Mine 2011 Game Has Changed

7/31/2019 Mine 2011 Game Has Changed

1/52

Mine 2011The game has changedReview of global trendsin the mining industry


3/52MineThe game has changed

09The golden rules

Page 36

02

The state of Silver | page 07

02Emergence of Sovereign Wealth Funds (SWFs) | page 08

02Disclosing government payments | page 09

04Operating costs and marginsA new base | page 17

06Chilean mining clustersAccelerating the development of

world-class suppliers | page 24

06The talent race is back on! | page 25

06Mining company returnsrisk vs. reward | page 25

06The push for capital expenditures | page 27

07Exploration expenditure | page 32

Featurettes

Mine 2011The game has changed


4/52


PwC

01

Executive summary


5/52MineThe game has changed 1

Last year we highlighted the growing optimism in the miningindustry and demand fundamentals that were driving theindustry back to boom times. The 2010 results have deliveredon this expectation, but it is clear that the game has changed.

The mining industry has entered a new era. Demand

continues to be stoked by strong growth in emergingmarkets. Supply is increasingly constrained, as developmentprojects become more complex and are typically in moreremote, unfamiliar territory. The cost base of the industryhas permanently changed as lower grades and shortages oflabour take effect.

To keep up with demand, the Top 40 have announced morethan $300 billion of capital programs with over $120 billionplanned for 2011, more than double the total 2010 spend.

While not all will be completed, the sheer size and volume ofthe announced capital projects demonstrates an industry

where fullling seemingly insatiable demand is the top priority.

In 2010, despite tones of cautious optimism from CEOs andshort-term uctuations in the market caused by instabilityacross many areas of the globe, the nancial results for theTop 40 were spectacular:

Revenues increased 32% breaking $400 billion for therst time

Net prot was up 156% to $110 billion

Operating cash ows grew 59%, leaving more than $100billion cash on hand at year end

Total assets approached $1 trillion

Net debt reduced to $46 billion, resulting in gearing ofonly 8%

However, while commodity prices have increased themargins achieved in the past year are still below the highs of2006 and 2007.

Investment in new supply is increasingly focused on emergingmarkets, and by new faces, as customers and governmentsenter the industry with the primary goal of securing supply.

Vertical integration into mining by customers that prioritisecertainty of supply over cost, will bring additional supplyonline from non-Tier one assets. The cost curve has shifted

and commodity prices have permanently moved higher.Production for 2010 increased by 5% overall with thebenets of expansion through the global nancial crisis beingrealised by those who continued to invest through the cycle.

Emerging markets continue to change the face of the miningindustry. One sign is the average Total Shareholder Return(TSR) of companies from emerging markets in the Top 40more than doubling the return from the traditional miningcountries over the past four years.

Overall the market capitalisation has increased by 26%.While some have expressed concern that the marketcapitalisation of the industry has increased too fast and toomuch; the jump is attributable largely to balance sheetgrowth following 2010s stellar results.

The outlook expressed by industry leaders is increasinglypositive, with companies taking denitive action on capitalprojects, as well as mergers and acquisitions. In a view fromthe top, the CEOs note their continuing belief in emergingmarkets, particularly the ongoing growth in China and thenations ability to achieve or exceed the 7% growth targetoutlined in the 12th Five Year Plan. Resource nationalism

and stakeholder management occupy a higher degree ofattention from the CEOs, as does the ever increasingcomplexity and sophistication in the industry.

With mining continuing to climb up the political priority listat a time of budget decits and changing economic and socialpriorities, many governments are looking at reforms to theirmining codes, grappling with sustainability issues andrevisiting their approach to taxation and royalties. In whatsmine is mine we are joined by Eurasia Group, which hasprovided an overview of a number of the key drivers for thesetrends in light of a growing focus on corporate transparencyand the interplay between corporates and society.

These are interesting times for the mining industry, with everincreasing scrutiny from governments, customers and otherstakeholders. Growing demand for its products, driven byemerging markets, highlights that supply will be the mostsignicant challenge it will face. The shift in balance is apositive one for the mining industry, but it will not be simpleand will take some managing. All of this highlights that the

game has changed.

We trust you will nd this years publication informative andencourage you to send us your feedback.

Welcome to PwCs eighth annual review of global trends in the mining industryMine. These reviewsprovide a comprehensive analysis of the nancial performance and position of the global miningindustry as represented by the Top 40 mining companies by market capitalisation.

Tim Goldsmith

PwC Global Mining LeaderMine Project Leader


6/522 PwC


02

Industry in perspective



Game-changing trendsOver the course of the last year, global economic and

political trends have changed the industry. The miningindustry nds itself in a new era and there is no turningback. Emerging markets are leading bullish long-termdemand projections while supply remains constrained,

with challenges such as declining grade and moreremote locations. The cost curve has shifted up,continuing to put pressure on the industry to maintainnancial discipline. New players are emerging and theindustry is receiving more attention from its many and

varied stakeholders. The game has changed in the miningindustry.

Leading the way

Mining companies have continued to outperform theoverall market, as consumer sectors dependant ondemand from developed economies struggled torecover. While the industry was hit hard by the globalnancial crisis, mining companies have led the returnand gone beyond.

