Commodity price increases accounted for more than half of the shareholder value generated by the mining sector from 1999 through 2009, but price increases do not account for the sharp variations in the performance of different companies within the sector, says a new report from The Boston Consulting Group.
The report, Value Creation in Mining: More Than Commodity Prices, shows that three key levers explain the superior performance of the most successful companies: production growth, capital management and discipline, and increases in valuation multiples. The top 10 value creators from the sample of 37 major mining companies averaged annual total shareholder return of 34 percent—twice the TSR of the full sample.
“That the top performers have generated annual returns of 34 percent, against commodity price increases of 10 to 12 percent, speaks to the power of these nonprice factors,” said report coauthor Philip Krinks, a partner and managing director in the firm’s London office and the global leader of BCG’s metals and mining sector.
The top performers grew their production volumes faster than the sample as a whole, benefiting from a balanced mix of organic growth and M&A. Meanwhile, the rest of the sample achieved lower growth rates and relied more heavily on M&A. Growth from M&A produced mixed value-creation results. High premiums combined with low synergies explain the fact that highly acquisitive companies did not differentiate themselves from their peers in their value-creation track record.
Capital management and discipline varied greatly between the top ten companies and the overall sample. Top companies used capital more wisely and avoided excessive equity dilution and debt issuances, while paying healthy dividends. Less successful companies were particularly prone to diluting the holdings of existing shareholders, weighing down their returns.
“It is impressive that the best performing companies managed to grow so strongly while maintaining a healthy capital structure,” said Victor Scheibehenne, a principal in the firm’s Toronto office and another coauthor of the report.
Understanding and closing valuation gaps with peer companies was also a powerful driver of value for investors. Such increases in valuation multiples sharply differentiated the top performers—which were rewarded for improving their outlook for cash flow growth, reducing their perceived risk levels, and establishing a track record of shareholder-friendly capital-allocation decisions—from the rest of the sample.
The three levers are essential to creating value above and beyond the benefits of commodity price increases, but there is no one-size-fits-all pathway to success. Every company must define its own value-creation strategy in light of its individual starting position and strategic context.
“Given the uncertain outlook, both positive and negative, for the world economy and the potential impact on mining industry returns, it is ever more important that mining companies have a clear value-creation plan that relies on more than commodity price increases,” says report coauthor Gustavo Nieponice, a partner and managing director in BCG’s Santiago office and the firm’s Americas leader of the metals and mining sector.
MORE RTICLES ON CAPITAL MANAGEMENT