Pausing for breath... ASX top 100 miners December 2010 Introduction Welcome to the third edition of Ernst & Young’s ASX top 100 miners, our annual analysis of the 100 largest miners by market capitalization listed on the Australian Securities Exchange (ASX). 2010 has seen the ASX remain one of the most attractive capital markets for mining companies, leading the global mining sector by volume, with 41 new listings1 and ranking fourth globally in terms of capital raised during the period. More broadly, improvements in conditions in the Australian mining sector over the last 12 months has seen market capitalization of the ASX top 100 miners rise 19% on the prior year. This coincided with a strengthening in balance sheets as a result of increased cash holdings and a reduction in total debt. Over the next 12 months we can expect to see those capital rich ASX top 100 miners considering options such as acquisition, consolidation, expansion, or dare we say it, returning capital to shareholders. These investment decisions however, will be impacted by the final minerals resource rent tax (MRRT) framework given its potential valuation impact on companies with coal and iron ore assets. We do of course expect macro events in the coming year, such as the Chinese economy, carbon pricing and the outcome of the European debt crisis to also impact the ASX top 100 miners. I trust you will enjoy this analysis, which aims to provide you with an understanding of the size and scale of Australia’s top performing miners, as well as sharing insights on the leading commodities and issues driving opportunities in the sector. Paul Murphy Asia Pacific Mining and Metals Transactions Leader About this report This publication provides an analysis of the 100 largest miners listed on the ASX at 1 October 2010 and is produced every year at the close of the reporting period. Debt and cash balances have been calculated on financial statements with a balance date of 30 June 2010. All figures throughout this report are sourced from Bloomberg Finance LP at 1 October 2010 and contrasted against figures sourced at 1 October 2009. These dates have been used to ensure the market data incorporates all recent financial reporting and reflects true market trends. This analysis excludes selected international companies with minority listings on the ASX, such as Anglogold Ashanti and Newmont Mining Limited. All financials within the report are recorded in Australian dollars unless otherwise specified. 1 Based on the nine months prior to 30 September 2010 ii Pausing for breath ASX top 100 miners Snapshot Despite an overall annual improvement • 36 of the ASX top 100 miners saw an AIM, ASX and TSX miners series in market capitalization, continued increase in market capitalization in This paper complements our series of uncertainty arising from global economic excess of 100% volatility, the recent Federal election and global papers that provide an analysis • Balance sheets have strengthened of AIM, ASX and TSX listed mining the proposed mining tax in Australia, with total debt of the ASX top 100 companies. The papers explore the contributed to a stalling in the market miners totalling $47b, 41% lower on recovery of mining companies value of the ASX top 100 miners over the the prior year following the global financial crisis past six months. This uncertainty, • Cash holdings were up by 26% to $31b and its impacts on their balance coupled with a preceding strong run-up resulting in net debt totalling $16b sheets and market position. in value in the first six months has resulted in a somewhat cautionary (a reduction of $39b for the ASX top To view these papers, please visit environment, driving a disconnect 100 miners on the prior year) www.ey.com/miningandmetals between current market values and • The total debt to market capitalization fundamentals, especially when viewed ratio of the ASX top 100 miners has in the longer-term. decreased to 9% from 19% In the face of improving fundamentals, • Buoyant gold prices saw gold miners in we do not expect the relative period of the ASX top 100 miners have an calm that the ASX top 100 miners have especially prosperous year with an experienced during the past six months average increase in market to continue. capitalization of 218%, an increase in cash levels of 104% and total debt to The points below provide a snapshot of market capitalization levels steady at 5% the key findings in this report: • Investment in new production capacity • There has been some movement resulted in increased total debt and with 16 changes to the ASX top 100 falling cash levels for coal companies — miners list including nine entries by a stark contrast to other ASX top 100 gold companies miners. This has been somewhat • The total