Global indices (February 1989=1)

0

1

2

3

4

5

6

7

8

9

201120092007200520032001199919971995199319911989

Source: Bloomberg.

Dow JonesFTSE

HSBC Global Mining Index

2010 saw real tension in the market as growthrebounded, offset by a number of incidents that keptcaution and risk on the agenda. Emerging countriescontinued to storm ahead, with demand for resourcesdriven by strong GDP growth, including close to 10%growth in China.

These results were achieved against a backdrop of naturaldisasters, including the Chilean earthquake and oods in

Australia. Political pressure increased with reviews of


8/524 PwC


mining and taxation laws and government interventioninuencing deals in a number of mining countries such as

Australia, Canada and South Africa. The tension in theMiddle East and continuing concern about Europeansovereign debt have also weighed on markets.

Market cap is (almost) backMining market capitalisation continued to rebound in2010, with many players recovering the remainingmarket capitalisation lost during the global nancialcrisis and surpassing the level seen at the end of 2007.

The total year end market capitalisation of the Top 40increased by 26%, with larger gains generally achievedby the smaller companies. This made it tougher to be

included in the Top 40, with the market capitalisationrequired to make the list increasing from $6.5 billion in2009 to $11.0 billion in 2010.

Undervalued industry?The Price to Earnings (P/E) multiple for the Top 40 hasdeclined in 2010 as prot growth has well exceeded theincrease in market capitalisation. We note that the 2009P/E was unusually high due to historical earnings beingimpacted by impairment charges and lower commodityprices, while market capitalisation is forward looking.

Some commentators have questioned the sustainabilityof the rise in the share prices of mining companies. Acomparison of net assets to the market capitalisation ofthe Top 40 shows that net assets have remained at 35%of market capitalisation, demonstrating that marketcapitalisation has only increased by the prots theindustry has generated and retained in 2010.

Price/Earnings1

0

5

10

15

20

25

30

20102009

Source: Capital IQ, Bloomberg, PwC analysis.1Price/Earnings is computed by dividing market capitalisation by profits.

2009 Net assets as % of Market Capitalisation

Market capNet assets

35%

Source: Capital IQ, Bloomberg, PwC analysis.

2010 Net assets as % of Market Capitalisation

Market capNet assets

Source: Capital IQ, Bloomberg, PwC analysis.

35%



The super majors step outDuring 2010 we saw the top three miners (BHP Billiton,

Vale and Rio Tinto) step clear of the rest of the industry.The market capitalisation of third place Rio Tinto isdouble the size of the next largest player, ChinaShenhua, which declined 25% in value during 2010. Atthe top, BHP Billitons market capitalisation furtherstrengthened, putting it clearly above the rest. Price andproduction increases in iron ore were major drivers ofthe growth by the top three.

Top 3 market capitalisation ($ billion)31 December

Source: Capital IQ.

0

50

100

150

200

250

Rio TintoValeBHP Billiton

2005

2006

2007

2008

2009

2010

The drive for growthStrengthening demand for primary resources,predominantly from emerging economies, has been thebig story for 2010. End user need for minerals shows nosign of letting up, especially given the targeted 7% GDPgrowth included in Chinas recently released 12th Five

Year Plan. The plan included signicant infrastructurespend, such as the construction of 30,000 km of newrailway line.

At the same time, there is the challenge of decliningextraction grades, more geographically remote and/orpolitically challenging regions and the increasing scaleof projects required to generate economic returns.Supplying sufcient resources to meet the growingdemand is a key challenge for the industry.

The world continues to need raw materials andmining companies results show this. However, withpressures from a growing number of stakeholders onhow to distribute the benets, miners have the challengeof delivering on their social commitments and ensuringtheir contributions are both appropriate and properlyunderstood.


10/526 PwC


The evolving marketThe challenge for mining companies in a resurgent

market is to demonstrate that they made the right choicesduring the nancial crisis and that they are able to takeadvantage of the upside potential of the industry. Four-

year Total Shareholder Return (TSR) data through 2010shows mostly impressive, although uneven, returns fromthe sector.

In 2010, there were a number of players that greatlybeneted from volatility in commodity markets, notablycopper and silver, with companies like Silver Wheatonshowing an impressive 160% one year TSR.

The difference in returns between emerging market

producers and those from traditional countries widenedin 2010. The four year TSR for emerging market playersmore than doubled the returns of companies fromtraditional mining countries. This outperformance linksto the wider economic story of faster growth inemerging markets. Even though companies fromtraditional mining countries hold assets around the

world, emerging market players have still outperformed.

Top 40 TSR 20072010

0%

50%

100%

150%

200%

250%

Traditional marketEmerging market

Source: Bloomberg and PwC analysis.

Key playersThe Top 40 for 2010 saw four companies rejoin the list

and three rst time entrants. The newly listed Coal Indiawas the largest new entrant, following its IPO in October2010. There has been less volatility in 2010, with onlytwo companies more than doubling their marketcapitalisation and just four decreasing; the largestdecrease being 32% by NMDC. Interestingly all four ofthe decreases were Indian or Chinese companies.

Glencore has recently completed its listing in Londonand Hong Kong, creating many headlines in the process.The move by traders, steel companies and others toacquire mining assets makes it more challenging each

year to determine who the Top 40 mining companies are.

