Home' Australian Resources and Investment : March 2013 Contents VOLUME7NUMBER1•AustralianResourcesandInvestment•7
Mid-tier mining sector in
2012 was not an easy year for the mid-tier 50; they
were battered by falling con dence as concerns
around growth in China arose. The subsequent fall in
commodity prices devastated the market capitalisation of the
group -- almost one-third of their value was wiped out from
its post-global nancial crisis peak of March 2011. Iron ore
prices have since rebounded, but other commodities have
not experienced the same fortune. Continued volatility in
commodity prices, as seen in recent iron ore price movements,
highlights the dif culties confronting mid-tier companies
in making long-term investment decisions. Despite these
conditions, the mid-tier 50 posted solid results, with revenue,
gross pro ts and operating cash ows all up on last year.
Rising costs continue to hamper the industry, climbing by
more than 20 per cent in 2012.
But overall, we believe that the outlook for 2013 and
beyond is positive. There is continued strength in the long-
term demand for commodities driven by the industrialisation
and urbanisation of the bulk of the world's population. This is
a journey with many miles still to travel, and one that offers
mid-tier miners a bright future, provided they can navigate
the multitude of supply side risks.
China's demand and leadership transition
The leadership transition in China is a key event that will set
the scene for the next phase of growth. Things will change as
the Chinese economy continues to mature, but we are in no
doubt that the development and urbanisation of China still has
many years to run.
Some China doubters point to its 12th ve-year plan (2011
to 2015), which has the stated goal of more sustainable growth
and the promotion of domestic consumption. Even with a shift
towards more domestic consumption, the demand for steel will
Driving this demand is unstoppable urbanisation. China's
urban population now sits at approximately 51 per cent,
compared with 82 per cent for the United States and 89 per
cent for Australia. The ve-year plan estimates that 12 million
people will migrate into cities annually. These cities, larger than
Melbourne and Sydney combined, are yet to be constructed.
This demand will continue to be the biggest factor shaping
the prospects of the mid-tier 50. With the majors battening
down the hatches and deferring projects, opportunities exist for
the mid-tier 50 to capture their share of this growth.
With uctuating commodity prices and rising costs,
bringing in projects on time and on budget has never been
Operating a mine in Australia is expensive. With the
mining majors also completing their own large projects, it has
been tough for the mid-tier 50 to deliver projects on time and
on budget. More recently, the majors have announced project
deferrals and scalebacks. Many of the mid-tier 50 lack this
luxury, as they operate or seek to develop a single asset. The
mid-tier miners must stay the course with a focus on cost
The funding challenge
Companies that already have funding for projects are in a
strong position. During 2012, we saw the equity markets
support the mid-tier miners by providing additional capital.
Share price volatility, however, can make equity raisings
expensive and, in some cases, deeply dilutive to existing
shareholders -- forcing them to give away value in order to
fund a project.
The challenge for these companies during 2013 and
beyond is to look to more innovative funding arrangements.
Debt funding has not been the traditional realm of the mid-
tier 50, but this is changing and debt funding will continue
to be used to fund project development.
With interest rates at all-time lows in many parts of
the world, particularly the United States, companies can
increasingly turn to foreign debt markets where debt costs
are lower. This can provide another avenue of funds for the
The mid-tier 50 are also getting creative and looking
to alternative funding arrangements, such as off-take
agreements, selling partial stakes in projects and agreeing to
joint ventures. Companies funding these projects have often
been downstream users of the commodity who are willing to
inject capital in return for supply security.
Despite the short-term challenges
facing the mid-tier 50, the future
remains bright. The continued
emergence of developing nations and
their increasing wealth will drive this
industry for generations. As we look
forward, it will be the companies
best able to manage costs that will
not only survive, but prosper, as
macroeconomic conditions improve
around the globe. In turbulent times,
the mid-tier 50 needs to remain
con dent and stay the course.
The Aussie Mine publication, by PricewaterhouseCoopers (PwC), looks at the annual results
of the mid-tier mining sector -- the 50 biggest ASX-listed miners with a market capitalisation
of less than $5 billion. Jock O'Callaghan, PwC Australia Energy, Utilities and Mining leader,
looks at the key challenges and the outlook for 2013 and beyond.
Energy, Utilities and
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