PwC’s Top 40 sees many ‘firsts’ in 2015 — most of them bad

Last year, the mining companies on PwC’s Top 40 list, measured by market cap, chalked up their first-ever collective net loss of US$27 billion and their lowest return on capital employed (ROCE), in the 13 years that the consulting firm has been publishing its annual review, which this year is entitled Mine 2016 — Slower, lower, weaker … but not defeated.

ROCE in 2015 fell from 8% to 4%, compared with the commonly cited 15% hurdle rate for new projects, while impairments surged to US$53 billion, which, the study said, “may not be an absolute record, but at 77% of 2015’s capital expenditure is the highest proportion ever recorded.”

Market capitalization also shrank by a large amount. At the end of 2015, the Top 40’s market capitalization contracted to US$494 billion — a 37% drop from 2014 and the lowest level since 2004.

Not only did the drop in market cap outpace the 25% fall in commodity prices, the PwC study found, but “many of the established members of the Top 40 marked below their book values for the first time in the history of our publication.”

“All gains made during the commodity super-cycle were effectively wiped out,” the study said. “The collapse was all the more painful for producers in 2015 because the value destruction was perceived as self-inflicted, whereas during the global financial crisis, by contrast, extraneous market forces drove valuations down across multiple sectors.”

“This is the first edition of Mine where we have observed a sustained deterioration in the viability of the Top 40,” the study stated, noting that the minimum threshold for inclusion on the annual list is a market cap of US$4.5 billion.

The report’s other findings included negative price-to-earnings ratios (the first in the publication’s history); a 39% decline in the group’s adjusted earnings before interest, taxes, depreciation and amortization (EBITDA); and leverage at an all-time high of 46%.

The study also touched on the reduction of investment on property, plant and equipment to US$580 billion from US$650 billion; the fall in capex to US$69 billion (half what it was in 2012 and 2013); “the first wide-scale mothballing of marginal assets” and decrease in capital velocity to 10.6%; the trimming of debt by US$10 billion or 3%; nearly a third of the Top 40 companies reporting they had assets for sale; the 42% plunge in the HSBC Global Mining Index; and finally, a net debt to EBITDA ratio above four for 12 of the Top 40 companies, up from four in 2014.

“Companies are now valued significantly less than what the commodity price would dictate, so they have been very severely punished,” Liam Fitzgerald, Canada’s National Mining Leader for PwC, says in an interview.

While it is too premature to call the bottom, Fitzgerald notes that the sector “is starting to turn the corner” and that from a data perspective is seeing “an uptick.”

“If you look at some of the deals happening and some of the money flowing through the capital markets, there are some positive signs out there,” he says. “There’s good performance on the TSX for the mining and materials sector, so the attitude: ‘We won’t be defeated’ will hold true and the market should improve in 2016.”

The sector will see more asset sales and mergers and acquisitions, he says. “In 2015 the market was dominated by single-asset sales in the bidding processes — like Anglo’s sale of its niobium assets — so you can expect a few more of those. What we expect to see is that, given a lot of non-core asset sales have been made already, some companies will have to look at assets they may like to keep but may have to sell … there could be a few billion dollars of dispositions of assets or M&A might increase the volume as well as the dollar amounts.”

And there’s still a lot of work to be done on cutting debt, he says.

“Companies don’t look anywhere as bad as they did, but there’s still some work to do on the debt side — companies can’t assume debt burdens have been taken care of.”

Teck Resources and First Quantum Minerals fell off the list in 2015, while the four new companies added to the list were all Chinese, bringing the total number of Chinese companies on the Top 40 to 12. A lithium company joined the list for the first time: Sichuan Tianqi Lithium.