Top 10 market capitalisation ($ billion)31 December 2010

Source: Capital IQ.

2009

2010

0

50

100

150

200

250

Coal

India

PotashCorp

Barrick

Gold

Freeport-

McMoRan

Anglo

American

Xstrata

China

Shenhua

Rio

Tinto

Vale

BHP

Billiton

Reliable performanceStrong demand has made 2010 a stand out year for themining industry. Across the Top 40 there was acumulative 32% increase in revenues, a 72% increase inadjusted EBITDA and a 156% increase in net prot.

Much of the industrys good news has been achievedthrough a combination of commodity price andproduction increases. Many analysts would argue that in2010 the Top 40 were simply in the right market at theright time. However, if it is luck, fortune has mostgreatly rewarded those who invested through the cycle,as the value from large capital spend by these companiesis reaping rewards.

Financial discipline and management of costs will beimportant in 2011, while companies continue to drivetheir operations to maximise production and returns.


11/52

The 2010 four year TSR for the Top 10 miningcompanies (excluding Coal India which listed in

2010) provides insight into challenging performancestories. While a four-year period is arguably a shorttime frame for the industry, we have seen the highsand lows of a commodity cycle, albeit a short one,during this period. The results show the importanceof holding Tier one assets and being the leader inchosen markets.

Top 10 TSR 20072010

Note: Coal India figures are excluded due to lack of comparative data as it

has only listed in 2010.

Source: Bloomberg and PwC analysis.

Barrick

Gold

Freeport-

McMoran

Anglo

American

Xstrata

China

Shenhua

Energy

Rio

Tinto

Vale

BHP

Billiton

PotashCorp

-20%

30%

80%

130%

180%

230%

Ag

47

107.868

The state of SilverSilver made headlines in2010 and Silver Wheatonhad the highest one year

TSR of the Top 40. Investorinterest in a minor metal,commonly considered a by-product by most miners wasenormous. This reinforcesthe story that commoditymarkets have become moredynamic in the last year.

The formation of silverETFs ve years ago hasclearly driven new interestin the market. From May

2006 to early 2011, thelargest of these (iSharesSilver Trust) moved fromholding just over 600tonnes to over 11,000tonnes of silver.

Much of the rise in theprice of silver has been onthe back of speculation,

although there are somegrowing commercial uses,such as the importanceof silver in solar cells. It isclear, however, that ETFsare playing an increasingrole in the volatile silvermarketindeed at the timeof writing this volatilityhas caused signicantprice uctuations.Understanding hownancial investors will actis increasingly as importantas understanding demandand supply characteristicsin the short-term.

MineThe game has changed 7


12/528 PwC


Citizens of the world

The mining industry has increased its focus on stakeholdermanagement in response to growing pressure on executives.There has been broad agreement that cooperation betweenthe public sector, private sector and society is needed todeliver equitable returns for all.

In many cases the mining sector is at the forefront of muchof this debate, reecting the attitudes of the companies andpressure from stakeholders in the regions in which theyoperate. More than ever, companies need to deliver benets

to local communities, which increases the onus todemonstrate leadership through transparency in reporting,corporate values and direct contributions.

For example, in 2010 the International Integrated ReportingCommittee (IIRC) was formed in an effort to strengthenreporting and address all stakeholder needs. We believethere is still work to be done in terms of improvingreporting. Our analysis revealed signicant differencesbetween the reporting by companies from emerging andtraditional markets when it came to matters such as waterand energy consumption, pollution and social investment.

For many companies from the emerging markets there waslittle or no information available, whereas for the traditionalplayers comparability is challenging due to differences inmethodologies applied and measures used.

It is not new for SWFs to invest in theresources sector. Several of the largestfunds (notably from the United ArabEmirates, Norway and Kuwait) were setup with oil money, and have not beenshy to invest in commodities-basedbusinesses, although historically mostlyin the oil sector. What is relatively new isthat non-commodity SWFs have begun toinvest heavily in mining either througha desire to diversify their portfolios,taking advantage of the under-valuedresources sector or, perhaps moreimportantly, to secure supply ofcommodities for their home markets.

For some, SWFs have been both astable source of capital, with longerinvestment horizons than most, andstrategic partners. This can be seenin China Investment Corporations(CIC) investments in Teck Resources

and Bumi Resources, both of whom sellmuch of their production to China.

Mining companies should considerthe perception of political overtonesaround some SWF investments.With operations becoming moregeographically spread, often inlocations with limited democracy andimmature or evolving governancesystems, SWFs may be seen tobe leading the charge for foreigngovernments in securing resources.

The game has indeed changed.

Emergence

ofSovereignWealth Funds

(SWFs)



Pay your fair share,Publish What You Pay,Extractive IndustryTransparency Initiative,Dodd-Frank Tax and

Royalty Disclosure Rulesall of these thoughts, ideasand rules embody similar

concepts: do the paymentsmining companies maketo governments contributeto sustainability, fairnessand transparency?

Various voluntary initiativesare now in play, followedby upcoming rules-baseddisclosure standards, forexample, in the Dodd-Frank Act in the US that

was enacted in July 2010.We have heard from

mining industry leadersthat gathering this datais difcult.

In what format should thedata be disclosed?

