According to PwC’s latest Mine report, 2017 was a remarkable year for the world’s Top 40 miners. Thanks in large measure to the continuing recovery in commodity prices, fueled by general economic growth, revenues rose dramatically by 23 per cent. At the same time, the cost saving strategies of the past few years delivered, with margins and cash generating ability improved as well, leading to a sharp increase in profits. Capital expenditures remained flat.
With liquidity concerns that were still lingering in 2016 mostly resolved and balance sheets strengthened, companies have the flexibility to act. Across the board, a heightened focus on safety in operations, reducing leverage, and avoiding aggressive investments in new capacity indicates that management is proceeding in a measured and deliberate way.
For the first time, we have included a 2018 outlook. Our outlook indicates that the Top 40’s improved performance will continue in 2018, as companies continue to reap the benefits of the upswing in the mining cycle. The critical question facing leaders and investors is how they will respond to their current run of good fortune. Will they give in to the impulses that have spurred aggressive actions in the past, or will they continue to pursue a path of safety first?
Perhaps the most significant risk currently facing the world’s top miners is the temptation to acquire mineral-producing assets at any price in order to meet rising demand. In the previous cycle, many miners eschewed capital discipline in the pursuit of higher production levels, which set them up to suffer when the downturn came. While we expect capital expenditure to increase next year as companies implement their long-term growth strategies, miners must be careful to maintain discipline and transparency in the allocation of capital. They need to resist the urge to pursue projects or acquisitions at any price, and instead, focus on mining for profit, not for tonnes.
Miners may also find themselves tempted to give in to stakeholder demands for a share of the success. Given the sector’s strong overall performance, this pressure will come from multiple directions. As they view the improving results, shareholders, governments, workers, management and host communities will all be ramping up their asks – for higher dividends, higher taxes, and higher wages. Miners need to strike a balance between near-term demands and their long-term vision to deliver value.
Indications are that this current cycle has several more years to run. Steady global annual GDP growth over the next five years, along with significant infrastructure growth in emerging economies, is expected to underpin continued demand for mining products. But the operating environment is not without significant headwinds: geopolitical uncertainty, regulatory risk, technology and cyber risks, and social licence risks are all on the rise.
So while the future looks bright for the Top 40, long-term success is by no means assured. Both risks and temptations loom and miners will need to stay focused and deliberate in the pursuit of their long-term goals to create value for all stakeholders on a sustainable basis.
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