PwC evaluates the top 40 miners in ’08

Mining companies have been busy slowing down, laying off and shutting down in reaction to the global financial crisis; now the next big challenge is figuring out when it’s safe to start reversing all of that.

PricewaterhouseCoopers’ (PwC) sixth annual review of global trends in the mining industry, Mine – When the going gets tough, evaluates the impact of the global financial crisis on 2008 results of the top 40 mining companies.

In an interview, Steve Ralbovsky, the United States mining leader for PricewaterhouseCoopers, says that management have been busy reacting in whatever way the had to.

“I think now they are also sitting back and trying to evaluate ‘when do we react the other way, when do we make an acquisition or restart a project that we had slowed down,” Ralbovsky says. “But they are all in a tough spot because none of us can tell where this is going.”

PwC found that market capitalization of the top 40 mining companies – with market cap of US$2.3 billion or more — plummeted 62% in 2008. Meanwhile the S&P 500 companies saw their market caps slide 38%.

And although market caps at the end of 2008 were still higher than they were in 2005, which was considered then an outstanding year, mining companies were forced to take action.

Of the top 40 miners, 14 of them closed mines, cut production or put operations on care and maintenance. Plus, about US$13 billion in planned capital expenditures has been deferred or cancelled and about 40,000 jobs lost.

Costs played a huge role in causing grief on income statements. Operating costs rose 27% in 2008 while revenues rose by less at 23%.

In some ways Ralbovsky was pleasantly taken aback at the 2008 results. “I was surprised that the numbers held up as well as they did given what the fourth quarter was like,” he says.

But the continuation of rising operating costs was also noteworthy. “It’s not necessarily completely surprising. It was a trend we’d seen over the last couple of years,” he says. “I know that companies are trying to watch that but when prices are good you try to produce whatever you’ve got.”

Overall net profits fell in 2008 by 14% — the first decrease PwC has seen since starting up report six years ago. And half of the top companies recorded impairment charges for a total of US$31 billion though 80% of the total were from two companies (Freeport McMoRan Copper & Gold and Rio Tinto) who completed deals close to the top of the market. In any case, these circumstances caused the 2008 net profit margin fall by 30%, which PwC says continued a worrying trend that was noted in 2007.