Will this data becomparable amongstmining companies andbetween countries?

Mining company leaders

face a long road to balancethe consistency anddata integrity aspects

with fair and accuratedisclosures, to accomplishthe transparency thatstakeholders are requesting.

As governments continue toimplement active changesto laws surrounding

taxation, royalties anddisclosures, miningcompanies should continueto consider politicalenvironments when makinginvestment decisions. Weexpect continuing focusand discussion to comein this area in the nearterm as mining companiesgather and report, in

varying forms, the datathat stakeholders demand.

Disclosing government payments


14/5210 PwC


03

A view from the top



As in prior years, we have discussed the futureof the mining industry with CEOs of a numberof the Top 40 companies. This articlesummarises those views.

First and foremost, the CEOs hold a higher degree ofcondence in the future than we have seen in the lastfew years. It is not only the CEOs words which showthis, but also their willingness to commit substantialcapital to fund the expansion of major mineral regions.Weve also seen 2011 start in an active merger andacquisition environment, and whilst mega deals are not

yet coming through, most other types of transactions arecommon place.

The CEOs continue to believe in the emerging markets storyand particularly the ongoing growth in China 30 yearsof achieving its targets and Five Year Plans has convincedthe miners that the likelihood of the 12th Five Year Planbeing successfully achieved is high. They point to the 7%growth target as being the oor not the ceiling andsupport this with results from recent history. By anymeasure, adding this level of supply year in year out is botha signicant challenge and opportunity for the industry.

Most point to China as the short-term driver of theindustry; at the same time, they talk of the other rapidly

growing economies such as India, Indonesia and Brazilcontributing to increased mineral demand. Other positivemacro-economic developments include the recovering USeconomy, which remains a major mineral consumer, andthe demand generated by the rebuilding of part of Japan.

While condence in the future of the global economyhas grown, risk remains. Growth in Europe remainssluggish and sovereign debt issues do not seem to befully ushed through the system. In addition, thepolitical unrest moving through the Middle East and theimpact of the earthquake and tsunami in Japan are

examples of black swan events to which CEOs have hadto respond. They are becoming accustomed to expectingthe unexpected and have focussed on increasingorganisational exibility to be able to respond morequickly to the volatility generated by such events.

As the mining industry is a long-term game, CEOs seetheir role as looking through the short-term blips thatmay occur and planning for the long-term. There is aconsistent view that commodity demand in the long-term will be strong and the CEOs want to position theircompanies to benet.

While the majors will always be looking to acquireassets, the view of the CEOs we spoke to was that


16/5212 PwC


building was better than buying at the current time. Infact, if you take that one step further, expanding rather

than building is seen as the most cost effective and easiestway to grow. Indeed, while many lament the lack of newgreeneld projects throughout the industry, they are alsorelatively cautious in incurring major expenditures onearly stage exploration, relying instead on the juniorsector which has historically been more effective on apound for pound basis. This could be a dangerousapproach and could lead to major shortages of minerals in

years to come if the junior sector loses its current support.

Building new mines and expanding existing mines is notgetting any easier. Cost ination, lead times and skillshortages are increasing challenges to all industry playersand no-one is immune. Whilst geography has a majorimpact on how short these essentials may be, there isincreasing empirical evidence that stretched boom towns,such as Perth in Western Australia, are more commonthan they were only six months ago. The tighter thesetowns become and the less available the resources, theless likely that supply will come to market at the time thatplans might currently suggest. The CEOs see that theyhave a real challenge in this area, but also note that whileslippages and cost increases occur (often in tandem), theyalso lead to stronger commodity prices as supply struggles

to keep up with ongoing increases in demand.Given so many challenges in building and operatingmines, we are seeing innovative initiatives by miners,particularly pushing technology further to the forefront ofthe industry. While peopleless mines appear a realisticgoal, it is difcult to see the construction of new minesreaching the same point anytime soon.

CEOs are faced with a continuing challenge of properlymanaging existing talent and securing the right talent forsuccessful future projects around the globe and notably inemerging markets. CEOs believe the talent management

process must continue to evolve to keep up with theunique industry challenges surrounding location of minesand type of workforce.

In the intervening 12 months since we last undertookthese interviews, the greatest change to the thoughts ofthe CEOs is around resource nationalism. Last year this

was an emerging issue, spearheaded by the AustralianGovernments announcement of a proposed ResourceSuper Prots Tax. Whilst resource nationalism remains anill-dened term, the industry is seeing varied, but regular,occurrences which provide the CEOs with much food for

thought for example, in the last 12 months governments

in Australia, Brazil, Canada, Chile, DRC, Guinea, SouthAfrica and Zimbabwe, to name just a few, have all taken

action in different ways and others have openly discussedthoughts of doing the same.

The challenges facing CEOs seem more diverse andplentiful in a booming mining industry and certainly nonereport the last year as being easy, or expect the future toget any easier. All stakeholders need careful considerationand relationships need to be forged ever deeper. Onestakeholder that some seem to be taking for granted is thecustomer. Clearly, in a supply constrained world, theminer has the upperhand and the customer has to take

what it can. Many of the customers are not happy withthis arrangement, particularly in bulk minerals as theysense their sector is far more fractured than the miningindustry and they are unable to pass increased rawmaterials prices on to their own customers.

