World mining outlook grim, costs eat profit
NEW YORK (Reuters) - Short-term prospects for global mining companies are bleak, as rising costs eat into profit margins already depressed by the recession, according to a report by PricewaterhouseCoopers (PwC).
"There is no doubt that the industry is facing a tough road ahead," said Steve Ralbovsky, the professional services firm's U.S. mining industry expert.
"Reducing capital and operating expenditures and managing production levels to ensure they operate at the lowest possible cost will be crucial for mining companies.
"However, given the long-term nature of mining projects and associated capital commitments, it may be difficult for companies to drastically reduce costs in the short-term," Ralbovsky said.
PwC's report on the worldwide mining industry, "Mine -- When the going gets tough," shows that despite the economic downturn in the 2008 fourth quarter, mining companies capitalized on early-year strong demand and record prices to increase revenue 23 percent last year to $349 billion from $284 billion in 2007.
But operating costs continued to rise at a greater rate than revenue and net profit for the 40 top miners decreased 14 percent to $57 billion from $66 billion in 2007, PwC said.
Market capitalization of the top 40 plunged 62 percent in 2008 compared to the S&P 500 index, which declined 38 percent over the same period.
"While financial results were strong, 2008 was a year of two parts with the good times quickly turning bad as the global economic crisis took hold in the last quarter and commodity prices went into freefall," the report said.
The first quarter of 2009 saw 14 of the top 40 announce mine closures, production cuts or moves to place mines on care and maintenance, the report said. Additionally, $13 billion of capital expenditure has been deferred or canceled. Combined, this has led to more than 40,000 job cuts.
PwC said gold companies were the least affected by the downturn, as the gold price remained relatively high, compared with copper, aluminum and other metals.
Gold company market capitalization decreased just 20 percent, based upon the perception of gold as a safe haven in time of economic turmoil, PwC said.
In fact, four gold companies are in the Top 10 miners -- Denver-based Newmont Mining (NEM.N) and Canada's Barrick Gold (ABX.TO), Goldcorp (G.TO) and Kinross Gold (K.TO).
The top mining company by market capitalization on December 31, 2008, was Anglo-Australian miner BHP Billiton (BHP.AX) (BLT.L), valued at around $110 billion, according to PwC.
Second was Brazil's Vale (VALE5.SA) at around $60 billion, followed by China's Shenhua SHGRP.UL at about $50 billion.
The Top 10 was rounded out by Rio Tinto (RIO.L), Barrick, Anglo American (AAL.L), Goldcorp, Newmont, India's NMDC (NMDC.BO) and Kinross.
(Reporting by Steve James; Editing by Tim Dobbyn)
