Mining & Metals Industry Outlook Flashcards
Describe mining in one sentence.
A cyclical industry driven by global economic growth.
Why is mining cyclical?
The mining industry is cyclical, thanks to the lag between investment decisions and new supply. Demand tends to grow in a relatively stable fashion on the back of global economic growth. By contrast, supply is added in bulk when a new development is completed.
What nations are driving demand?
It’s not all about China
Infrastructure-driven growth in Asia, mainly China, has resulted in above-average economic growth and a significant increase in demand for commodities like iron ore, copper and coal. However, as can be seen from Figure 2, the USA and Europe account for more than 40 per cent of global GDP. Although their growth rates are nowhere near as impressive as those of the emerging markets, relatively small increases, or declines in growth can have an impact on metal demand, especially consumer driven demand.
What are the top development and principal risks and uncertainties?
- Public perception
- Geopolitical and regulatory
- Technology and cyber
- Increased costs / pressure efficiency and effectiveness
- Macro-economic fluctuations
What is the change in revenue, gearing, EBITDA and net debt to EBITDA for the top 40 miners?
Revenue: $600bn up 23%
Gearing: 31% down from 41%
EBITDA: $146bn up 38%
Net debt to EBITDA: improved by 38%
What is the operating cost breakdown of the mining industry?
- Raw material and consumables
- Employee expenses + external services
- Government royalties paid / payable
- Freight and transport
- Other operating expenses
- Exploration and evaluation expenditures
What are BHP’s productivity cost gains?
BHP Billiton has reported that, through its Maintenance Centre of Excellence initiative, it expects to save $1.2 billion across the business by FY2022, with a corresponding reduction in downtime of 20 per cent. The company also reports that unit costs have reduced by 15 per cent over the past two years.
What are Rio Tinto’s productivity cost gains?
Rio Tinto identified $2.2 billion in operating cash cost improvements across 2016 and 2017 with the optimisation of its maintenance strategies, partnerships with suppliers and improvements in mine processes including cycle times identified as contributing factors.
What are Anglo Americans cost gains?
Anglo American increased its production by 9 per cent, at a 26 per cent lower cost per unit, and its volume target for 2017 by $1.1 billion. It attributed these successes to its improved mine planning and the simplification of its operating structure. Anglo American also identified the potential to achieve a further $800 million benefit by 2022 and an additional $3-4 billion improvement in underlying EBITDA per annum, as a result of improved production and cost reduction.
Discuss the record high increase in tax contributions?
The Top 40 tax expense increased by 81 per cent, with cash taxes paid to governments increasing by 67 per cent7 . This difference in growth partly reflects the lag between the tax expense and actual taxes paid.
With the exception of the USA, corporate tax rates have remained relatively stable across most key markets. The increase in tax expense is primarily driven by a profit increase and the impact of USA tax reforms (one-time impact of $2.8 billion or a 4 per cent increase in the effective tax rate largely due to the revaluation of deferred tax)8 . The USA tax reforms will ease the tax burden on USA operations going forward.
However, the lag in cash tax payments aided by the significant un-utilised tax losses across the Top 40 may create additional pressures for governments to increase the tax take as a way of addressing fiscal constraints. For example, certain governments in Africa are tempted to use tax as a way to get mining companies to the negotiating table to re-balance the share of economic resources from operations by claiming under declaration of revenue or export duties. While these claims are considered unsubstantiated, attention must be given to the trend these developments represent and how companies engage with governments in the future in the areas of taxes, royalties and overall sharing of economic benefits.
Discuss the recent profitability of mining.
Profitability on all measures improved
Mining companies were able to capitalise on the increased price environment as the additional production capacity created at the end of the previous boom was able to deliver into healthy demand.
Improved operating cash flows allowed companies to implement their strategies, be it balance sheet restructuring, acquisitions, project development or simply returning profits to shareholders. We see a definite, measured and patient approach adopted by mining companies to execute on their respective strategies to deliver longterm value.
Discuss how shareholders have been rewarded
We saw the beginning of this trend in 2017 when Anglo American reintroduced its dividend9 , which was suspended in 2016, and Rio Tinto paid a record level dividend of $5.2 billion in addition to an announced $4.5 billion share buyback10.
Of the Top 40, 23 have a formalised dividend policy that on average aims to pay dividends at 30-40 per cent of annual net profit. Based on current performance and expectations, dividends paid are likely to remain high in 2018.
Discuss the current margins on development
Although these margins are still too low to incentivise significant new developments, the 25% forecast EBITDA margin for 2018 gets closer to the higher EBITDA margin required to sustain a capital-intensive industry like mining.
Discuss the sentiment of the top 40 on growth
From risks disclosure, we see that the Top 40 are still comfortable that low levels of exploration and new resource acquisition pose a relatively low risk. They are comfortable that they can acquire at will and at reasonable prices when they want to expand. However, the current lack of investment in exploration and capital projects will eventually catch up. Following a clear growth strategy through the cycle will help companies avoid the mad rush for resources at the top of the cycle.
What is the increase in market cap and dividends paid for the top 40?
Market cap up by 30% from $714bn to $926bn
Dividends paid increased by 125% from $16bn to $36bn
