Over the past decade, the mining industry has outperformed the broader equity markets but this trend has recently changed. While 2012 saw mining stocks fall slightly, they fell nearly 20% in the first four months of 2013, according to new analysis from professional services firm PwC.
According to the Mine report, the industry faces a confidence crisis. Confidence over whether costs can be controlled, whether return on capital will improve and whether commodity prices will not collapse, among others.
Although it was a turbulent year for commodity prices, PwC’s analysis of the largest 40 miners shows total market capitalisation was roughly the same at the end of 2012 as at the start - $1.2 trillion - but not for gold miners. The gold miners in the top 40 lost $29 billion in 2012, while in the first four months of 2013, they lost a further $58 billion in value. This followed a major sell-off in April after the largest one-day percentage drop in gold prices since the 1980s.
“While longer term demand fundamentals remain, mining companies need to handle rising costs, increasingly volatile commodity prices and other challenges such as resource nationalism in order to regain investor confidence,” says Ken Su, PwC China mining leader.
Despite this drop in confidence, it's not all bad news as production volumes and dividend yields are up and while prices have fallen, they have not crashed - long term fundamentals are positive.
Chinese miners also stood out as more Chinese companies moved into the top 40.
Additionally, China remained active in acquiring mining assets, an increasing trend in the overall global mining deal scene.
“China continues to be a key factor in any demand discussions making slowing economic growth in China more and more top of mind for industry players and observers. In addition, the profile of Chinese mining companies continues to rise as they expand at home and abroad,” adds Su.
To help restore confidence, shareholders have called for increased capital discipline and higher returns. Eight of the top 10 have publically announced that they will maintain or increase current dividend levels. Meanwhile, since April 2012, half of the CEOs have been replaced at the largest 10 miners, and they will be looked upon to deliver for shareholders.
“Increasing efficiency and productivity while carefully managing capital allocation along with targeted exploration and non-core asset divestiture programs will be focus areas in the upcoming year. Mining companies look to be working hard on all fronts to bring back more investors," notes Su.