Are the tumultuous times over for Australian mining’s mid- tier and all those businesses depending on it?
National Mining Chronicle Resources Lead Reporter Jack McGinn delves into PricewaterhouseCoopers’ Aussie Mine report to get the low-down on what’s being described as the sector’s ‘next act’.
2016 was, in many ways and places, a year in which the systems by which the world has come to function were turned on their head.
In Europe there was Brexit and in the US the election of Donald Trump; both seemingly against all odds but the result of groundswell of discontent with the way things were and a wave of nationalism which somehow continued to catch observers off-guard.
There were also big losses in popular culture; David Bowie, Prince, Alan Rickman, Lemmy Kilmister, George Michael, Carrie Fisher and Debbie Reynolds were among those who passed.
The merit of these matters and whether they could possibly be in any way the fault of a calendar year is a debate for another day, or another publication, but on the surface it would appear the western world witnessed some significant and visible change last year.
If PwC’s annual and well-respected Aussie Mine report is anything to go by, 2016 (the financial year, at least) was as transformative for Australian mining’s middle tier as it was divisive in other areas.
Celebrating its 10th year, Aussie Mine tracks the performance of Australia’s 50 biggest ASX-listed miners with a market value under $5 billion each financial year.
Coming off the back of a difficult run characterised by depressed commodity prices and the end of an unprecedented construction boom, things have been difficult for many in the sector in recent years.
However, on the back of the performance of its mid-tier top 50 list in 2016, PwC is heralding the end of the worst and a transition to better times for Australia’s all important middle tier miners.
“We’re seeing signs that the mid-tier has hit the bottom, survived the worst and is now making a comeback,” PwC Mining Leader Chris Dodd said on the release of Aussie Mine 2016.
“Increases in market value, capital expenditure and ordinary dividends all point to confidence returning.”
FY2016 saw a 23 per cent increase in market capitalisation of PwC’s mid-tier 50, driven largely by investor confidence in gold – in part on the back of aforementioned global volatility – and the emerging lithium space.
Premium of market capitalisation over net assets was up from 3 per cent to 47 per cent.
Impairments of $2 billion were recorded in FY16 among those companies surveyed, but the result represented a 36 per cent fall from FY15’s record of $5.5 billion.
In a positive sign for investors, ordinary dividends jumped 21 per cent while capital expenditure grew 37 per cent in a reflection of management confidence in existing projects.
With the exclusion of an outlier, net cash position of the mid-tier increased by five per cent.
PwC said the signs indicated a looming turnaround, though an aggregated net loss of $1 billion showed there was still work to be done.
“Against these tough market conditions a turning point appears to have been reached in 2016 with impairments down by 36 per cent,” Mr Dodd said.
Entering the third act
PwC has split the last 10 years into three distinct periods?of performance, with a first act from FY07 to FY11 in which the industry grew and soared on huge demand from China; and a second from FY11 to FY15, when global growth slowed and volatility prevailed.
Conditions at present are considered the beginning of a third act as gold, coal, aluminium, nickel, copper and iron ore prices all rose in FY16.
“The downturn has stabilised and investments made are showing rewards for miners who controlled costs and strengthened their capital position,” the report said.
“This is the bottom of the cycle and the mid-tier 50 are about to write a new story.”
What will that next story actually be? According to PwC, the industry has a number of challenges to face as it navigates a world in which prices are increasingly volatile, demand is harder to predict and stakeholder mistrust is a growing factor in project operation and development.
Mining’s ‘brand’ is expected to be a particularly prominent factor moving forward – vocal public opposition to the development of Adani’s Carmichael coal mine in Queensland, for example, shows much work is to be done in re-engaging a public increasingly conscious of the industry’s environmental impacts.
But PwC says influence of activism stretches further than protesters and placards; public pressure from groups has resulted in funding difficulty, as seen at Carmichael, while governments need to balance the interests of the public and industry.
The report also cites the example of the collapse of Queensland Nickel’s refinery in Townsville earlier in 2016, which contributed to the passing of the Chain of Responsibility bill in the state to force key stakeholders to meet their obligations in terms of project rehabilitation.
In public dissatisfaction lies opportunity, and PwC recommends setting aside the tried and tested conventional means of viewing business and the environment, giving significant thought to the future while operating in the present.
“The backdrop for mining has never been this challenging,” the report said. “With the brand of mining this damaged there can be no exceptions.
“In our view all companies should accept their social burden and proactively self-regulate on rehabilitation. Only then will the industry take a step towards winning back the public’s trust.”
The emergence over the next decade of savvy new companies capitalising on low-entry barriers to challenge traditional operators is seen as one potential future for the industry.
Where there’s risk there’s also potential reward; tools like Blockchain could one day allow consumers to trace the source of materials used in cars to an individual mine.
“Is it possible that an Australian mid-tier copper producer, boasting an environmental five-star rating on its flagship mine, will sell the output from that small, low-cost mine directly to Toyota at a 20 per cent price premium for use in the ‘really green’ 2025 model Prius?” PwC ponders in its Aussie Mine report.
While the social licence debate seems dominated by majors, this year’s mid-tier 50 holds more projects in Australia than Rio Tinto and BHP Billiton combined.
PwC suggests these companies could “take up the fight” in the coming years and show the public that they can operate safely, responsibly and sustainably without overdone regulation and oversight.
“The players that can embrace technology and innovation as the new norm and rebuild the public’s trust in the industry to be socially responsible operators will be best- placed for success,” Mr Dodd said.
One decade down
A telling sign of how quickly things change in the mining sector is the comparison between the list of top 50 mid-tier companies used in the first and most recent Aussie Mine reports.
Only 11 miners survive from the inaugural Aussie Mine report, with 22 of the original companies since acquired by others and two having merged.
Of the 10 companies which have fallen out of the 50 since 2007, three operate in iron ore. PwC said this was a reflection of the impact majors squeezing out the mid-tier operators in the space. Three from 2007 class entered external administration, while two were delisted from the market.
Meanwhile, Orocobre was joined by four new lithium entrants in the 2016 mid-tier 50 list, highlighting the increased popularity of the commodity in the market.
Picture Rio Tinto's Energy Resources of Australia is one of the surviviors from the original 2007 Mid-Tier 50 list. Rio Tinto 2016