look to develop a tailored portfolio of projects to secure supply and increasingly look to locate new mines in remote areas.
Goldsmith says that given shareholder resistance, and the challenges inherent in bringing increasingly large, remote and complex projects to completion on time and on budget, the capital expenditure forecasts for 2012 will likely be missed.
"If the demand story dominated the past five years, the next five will be shaped by supply issues. Supply has failed to keep up with demand and that's likely to remain the case for a while yet."
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