Indeed these same bulk mineral customers appear to bemaking their move, increasingly buying undeveloped tiertwo and three assets. The dash to secure resource is on,and India and China are both up to their necks in it. TheCEOs are acutely aware of these developments andrecognise that this will ultimately lead to greater supply.However, as many of these assets are more marginal thanthe current crop owned and operated by the majors, theyperceive that much of this activity will push the industrycost curve much higher, which will help underwritehigher long-term commodity prices.

The nal thought is that funding is not the same key issueit was a year ago an incredible statement given wherethings were so recently. Cash ows are plentiful.

In closing, the CEOs are condent of the future but expectvolatility. They too believe that the game has changed.While specic commodities have different outlooks,almost all are seen as positive. CEOs know that all

stakeholders want their share record prots and cashow may be great to offer up to investors; however, theydo not pacify a government wanting to address a budgetdecit or customers struggling to pass on costs to endusers. Last year we raised the entrance of diplomacy as apre-requisite skill of the modern mining CEO. In 2011 theability to navigate competing stakeholder demands could

well be the differentiating factor in the industry.


18/5214 PwC


04

Nine-year trends 20022010



$ billion 2010 2009 2008 2007 2006 2005 2004 2003 2002

Aggregated income statement

Revenue 435 325 349 312 249 222 184 110 93

Operating expenses 246 217 208 176 141 141 129 81 72

Adjusted EBITDA 189 108 141 136 108 81 55 29 21Amortisation, depreciation and impairment 34 31 57 19 12 16 15 10 9

PBIT 155 77 84 117 96 65 40 19 12

Net interest cost 7 6 6 5 3 4 3 3 4

PBT 148 71 78 112 93 61 37 16 8

Income tax expense 38 22 21 32 27 16 9 4 2

Net prot 110 49 57 80 66 45 28 12 6

Increase/(decrease) in revenue 34% (7%) 12% 25% 12% 21% 67% 18% -

Increase/(decrease) in adjusted EBITDA 75% (23%) 4% 26% 33% 47% 90% 38% -

Year on year increase/(decrease) in net prot 124% (14%) (29%) 21% 47% 61% 133% 100% -

Adjusted EBITDA margin 43% 33% 40% 44% 43% 36% 30% 26% 23%

Net prot margin 25% 15% 16% 26% 27% 20% 15% 11% 6%

Aggregated cash ow statement

Operating activities 137 83 104 95 77 58 41 22 -

Investing activities (79) (74) (102) (126) (67) (38) (23) (20) -

Financing activities (35) 10 14 36 4 (11) (10) 1 -

Aggregated balance sheet

Property, plant and equipment 511 467 402 371 262 224 196 140 116

Other assets 432 334 274 284 192 148 120 83 72

Total assets 943 801 676 655 454 372 316 223 188

Total liabilities 387 354 339 329 217 178 151 114 101

Total equity 556 447 337 326 237 194 165 109 87

Return on equity 22% 13% 17% 28% 31% 25% 20% 12% 7%

The information included below differs from the rest of our analysis as it includes the aggregatedresults of the companies as reported in Mine in each of the respective years disclosed. As such, the 2009column presented below differs from that included in the Financial Review section as it relates to the40 companies that were included in our previous Mine publication.

Income statement Revenue smashes through$400 billion At $435 billion, revenue exceeded the $400 billion

barrier to reach the highest level ever reported, a34% increase over 2009. This has been driven byincreases in prices in major commodities and a returnto growth in production, illustrating the miningindustrys come-back since the global nancial crisis.

Consistent with revenue, adjusted EBITDA has alsohit its highest level. At 43% the 2010 adjustedEBITDA margin is in-line with 2006 and 2007results as relative increases in operating expenseshave offset the rise in revenue.

Despite increases in the scale of the Top 40, netinterest cost has remained relatively at as a resultof falling interest rates, coupled with more interestearning cash reserves and less interest bearing debton company balance sheets.

Net prot has increased by 124% compared to 2009to surpass $100 billion for the rst time. However,similar to adjusted EBITDA margins, the 2010 net

prot margin of 25% is slightly lower than the netprot margin achieved in 2007 and the record 2006net prot margin.


20/5216 PwC


Despite record revenue and net prot, marginscontinue to be impacted by increasedoperating expenses. The 2010 adjustedEBITDA margin is no higher than in the boom

years of 2006 and 2007, despite recordcommodity prices exceeding those previouslyachieved. These results suggest that there hasbeen a fundamental shift in the cost base of the

industry. Costs have remained high throughthe nancial crisis and with continuingpressure on the price of key inputs such asenergy and reagents, coupled with everincreasing capital construction costs, thereappears to be no let-up in sight for theindustry. Labour continues to be in highdemand. With many newly announced majorgrowth projects commencing and skillshortages in a number of locations, the cost ofhiring and retaining workers is more likely toincrease over time.

Ongoing weakness in the US dollar has meantthat for the rst time commodity currencieshave higher relative strength than the USdollar, also impacting margins for many.

Industry valuations often use historicalaverage commodity prices as long-termassumptions, but given the shift in theindustrys cost base, commodity prices cannotreturn to historical averages. We have seen thisgame change.

