Release: PwC: Global miners deliver record earnings, but challenges ahead

(07 June 2011)--Revenues for the world's 40 largest Miners leapt 32 per cent to a record $435 billion from surging commodity prices and strong production output in 2010.

The strong top-line results catapulted the Miners' net profits to a staggering $110 billion ? a 156 per cent increase over last year, according to PwC's ?Mine: The game has changed report'.

Tim Goldsmith, Australian and Global Mining Leader says, "The mining industry has entered a new era, delivering record results in 2010. Moving forward there will certainly be supply-side and price volatility challenges that will fundamentally impact the industry."

"Demand continues to be propelled by strong growth in emerging and industrialising markets, including China, Brazil and Indonesia."

"Ensuring supply will continue to be the industry's most significant challenge. The need to explore more remote locations, project complexity and new sovereign risks will compound this issue."

"However, the long-term industry outlook remains bullish and was reflected by the 26 per cent rise in the Top 40's combined market capitalisation," said Goldsmith.

Four Australian companies were among the Top 40: BHP Billiton, Fortescue Metals Group, Newcrest Mining and Rio Tinto.

To keep pace with demand, the Top 40 announced more than $300 billion of capital programs of which more than $120 billion is planned for 2011, doubling the capital expenditure of 2010.

"Despite these challenges, the Top 40 is well position to capitalise on the upside. Collectively, they own nearly $1 trillion in assets, including a $100 billion war chest of cash. They are also largely debt free with net gearing of 8 per cent of total assets."

"Australia is particular well placed to continue growing its mining sector with an abundance of commodity resources, close geographical proximity to Asia, and recent capital expansion commitments worth more than $100 billion," he said.

Emerging market players outperform
Emerging market producers were the standout performers among the Top 40. Over the past four years, companies from these emerging markets delivered an average Total Shareholder Return double that of their peers in more developed markets such as Australia, US, Canada, South Africa, and the UK.

Goldsmith said, "The challenge for mining companies in the current resurgent market is to demonstrate that they made the right investment choices during the GFC and are able to take advantage of the potential upside."

Returns strong, but moderated
According to the report, cost inflation has also kept a lid on the Top 40's combined return on equity (RoE), reaching 22 per cent in 2010. This result was well below the 31 and 28 per cent achieved in 2006 and 2007 respectively.

"Despite benefitting from record high commodity prices, the Top 40's cost base has risen considerably as lower grade assets and labour shortages take effect. Like RoE, profit margins are still below their historical peak."

"With no sign of inflationary pressures easing, maintaining cost discipline in a volatile global and financial environment will be extremely important for the industry moving forward," said Mr Goldsmith.

Commodity outlook
All major commodities: copper, coal, gold, nickel and aluminium experienced significant price increases ranging from 26 to 49 per cent in 2010.

The price of gold has been on a constant upward trend since the average of $364 per ounce in 2003, reaching $1,421 at the end of 2010. The price of gold is expected to rise further during 2011 despite forecast volatility.

The price of other bulk commodities is expected to increase, largely driven by large-scale industrialisation of Asia's developing economies. (end of release)