Mining capex remains low despite bumper profits
8th June 2018
Resources Rising Stars
Strong profitability and low debt across the big end of the mining sector has not translated into increased capital spending on new mines, suggesting commodity prices could remain elevated for some time (reports The Australian Financial Review).
Data compiled by accounting and auditing firm PwC has revealed capital spending by the world's 40 largest miners remains anchored at a 10-year low, despite revenues and profits across the sector surging by 23 per cent and 126 per cent respectively over the past year.
The findings came as the Australian Bureau of Statistics reported that mining and construction companies had driven a surge in company profits in the first three months of 2018, with the 5.9 per cent rise in Australian corporate profits being almost double economists' expectations.
The 40 biggest miners had an average gearing ratio of 48 per cent in 2015, but that was reduced to 31 per cent by December 31, 2017; the lowest level since 2012 according to PwC.
Gearing has continued falling over the past five months, with the world's second-biggest miner Rio Tinto almost liberating itself of debt in recent months with the divestment of $US4 billion worth of coal mines.
But despite the sector having surplus cash and debt under control, PwC's Australian mining leader Chris Dodd said he expected growth in spending on new mines to rise incrementally rather than exponentially.
"Significant investments made during the previous boom resulted in a substantial overhang in production capacity and weak balance sheets. So it is not surprising that the industry has been slow to ramp up investment significantly," he said in a report to be published on Tuesday.
"Our analysis identifies an approximate two-year lag between a movement in [earnings before interest tax, depreciation and amortisation] and a resultant impact on capital expenditure. After a number of years of record low capital expenditure, we expect next year's level to increase as companies press ahead with long-term strategies, be it growth through greenfield or brownfield investments, or new acquisitions.
"However, the miners are expected to maintain capital investment discipline and continue to assess each opportunity against consistent criteria. This means resisting the temptation to pursue acquisitions or projects at any price."
Data published by the ABS last week showed miners increased capital spending in the March quarter by just 1.2 per cent.
The biggest of the 40 miners surveyed by PwC, BHP Billiton, will spend $US6.9 billion on capital projects in fiscal 2018 and vowed to keep capital spending below $US8 billion in each of the 2019 and 2020 financial years.
Rio has vowed to keep capital spending below $US6 billion per year until the end of fiscal 2020 at least.
Mr Dodd's comments echo the thoughts of Glencore chief executive Ivan Glasenberg, who told an investor briefing in the US last month that large increases in capital spending were "unlikely" to be seen in the mining industry any time soon.
Mr Glasenberg said a prudent mood among investors, tougher permitting challenges for new mines and the need to move into challenging jurisdictions to find new deposits were among the factors that would keep capital spending low.
Mr Glasenberg also said exploration for new deposits had been unsuccessful of late by historical standards.
Despite being the world's biggest exporter of iron ore, coking coal, bauxite and a major producer of other commodities like gold, uranium and spodumene concentrate, just five of the world's top 40 miners by market capitalisation were listed on the ASX in 2017.
Aside from BHP and Rio, PwC found that South32 and Newcrest Mining were the 19th and 20th largest miners in the world by market capitalisation, with Fortescue Metals Group ranked 24th.
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