Adjusted EBITDA has steadily increased over the lastnine years, except in 2008 and 2009 during theglobal nancial crisis. The table below showsadjusted EBITDA for the last nine years, including atrend line of what adjusted EBITDA could have beenif the longer-term trend continued during the crisis.

This shows that the 2010 result is a return to thehistorical trend, rather than an outlier result.

20022010 Adjusted EBITDA ($ billion)

Source: PwC analysis.

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

201020092008200720062005200420032002

Return on equity and return on capitalemployed lag despite record prots

Year ROE ROCE

2010 22% 18%

2009 13% 9%

2008 17% 13%

2007 28% 22%

2006 31% 23%

2005 25% 18%

2004 20% 14%

2003 12% 8%

2002 7% 5%

ROE has increased since 2009, but is still well off the2006 peak of 31% and is not signicantly higher thanthe 2002-2009 average of 19%. Net prot in 2010reached above $100 billion for the rst time and themajority of these historical prots have been retained bycompanies. This, combined with relatively expensivecapital raisings over recent years, has kept equity

invested in the industry relatively high, pushing downreturns. Determining the most appropriate and efcientcapital structure remains a challenge for the industry.

Operating costs and

margins a new base



Cash ows Operating cash ow returns, butinvesting lags

At $137 billion for 2010, operating cash ows increasedto their highest level, a 65% rise over 2009 and only thesecond time they have exceeded $100 billion.

Investing cash ows increased by 7% but were stillwell below the $126 billion invested in 2007. In 2010for every dollar earned in revenue only 18 cents wereinvested, signicantly lower than the 40 cents investedper dollar of revenue in 2007 and the 2003-2009average of 26 cents per dollar. In 2010 Investing cashows were only 58% of operating cash ows,compared to an average of 94% for 2003-2009.

With recently announced capital projects, we expectinvesting cash ows to increase again in the comingyears. However, companies struggle to meet theircapex targets as complexities often delay projecttimetables.

Financing cash ow was a net outow for the rst timesince 2005, with a net of $35 billion being repaid tolenders or returned to shareholders.

Balance sheet Assets approach $1 trillion Property, plant and equipment continued the upward

trend experienced every year since 2002, as capital

expenditures and acquisitions exceeded depreciationand disposals.

The increase in property, plant and equipment is wellbelow the 2002-2009 average of 23% and is thesecond smallest year-on-year increase in the history ofMine; only slightly higher than the 2008 increase of8%, which was largely the result of signicantimpairment charges in that year.

Total assets increased to close to $1 trillion, largelydriven by record levels of cash and property, plant andequipment on company balance sheets.

The 24% increase in equity in 2010 was largely in linewith the average increase of 27% from 2002-2009, withthe bulk coming from prots, rather than capital raising.

Top 40 analysis Three companies debut in 2010We have examined the composition of the companiesincluded in each of the eight publications of Mine.Looking back, there has been remarkable stability in thecomposition of the Top 40. We can see:

17 companies have been included in every editionof Mine, with a further 20 being included in four or

more editions.

Over the years a number of companies have droppedoff as a result of mergers and acquisitions, the

majority of which were Australian and Canadianmid-tier miners. Amazingly there were no South

African or UK based miners acquired. Notable namesinclude:

o Australia: Lihir Gold, WMC Resources, and Zinifex

o Canada: Falconbridge, Glamis Gold, Inco,Noranda and Placer Dome

o United States: Phelps Dodge

Where change has occurred, there has been a shift inthe countries represented, with a higher portion ofemerging market companies making the Top 40 inrecent years. This increased to 18 in 2010. This movereects the continued shift in the players and power

base of the mining industry.

Composition of Top 40

0%

20%

40%

60%

80%

100%

20112010200920082007200620052004


Emerging marketsTraditional markets

The trend has partially been the result of more publicinformation being made available for companies fromemerging markets as a result of the public listing of

stakes in a number of state-owned enterprises. It isimportant to note that there are a number ofadditional Chinese and Russian companies that wouldotherwise have been included in the Top 40 each year ifsufcient information was available at the time ofpublication.

In Vertical Integration no-go or gung-ho!we discussthe increased level of integration in the industry. Weexpect to see a few new names among the top miningcompanies in coming years.


22/5218 PwC

05 Verticalintegration

Over the last three decades, as WallStreet and management theoristsencouraged companies to focuson their core competencies, themining and metals industry became

less vertically integrated. Recentevents however have indicated agrowing trend towards the verticalintegration of yesteryear. Verticalintegration strategies vary, but recenttrends show that it has been largelyupstream as metals companies andend-users seek to add mining assets,and miners add infrastructure,reintroducing the question of whatmakes a mining company?

Vertical integration trends have

been shaped by an increase in globaldemand for metals and the growingimportance of securing stable suppliesof increasingly scarce resources.

Metals companies have looked tovertically integrate primarily tosecure alternative sources of rawmaterial supply to facilitate theirown continued operation. Additionalobjectives often include gaininggreater control over the price ofproduction inputs and to providefuture growth prospects.

