Wednesday, June 6, 2012

Miners unlikely to realize planned US$140bn capex in 2012 - PwC

The world's top 40 publicly listed mining companies plan to invest a combined US$140bn in capital spending in 2012, which would represent a 43% leap from the US$98bn they spent in 2011, according to a new report from PricewaterhouseCoopers (PwC).

But projects face numerous hurdles to execution, not least of which is investor pressure to give cash back and exercise discipline in capital allocation, and the actual spend will likely be smaller.

"With these new demands from shareholders, it is very likely that that sum is not going to materialize. It is very likely that projects will be questioned, or some projects will be delayed," PwC lead partner for mining, Latin America Colin Becker said Wednesday at the Santiago, Chile launch of the report Mine 2012.

The report highlights a disconnect between the mining industry and investors, an environment fueled by the market's doubts that miners will be able to continue to deliver profits and fear of the massive capital requirements of mining projects in the face of general economic uncertainty.

In other words, investors do not believe that investing in mining development projects will provide the returns they want, and have been turning away from mining stocks in favor of holding metal through ETFs or physical investment.

The result is a 25% fall in combined market cap among the top 40 listed mining companies from US$1.6tn at end-2010 to US$1.2tn at end-2011 despite miners' historically high cash flows and continued profit growth.

In a bid to keep shareholders on board, companies are heeding their call. "For the first time we are seeing interest from the companies in returning more money to their shareholders via larger dividends and share buybacks," said Becker.

In 2011 almost 30% of cash allocation was attributable to returns to shareholders. While so far the growing returns are coming mostly at the expense of net debt repayment, the longer term effect of larger cash returns would be less cash into organic growth and less supply coming online.

Becker said that the price-over-earnings ratio of the top 40 miners was just 9 at end-2011, lower than in 2008 during the global financial crisis.

"Again the market is saying it is worried about whether profitability levels can be maintained in the future. The market foresees an important fall in mining industry profits and margins," he said.

Roughly one-third of the US$98bn global capital expenditure of the top 40 miners in 2011 went to projects in South America. Brazilian giant Vale (NYSE: VALE) accounted for more than 50% of the total figure, which excludes investments by Chilean state-owned Codelco.