market capitalization of the mirrored by iron ore miners, though ASX top 100 miners increased by 19% higher iron ore prices have resulted in to $495b from $417b greater cash levels than coal miners2 • Over the past six months, the market • Current estimates by the Australian value of the ASX top 100 miners fell Bureau of Statistics for 2010/2011 slightly from $497b at the end of mining investment is $50b March to $495b at the start of October 2 Coal numbers may have been impacted by new entrant, Aston Resources, which has $552m in total debt, accounting for approximately 44% of total coal company debt. Pausing for breath ASX 100 miners 1 Profile of an ASX top 100 miner 2010 has seen the ASX top 100 miners emerge as an The average ASX top 100 miner (excluding BHP Billiton and operationally efficient group of companies with a focus on Rio Tinto) has: margin improvement and cost reduction. The group as a whole • A market capitalization of $1.51b outperformed the market, achieving 19% growth over the period, compared to the 1% increase in the ASX All Ordinaries Index. • Cash holdings of $121m • Total debt of $102m • Net cash of $19m Figure 1: Size of the ASX top 100 miners by Figure 2: ASX top 100 miners by primary commodity market capitalization at 1 October 2010 (by number of companies) 5% 5% 6% 13% 6% Base metals 13% Coal A$200-250m 7% Copper 26% A$250-500m 4% Diversified A$500m-1b 7% Gold 29% A$1-5b 12% Iron ore A$5b+ 13% PGM Nickel 27% 27% Uranium Other Figure 3: ASX top 100 miners by primary commodity Figure 4: ASX top 100 miners by primary commodity (by market capitalization) (market capitalization) — refer to ‘other’ percentage in Figure 3 3% 4% 6% 23% Coal 4% 28% Copper 3% Gold Iron Ore Diversified 6% PGM Other 17% Nickel Uranium 72% Base metals 34% Other Source: Ernst & Young, Bloomberg Finance LP 2 Pausing for breath ASX top 100 miners Getting the house in order “The analysis tells the While it is clear the ASX top 100 miners Following the highs reached in February are in better shape than a year ago, the and March, the market eased back tale of two distinct market seems to be pausing for breath as through the middle of the year based on periods — the first saw it attempts to deal with the uncertainty fears of a double-dip recession in the US a sharp upswing off the created by the proposed changes to and Europe, coupled with the possible Australian resource taxation, the slowdown of China’s economy and the back of improving tentative global recovery and the prior mentioned domestic uncertainty. European debt crisis. commodity prices and The Baltic Dry Index, a lead indicator, conditions, while the 2010 has been a year of change, with saw sentiment plummet in late June/July, the first four to five months seeing followed by a rapid recovery. However, second has seen the commodity and equity prices rebound while the mining sector has recovered market pause for breath.” on strong global sentiment. There (particularly commodity and equity appeared to be a disconnect developing prices), it has not regained the highs Scott Grimley between market fundamentals and price. reached earlier in the year. Oceania Mining & Metals Leader Figure 5: Baltic Dry Index performance 5,000 4,500 4,000 3,500 3,000 Baltic Dry Index Dry Baltic 2,500 2,000 1,500 1/10/20091/11/20091/12/20091/01/20101/02/20101/03/20101/04/20101/05/20101/06/20101/07/20101/08/20101/09/20101/10/2010 Source: Ernst & Young, Bloomberg Finance LP Pausing for breath ASX 100 miners 3 At the end of March 2010, the ASX top 100 miners had a Movements combined market capitalization of $497b which remained steady at the start of October at $495b. This disconnect now There were significant changes over the period for the seems to be moving in the other direction, with lower equity ASX top 100 miners in both the composition and market prices despite better market fundamentals. capitalization benchmark for entry. There were 16 new entrants and the market capitalization threshold increased by A driving factor behind this disconnect in the Australian market 50% to $200m. Those leaving the list were either acquired, is the residual uncertainty resulting from the Government’s merged into new entities, delisted or surpassed in terms announcement in May of this year, of its intentions to introduce of market capitalization. a “resources super profits tax” that would have had broad application to mining companies operating in Australia. This saw The gold price reached US$1,319 per ounce on the combined market value of many miners adversely impacted. 1 October 2010, an increase of 32% on the previous year, and contributed to growth in market capitalization with nine There is continued uncertainty about the introduction of the new entries by gold companies.