pwc.com.au/industry/energy-resources Rise Aussie Mine November 2010 and Shine What would you like to grow? Foreword Welcome to Aussie Mine Many have bemoaned the loss of the Australian mid-tier miners through consolidation and for 2010. This year’s analysis takeover during the boom years of the past presents an interesting decade. We are seeing the rise of a new group foundation for what is of companies, now positioned to take the mantle anticipated as a return to of leaders in this sector and drive the re-emergence of a vibrant and commodity form as Australian mid-tier diverse Australian mid-tier. miners Rise and Shine. Many Australia’s mining sector now has a strong mid-tier miners are currently and unprecedented opportunity at its doorstep. enjoying bullet proof balance Our proximity to the growth of the emerging Asian giants and our abundance of in-demand sheets, commodity price resources to fuel that growth will continue strength and a responsive to drive our economy, support employment and optimistic equity market, and drive infrastructure development over the perhaps tempered by a strong medium and long-term. As a nation it is up to us to support this development. Michael Happell Australian dollar (A$) and Energy and Resources Leader The mid-tier 50 are cashed up and poised for uncertainty around changes to growth. Executives and Boards have weathered the tax regime. Our analysis will the storm, successfully raised capital and provide further understanding re-financed debt and are now ready to take of these key factors. the next step. We will see the deployment of the significant cash resources held by these companies, both through organic project development and mergers & acquisition activity. While current market conditions suggest short-term volatility will persist, investors should be poised and ready to be taken on a ride as the mid-tier Australian mining sector is ready to rise and shine. We trust you will enjoy… Tim Goldsmith Michael Happell Global Mining Leader Tim Goldsmith 2 PwC Table of contents 1 Mid-tier 50 summary financial information 4 2 Executive summary 5 3 Mid-tier industry in perspective 6 3.1 Market capitalisation 6 3.2 Comparison of the mid-tier 50 to other performance measures 9 3.3 M&A - from necessity to opportunity 10 3.4 Movements in the mid-tier 50 14 4 The way I see it – Nicole Hollows 15 5 Aggregated industry income statement 18 5.1 Focus – Accounting changes: Rocky road ahead for mining sector 26 6 Aggregated industry balance sheet 28 6.1 Focus - A tax on iron ore and coal, but encouraging for exploration 30 7 Aggregated industry cash flow statement 32 7.1 Focus - Don’t let your capital project bite back 34 8 Looking ahead 36 9 Glossary 37 10 Mid-tier 50 companies analysed 38 11 Explanatory notes 40 12 Contacting PwC 41 13 Other Mining Publications 42 Aussie Mine November 2010 3 Mid-tier 50 summary 1 financial information 2010 2009 Change A$m A$m % Profit and Loss Revenue 11,317 8,561 32% Operating expenses (8,639) (6,108) 41% Adjusted EBITDA 2,355 2,512 (6%) Gain / (loss) on sale of investment (354) 487 (173%) Impairment (111) (1,738) (94%) Net profit/(loss) (26) (622) 96% Cash Flow Proceeds from ordinary share issues 3,794 2,410 57% Distributions to shareholders (1,023) (966) 6% Net operating cash inflow 1,922 2,112 (9%) Net financing cash inflow 3,246 2,857 14% Net borrowing inflows/(outflows) (840) 677 (224%) Balance Sheet Cash 7,373 3,658 102% Property, plant and equipment and capitalised exploration 20,175 18,435 9% Total borrowings 5,475 6,602 (17%) Net assets 28,402 24,034 18% Market Capitalisation Market capitalisation 63,942 47,202 35% Market capitalisation to net assets ratio 2.25 1.96 15% 4 PwC Executive summary 2 Financial year 2010 saw strong growth for the mid-tier 50 as commodity prices continued to strengthen on the back of growing demand from Asia’s industrialising economies and a number of others in the developing world. It is time to shine for Australia’s mid-tier miners. Revenue jumped by 32% largely underpinned From a cash flow perspective, a focus on debt by the strong performance of copper, gold financing continued to be a key theme, as and the unexpected star, platinum. The strong some companies in the mid-tier 50 rationalised performance in these commodities has been investments or looked to the market for funds driven by production growth as a result of the to reduce borrowings. By the end of 2010, the increase in the number of operating mines mid-tier 50 experienced ‘net zero’ gearing as both locally and offshore. The increase in cash exceeded total borrowings by $1.9 billion. revenue has also been compounded by the A