A growing disconnect between miners and shareholders

Last year, the market capitalization of the top 40 global mining companies dropped 25%. This was despite the record earnings of those firms reported and with the average prices of all commodities in 2011 being higher than the average prices in 2010.

According to our recent report, Mine 2012: The growing disconnect, the ‘disconnect’ lies between the mining companies and their shareholders. In 2011, shareholders became more vocal about the top 40 companies becoming more disciplined with respect to capital allocation and giving more profits back, either by way of dividends or share buybacks. While the industry paid out a record US$32 billion in dividends and bought back US$26 billion in shares last year, being 156% more payments to shareholders than in 2010, shareholders have indicated that they want more.

Investors have also been cautious about the industry’s potential growth and are reacting to short-term global economic concerns. The mining sector’s stocks have significantly underperformed in the broader equity markets, losing value by year-end as a result of continuing global economic fears stemming from, among others, the ongoing European sovereign debt crisis and a projected slowdown of China’s economy.

What lies ahead?

According to the Mine 2012 report, the story for the next five year will centre on supply. Mining companies must carefully consider which projects to advance to generate additional supply. The top 40 global mining companies invested US$98 billion in capital projects in 2011 and announced a further US$140 billion for 2012. We do not expect these projections will be met given shareholders’ demand for increased discipline regarding capital allocation and demands for increased distributions to shareholders.

CEOs’ decisions on capital allocation will be challenging as they must consider changing fiscal regimes, resource nationalism, remoteness of certain locations, and structural changes to cost bases. CEOs may look to available alternative sources of capital to increase the availability of funds for projects, while at the same time satisfying shareholders’ demands for more cash.

Lower grades have been one cause of higher production costs. The lower the grade means the more waste needed to be mined and processed to produce the same amount of a commodity. If capital projects are delayed, grades will continue to decline so the cost of production will increase in the future. The industry report also highlighted rising input costs due to costs of labour and increased fuel and consumable prices.

Governments around the world are also looking into taking an increasing share of profits and resources through a range of measures. Currently, formal reviews of fiscal regimes or enacted changes have occurred in countries like Australia, Chile, Ghana, Peru and South Africa. As well, increases in export duties and export restrictions designed to encourage value added downstream industries, or protect security of domestic supply, are being put into place in countries such as India and Indonesia.

With a greater emphasis on resource nationalism, mining companies must act as good diplomats, as well as world-class miners to succeed.

Walking the walk and talking the talk

The top 40 global mining companies have devoted substantial resources and time in helping the communities in which they operate. The investments include training local work forces and improving biodiversity conservation. However, mining companies continue to face mounting pressure from active stakeholders to address sustainability issues.

The need for miners to effectively tell their story to stakeholders, be it government bodies, environmentalists or communities, is growing as social licenses to operate become increasingly difficult to keep or obtain.

Within the top 40 global mining companies, there is considerable diversity in the scope and concept of corporate social responsibility reporting. For instance, of the top 40, 65% issued a separate stand-alone sustainability report and 10% provided sustainability information only on their websites. Thirty-eight per cent of the top 40 global mining companies did not follow a recognized framework. Forty per cent followed the Global Reporting Initiative (GRI), 10% adhered to the International Council on Mining and Metals (ICMM), another 10% followed both ICMM and GRI, and two per cent followed the Shanghai Stock Exchange (SSE) guidelines.

A growing number of companies’ sustainability reporting is credible and transparent, but some reports do not convey a company’s sustainably issues or their social, environmental, and economic impact, and what they are doing to help.

Perceptions remain a valuable commodity, so it’s important for mining companies to use balanced reporting to tell their story in order to establish trust with stakeholders, and most importantly progress sustainability issues at the same time. Further, the industry should agree on reporting standards since existing reporting does not allow companies to be compared.

While results in the 2012 were excellent, a mining executive’s job has never been more difficult.

For more information, please visit PwC’s mining site at: www.pwc.com/ca/mining.

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