Integration exposes companies to newdimensions of market risk in differentsectors of the industry and potentially

decreases exibility to react tochanging market conditions. It soaksup signicant capital, which couldotherwise be deployed on growingthe existing business. Integratingoften requires M&A as organic

vertical growth is often impossible orimpractical and deals can be risky andoften do not generate the expected

value. Vertically integrating canstretch management into new areas offocus and could simply add too muchcomplexity to an organisation.

Despite these risks, the miningand metals industry is verticallyintegrating, albeit in different ways

no-go or gung-ho!?



Recent vertical integration hasalso included end-users of miningproducts acquiring upstream assets.Many power producers, includingHuadian of China and Tata Power ofIndia, have made major coal miningacquisitions. Amongst zinc smelters,Nyrstar has been active in acquiringmining assets, including their 2011deal for Canadas Farallon Mining,

which increased its self-suppliedzinc concentrate usage to 31%. This

trend will likely also apply to tradersas they increasingly look to build upupstream holdings, seen by Glencorein their run up to a potential IPO andChina Minmetals in their acquisitionof assets from Oz Minerals and recentattempt for Equinox.

We are beginning to see companiesalso look at other ways of achievingtheir integration objectives, such ascombining strategic investment andoff-take or partnership agreements

to lower the risk associated withintegration, but still reap similarbenets. A number of companieshave adopted this approach, takingminority stakes or providing initialfunding to major projects. Examplesinclude China Railways 12.5%equity stake in African Minerals witha 20 year off-take agreement andJFE Steels 20% investment in theByerwen Coal project with a long-term off-take agreement.

In contrast to other miners, Vale hastaken a 27% stake in the Braziliansteel production assets owned byThyssenKrupp CSA. This equity

investment is combined with anexclusive iron ore supply agreement,solidifying a domestic buyer for ValesBrazilian iron ore.

Although vertical integrationstrategies vary amongst the miners,generally there is no desire toincrease their presence in metalsmanufacturing or sales. Whereintegration has occurred, the focus

is primarily on infrastructure assets,largely for the same motivation asdescribed above ensuring securityof access to key production andtransport needs. Vale, for example,is adding a number of bulk iron oreships to their in-house eet.

Overall, trends in vertical integrationreect the changing nature of theindustry, particularly as customersare becoming competitors to theircurrent suppliers. For companies

moving upstream in the quest for self-sufciency, the mines being acquiredare generally not Tier one assets andare usually in the development phase.With the priority for new entrantsoften being security of supply, lowertier assets coming on-stream will shiftthe industrys cost-curve.

While traditional mining housesare not expected to verticallyintegrate downstream, many willlikely continue to integrate into

infrastructure. In metals, tighteningsupplies for raw materials andincreasingly variable commodityprices will continue to driveproducers upstream either throughdirect ownership and control orthrough minority ownership andstrategic off-take agreements. In asupply constrained world, for manycompanies there is no alternative.What remains to be seen is whether

vertical integration can deliver

sustainable value and how thebalance between miners, metalscompanies, and the markets theyserve will change.

and for different reasons. The steelindustry has seen considerable

vertical integration as producers drivefor greater self-sufciency of rawmaterials, either due to increasinglytight supply of inputs or increasingfrustration with the major minersability to dictate price and pricing

terms. This strategy seeks to reducethe market power of the major ironore producers through decreasedreliance on third-party suppliers.

An example of this strategy isArcelorMittal, which is signicantlyincreasing its in-house iron ore andcoal business as part of a strategy todouble iron ore production to 100million tonnes per annum. Manyother major steel companies havepublicly stated their intentions to

increase iron-ore and coking coal self-sufciency;

Taiwans China Steel plans toincrease iron ore self-sufciencyfrom 2% to 30% by 2015;

POSCO targets 50% raw materialself sufciency by 2014; and

Tata Steel plans to reach 100%iron ore and 50% coking coal self-sufciency.

While these stated desires are clear,

only time will tell whether thesecompanies, and others, are able tosuccessfully and protably deliverthese strategies.


24/5220 PwC


06

Financial review



Income statement

2010$ billion

2009$ billion

Change%

Revenue 435 330 32

Operating expenses (246) (220) 12

Adjusted EBITDA* 189 110 72

Impairment charges (1) (12) (92)

Depreciation & amortisation (33) (27) 22

PBIT 155 71 118

Net interest expense (7) (5) 40

Income tax expense (38) (23) 65

Net proft 110 43 156

* EBITDA adjusted to exclude impairment charges.

Key ratios

2010%

2009%

Adjusted EBITDA margin 43 33

Net prot margin 25 13

Return on capital employed 18 9

Return on equity 22 11

Prots risingThe Top 40 had an outstanding year, with net prot increasing 156% from2009 to break the $100 billion barrier. High commodity prices and increasedproduction explain most of this strong performance as operating marginsowed through to the bottom line. The key ratios demonstrate a well roundedperformance by the Top 40, with return on capital employed and return onequity doubling in percentage terms from 2009. However as noted in Nine Year

Trends, the returns remain below the highs of 2006 and 2007.

RevenueRevenue increased 32% from 2009, exceeding the $400 billion mark to reachits highest level since we started our analysis. The jump was attributable toboth record high commodity prices coupled with an overall 5% rise inproduction.