significant challenge for the mid-tier 50 rise in the commodity prices for copper, over the next 12 months is to balance the gold and platinum. expectation of shareholders with the objectives Whilst there has been some uncertainty of the companies to ensure that they look to surrounding the political arena in Australia invest in projects that give them ‘bang for and the impact of the Minerals Resource Rent their buck’. Tax (MRRT) and its doomed precursor, the In our 2009 publication we asked each Resource Super Profits Tax (RSPT), the mid- company whether they are on the road to tier 50 remain strong and poised for growth, recovery. Now that the global financial crisis is with cash balances climbing to a remarkable behind us and the political arena in Australia is 19% of total assets during 2010, to be in stabilising, the boards of the mid-tier 50 should excess of $7 billion. have growth aspirations at front of mind, as it Equity markets have opened once again, with is time to Rise and Shine. 10% of the market capitalisation of the mid-tier 50 at June 2010 having been raised over the past two years. While investors were willing to put their hands in their pockets, the mid-tier 50 were reluctant to spend their fortunes with capital investment falling 70% during 2010. The outcome of the Australian Federal Election and the MRRT negotiations appeared to have played a role in cautious investment decision. On the deals front, Chinese investors continue to target Australian resource companies and projects, however the strengthening A$ no longer favours the foreign investor; as it is increasingly expensive for them to engage in M&A activity in Australia. We have noted a recent trend of Chinese entities seeking control of ASX listed vehicles with African assets, or the ability to spin African assets into these entities as Chinese companies look to leverage off in-country experience and relationships to African projects. Aussie Mine November 2010 5 Mid-tier industry in perspective 3 3.1 We continue to see strong Chinese growth metrics and do not foresee a decrease in the China’s influence on Market capitalisation near term. The Chinese Communist Party the Australian mining Back to where we started (CCP) is starting to look at finalising the 12th Five-Year Plan, which will drive strategic industry and demand The market capitalisation of the mid-tier 50 priorities goals out to 2015. Commentary has increased by over 35% to $63.9 billion espousing a change in direction for China for our commodities in June 2010 compared to June 2009 levels, to a more inwardly focused growth story, delivering strong capital gains to any investors must be kept in context. China requires is not done yet. In fact, shrewd enough to have bought at the bottom mined commodities to bring its population of the market. from a largely rural society to an expanding it has probably When we look at the movements in market middle class with all the wants and needs only just begun. capitalisation over the past 24 months, the of consumers in developed nations. China’s rollercoaster ride investors have been on is influence on the Australian mining industry and evident. The market came off its lofty heights in demand for our commodities is not done yet. June 2008 to a nadir in late 2008/early 2009. In fact, it has probably only just begun. Putting the increase in market capitalisation 32% rise since June 2010 into context and stepping away from the headline of 35% increase – what we have seen In the first three months of the 2011 financial over the past 12 months is simply a return of year, the market capitalisation of the mid-tier the value that was lost in equity markets during 50 continued to exhibit accelerated growth, the global financial crisis (GFC) and fortunes increasing a further 32% from June 2010, the and results have improved. equivalent to the entire growth achieved in FY10, these companies are once again starting This market rally is framed against a weak to shine. Our performance appears to indicate outlook for the United States and Europe, some de-coupling from the United States and completion of stimulus packages by troubled European economies. government and uncertain debt and capital markets. If this subdued global outlook Whilst the mid-tier 50 have performed strongly was to turn to a more optimistic tone and a across the board gold, coal and copper have corresponding market sentiment achieved, been the standout performers, particularly in we may expect to see another upward push the period subsequent to 1 July 2010. Where in market capitalisation for these mid-tier 50 there has been a distinct elevation in the companies.