pwc.com.au/industry/energy-resources Onward and Upward! Aussie Mine November 2011 2 Onward and Upward! Foreword Welcome to Aussie Mine for 2011. Our analysis this year shows that the mid-tier has risen to the challenge and produced outstanding results for their stakeholders. Miners have again enjoyed strong momentum delivered by a year of commodity price growth. The mid-tier is a savvier group as a result of the global financial crisis. Having sustained their growth and safeguarded their balance sheets, they remain cashed up – just how this cash is utilised remains of great interest to industry observers. Wayne Huf Partner Organic growth through the successful development of projects typifies the Australian mid-tier, and this year we see strong evidence of it again. Although they will often fall prey to the larger global players, the mid-tier has taken on the role of strategic acquirer, and consolidation of more junior companies is another strong theme this year. We expect to see a lot more M&A activity in the forthcoming year, as companies jostle to take advantage of the indisputable strength in global demand for raw materials. The industrialisation and urbanisation of the Asian region continues to present the Australian mid-tier miner with an unprecedented opportunity. The Asian century is upon us and the mid-tier is positioned to take advantage. As we put the finishing touches to this year’s edition of Aussie Mine, a cautionary wind is blowing, in the form of volatility out of eurozone debt contagion fears and continued uncertainty in the US. Will global economic conditions test the group Tim Goldsmith once again? With a high Australian dollar and a tightening labour market, Global Mining Leader operations at the higher end of the cost curve may be in for a bumpy ride. Even with this short-term uncertainty, the strong long-term foundation laid by demand from developing nations remains. The mid-tier 50 are well placed to meet the challenges ahead and keep moving forward – it is onward and upward! Wayne Huf Tim Goldsmith Aussie Mine November 2011 3 Table of contents 1. Executive summary 1 2. Mid-tier industry in perspective 3 3. The rise of Africa 12 4. The way I see it 15 5. Social licence: winning the community’s vote 18 6. Positive investment in Indigenous communities 21 7. Aggregated industry financial statements 23 8. MRRT: time to implement 36 9. Unlocking the sources of future capital 38 10. Mid-tier 50 companies analysed 40 11. Explanatory notes 42 Mining Excellence@PwC 43 Contacting PwC 44 Other Mining Publications 46 4 Onward and Upward! Executive summary 1 2011 was a stellar year for the mid-tier Equity markets are still big funders. More than 50, with key indicators across the $6.4 billion of additional share capital was raised by the mid-tier 50 in 2011. $4.1 billion of this was issued board pointing to healthy growth in in return for cash. The disposable funds were used for a sector which has recovered from the acquisitions and exploration/development activities; global financial crisis (GFC). signalling confidence in long term global commodity demand, as CEOs put their money where their mouth is. The recent volatility in equity markets has raised some concern, but the fundamentals for the industry continue Transaction activity: a hallmark of the mid-tier 50. to look positive as the mid-tier 50 look onward and Seven of last year’s 50 companies have exited due to upward. Operating revenue has increased significantly, mergers or takeovers and, subsequent to 30 June 2011, as has transaction activity. Cash has been stockpiled to deals are in train for four more of the current 50. The help future-proof the mid-tier 50, and there is growing entrepreneurial nature of the group is exemplified by the excitement about the opportunities in Africa. At home, fact that 15 companies completed acquisitions greater the introduction of the MRRT is a cause for some than $15 million. concern, with many companies now having to consider Cashed up and battle-ready. Cash generated from its implementation. There also remain challenges around operating activities increased 34% to $3.7 billion. working with local communities, and gaining community Despite heavy investment levels, prudent financial support for new projects. On top of that a carbon price management appears to have been a GFC lesson well and a worsening industrial relations environment and we learnt. Balance sheets remain strong – with large can certainly see that many hazards lie ahead. holdings in cash – a stark contrast to the pre-GFC days. Operating revenue: continuing its upward trend. This cash strength indicates that the deals done in 2011 Revenue growth of 37% for the year led to a remarkable are just the beginning and more projects will be funded 6358% or $2.4 billion increase in net profit after tax. into operation. Iron ore companies led the way, almost doubling revenue Onwards to Africa. As economically recoverable from 2010 as a result of the demand-side