PHOENIX, June 21, 2007 (PRIME NEWSWIRE) -- A report by PricewaterhouseCoopers, 'Mine -- Riding the wave,' shows that 2006 was another spectacular year for the global mining industry, with net profits rising by 64 percent. They are now 15 times higher than their 2002 level, while return on equity reached 33 percent compared to 26 percent in 2005. The report also finds that net cash inflow from operating activities was $76.7 billion, an increase of 40 percent compared to 2005. Cash is being used to fund organic growth and spending on investment activities grew by 83 percent.
The annual study is now in its fourth year and provides a comprehensive analysis of the financial performance and position of the global mining industry. It looks at 40 of the world's largest mining companies, which represent over 80 percent of the global industry by market capitalization, from across the globe and based in 14 different countries. It also discusses the current global trends affecting the sector.
During 2006, the global mining industry witnessed some dramatic events. Takeover activity picked up from its rapid pace in 2005: consolidation and expansion through acquisition of new assets remains a cornerstone of these cash-rich companies. A number of 'mega-deals' were sealed in 2006.
"2006 was another impressive year for the industry, and the prospects for 2007 look excellent as well," said Steve Ralbovsky, U.S. Mining leader for PricewaterhouseCoopers. "Even with the high production volumes we witnessed last year, demand is still outstripping supply and driving higher commodity prices. This is rewarding companies that invested when prices were low, despite supply side challenges that have impacted input and development costs across the board."
Unprecedented demand, primarily driven by China, continues to increase. Supply is static and is struggling to catch demand, partially as a result of under-investment in the 1990s. There remains confidence that fundamentals will lead to the continuation of high commodity prices.
"2007 will continue to present equipment and supplies challenges," noted Ralbovsky, "as companies compete for resources to reopen mines while others try to keep mines running at full capacity. Despite these challenges, the industry has entered 2007 on a very high note and companies' fortunes will depend on how they ride the wave."
The impact of hedge funds on the mining industry has been felt particularly dramatically in the last two years, through their involvement in metal trading activities and the volatility this creates in commodity prices. The report points to this trend continuing due to high cash flows and easily accessible funds. The most significant challenge is the impact hedge funds can have on metal prices during cycle changes. A number of significant derivative or physical positions may result in metal markets being destabilised. The influence of hedge funds is expanding to impact equity ownership, as well. In a similar trend, there are growing indications of potential for private equity funds to share in the returns from the industry.
The companies in the top 40 list have changed significantly even just in the past four years and this edition looks back at what has happened to those original top 40. One third of the companies are no longer featured on the list. A period of significant consolidation funded by commodity prices has lead to nine been acquired by one of those in the remaining 27. Not only have the company names changed, but the sheer value of industry participants has also grown enormously. The 40th company in 2006 would have been 19th in 2003 based on its current market value. The lowest market capitalization has increased by 2.9 times and that of the largest by 2.2 times. Individually, the net profit of each of the top four in 2006 is higher than the aggregated net profit of the top 40 companies in 2002.
The most striking change in composition is the reduction in the number of Canadian companies, down from 12 to six due to acquisitions. A look at the market capitalizations of the emerging mining groups headquartered in Australia shows that a rejuvenation of mid-tier mining companies is well under way. This bodes well for the Australian market. Canada is also well positioned with its historically strong junior and mid tier sectors. The UK has now surpassed Canada as the top 40's primary access point for capital. The emergence of Asia is also worthy of note, as there are now four companies domiciled in Asia, compared with none in 2003.
A series of new elements have been included in the report this year. The series of discussions with industry CEOs included previously is now complemented with a snapshot of other stakeholder opinions on the industry as a whole, with particular emphasis on high commodity prices and the social responsibilities of the industry. There is also an article by the International Council on Mining and Metals discussing the Council's new reporting and assurance framework as a tool for increasing the accountability of the industry through more transparent reporting on a wider range of non-financial information.
The full report of 'Mine -- Riding the wave' is available for download at http://www.pwc.com/extweb/pwcpublications.nsf/docid/AD4DEFB47A20ED0A852572F9007200C7
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