growth from deposits become more difficult to identify in Australia, China and India. A surge in the copper price, along with investors have increasingly reached out to developing the commissioning of key copper and nickel projects, has nations in a bid to meet future demand. Africa has resulted in revenue growth of 54% and 81% respectively emerged as the continent of choice for the mid-tier 50, across these two commodities. with a 400% (approximately $10 billion) increase since 2007 in the value of companies with the primary asset in Africa. The increased risk of investing in some of these nations is clearly being offset by the rewards for those who succeed in navigating sovereign risk and other barriers to entry, such as a lack of infrastructure. Aussie Mine November 2011 1 Strategic planning – critical over the next Europe. The eurozone debt contagion that threatens twelve months: to spread has not been kind to the industry, with share prices reflecting that. It may be a tough year ahead, and MRRT and carbon pricing. The true impact of the MRRT companies will need to develop strategies to deal with and a price on carbon is not likely to be seen immediately. what could become the second chapter of the GFC story. These legislative changes are expected to have a greater However, today’s cashed-up mid-tier 50 stands in better bearing on future investment decisions rather than stead than their peers back in 2008. current production. In 2010, we challenged each company to ‘Rise and Shine’. Sovereign risk. Unfortunately, sovereign risk is now Given the outstanding results posted by the mid-tier readily associated with investment in Australia – a 50 this year, they have succeeded. In 2011, the mid- categorisation normally reserved for regions that are tier 50 is showing tremendous resilience in the face of viewed as politically unstable. Whether these changes considerable domestic and global challenges. Although genuinely increase sovereign risk over the longer term there are headwinds, it is onward and upward! is debateable. At this stage, it seems the damage to the Australian mining brand, and changing the perception of investment in Australia, will not be easy to remedy. Cash generated from operating activities increased 34% to $3.7 billion. 2 Onward and Upward! Mid-tier industry 2 in perspective 2.1 Market capitalisation overview: Whilst the whims of commodity markets have been reflected in the recent share price performance, our a year of growth analysis shows that the results for the mid-tier 50 are strong and tell a compelling story. Even with the falls The total market capitalisation for this year’s group of 50 since June 2011, market capitalisations are 39% greater mid-tier miners has increased by 39% from June 2010 to than they were in June 2010. For the mid-tier, it has been June 2011 – peaking at $76.8 billion in December 2010. a year of growth. However, the picture from June 2011 to 30 September 2011 is not as bright with market capitalisation falling by The point of entry for this year’s mid-tier 50 is a market $10 billion or 15% – in line with the falls in the broader capitalisation of approximately $463m; an increase over market (ASX 200). the previous year’s figure of $400m. Iluka and Alumina have breached the $5bn threshold and are no longer European sovereign debt default fears and continued part of the mid-tier group. It would be reasonable to economic uncertainty in the United States played on the expect that the cut-off point for entry would decrease, mind of investors post June. This highly volatile situation considering the companies that were in last year’s top took its hold on commodities between June and October 15 such as Equinox, Centennial Coal, Andean Resources with traded commodities being hit hard. For example, and Riversdale Mining have exited due to merger and the price of copper fell 27.5% from the middle of June acquisition activity; however, this is not the case. The 2011 to September 2011 and bounced back 14% through growth in the market capitalisation cut-off for our mid- to October 2011. Even gold – the safe haven against risk tier grouping, despite these exits, points to the fact that – has been hit solidly at the time of writing. Iron ore, a the mid-tier mining industry is burgeoning. non-traded commodity, has been a source of strength in this year’s mid-tier 50; but has not escaped the volatility, with spot prices recently falling 30%. Mid-tier 50 market capitalisation in AUD $million June 2009 to September 2011 90,000 2010 2011 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10 Sep 10 Dec 10 Mar 11 Jun 11 Sep 11 Market Capitalisation in AUD $million Source:Capital IQ Aussie Mine November 2011 3 China: continued strong demand for Iron ore: the big mover commodities Market capitalisation for the year to 30 June 2011 for China’s twelfth Five-Year Plan (2011-15) targets GDP the seven iron ore companies totalled $8.7 billion – growth of approximately 7.5% over the five years.