Revenue ($ billion) Adjusted EBITDA margin (%)

2010 2009 2010 2009

Rio Tinto 57 42 44 32

BHP Billiton 53 51 45 39

Vale 46 24 59 48


26/5222 PwC


The top three companies by revenue represent 36% oftotal revenues, largely unchanged from the prior year,

reecting the strong performance across the board. Themix however has changed signicantly, with Rio Tintotaking top spot from BHP Billiton this year and Vale nearlyto doubling its revenue. Vales strong performance in 2010is primarily due to a return to full production in 2010following the strength in the iron ore market. Rio Tintoand Vale together accounted for 35% of the total increasein revenues from the prior year.

However, it is worth noting that BHP Billitons revenuewould have topped Rio Tintos had its year end been 31December rather than 30 June, as BHP Billiton had a $9.6billion (39%) increase in half year revenues in the secondhalf of 2010.

Commodity pricesHigher commodity prices contributed to the improvedmargins and prots in 2010. The average price of all vecommodities noted below increased from the prior years,

with percentage increases ranging from 26% to 111%.Copper, gold, coal and iron ore reached new average highsin the year, while aluminium could not surpass pre-globalnancial crisis levels. The increasing trend continued with

year end prices higher than annual averages.

Average Iron Ore ThermalCoal

Copper Gold Aluminium

$/dmtu $/tonne $/tonne $/ounce $/tonne

2003average

30 27 1,789 364 1,431

2004average

36 44 2,868 410 1,717

2005average

62 53 3,684 445 1,900

2006average

73 52 6,725 604 2,568

2007average

80 56 7,124 697 2,638

2008average

145 125 6,938 872 2,567

2009average

97 70 5,178 974 1,671

2010average

205 98 7,558 1,227 2,200

2010close

210 120 9,600 1,421 2,470

Note: Iron ore prices used above are the Asian Basin price forHamersley nes sourced from the AME Group Iron Ore Outlook. Thethermal coal price is the typical price for Hunter Valley settlements,basis 6,700 kcal/kg GAD or 6,322 kcal/kg GAR, sourced from theAME Group Thermal Coal Outlook.

0

1

2

3

4

5

6

7

8

2010close

2010avg

2009avg

2008avg

2007avg

2006avg

2005avg

2004avg

2003avg

Commodity prices (2003=1)

Source: Bloomberg, AME Outlooks.

Iron ore US/dmtuCopper $/tonneThermal coal $/tonne

Gold $/ounceAluminium $/tonne

Iron OreIron ore turned in record prices with an increase of 111%in the 2010 average price as demand for steel rebounded,tightening the market for iron ore. Iron ore prices showed

volatility in mid 2010, but generally trended upwardsthroughout the year. With record prices and more contracts

moving towards shorter-term pricing, it is no surprise thatiron ore has received so much recent attention.

CopperThe copper price reached record levels with the 2010 year-end spot price reaching $9,600 per tonne and the averageprice up by 46%. This was inuenced by continued strongdemand for copper, led by China and supply constraintsdue to a combination of labour strikes, notably in Chileand Peru, mechanical failures and grade diminution.

The copper price continued its upward trend in the rst

quarter of 2011, driven largely by positive economic datafrom the worlds top consumer, China, and an expectedrecovery in the US economy. Consistent with the prior

year, the underlying fundamentals of copper remainstrong and the industrial metals required to rebuildJapans damaged infrastructure combined with continuedgrowth in the developing world are expected to contributeto continued high demand in the second half of 2011.Supply also remains severely constrained.

GoldGold has been on a constant upward trend since the average

price of $364 per ounce in 2003, reaching the new high of$1,421 at the end of 2010. Although gold prices experiencedsome price volatility in early 2011, the driving factors behindthe continued high prices have remained in place, leadingto further price increases through the rst part of 2011.



Revenue by commodity

Share of revenue by commodity


2009

2010

0%

5%

10%

15%

20%

25%

30%

Other

metals

Diamonds

Zinc

Platinum

Nickel

Fertilizer

Bauxite

Gold

Ironore

Copper

Coal

Coal, copper and iron ore account for 63% of Top 40revenue (2009 - 60%) generated this year. Iron orerevenues increased by $35.8 billion in the year andrepresented 20% of total revenues, up from 15% in the

prior year. The rise is due to higher prices and increasedproduction volumes, with production up 16% on the backof expansion projects and the return to full capacity by

Vale. Coals share of the total declined in 2010 due to thestrength of iron ore.

2010 Production

Commodity(measure)

Top 40production

(million)

Change fromthe prior year

(%)

Coal (tonnes) 1,499 1

Copper (tonnes) 7 (4)

Iron ore (tonnes) 716 16

Gold (tonnes) 34 2

Bauxite (tonnes) 40 10

Potash (tonnes) 13 30

Nickel (tonnes) 1 4

Platinum (ounces) 4 0

Zinc (tonnes) 3 0

Diamonds (carats) 14 (1)

Increases in production across the board are evidencedabove, with only copper and diamonds showing declines.

The largest boost in production comes from potash, areversal of the declines in 2009. Iron ore production

levels have returned to 2008 levels as iron-ore producersexpand operations and returned to full production rates.In 2010, with demand on the rise, iron-ore mines operatedat full capacity, brought major capital projects online, andgenerated a 16% increase in production levels. Copperproduction decreased as a result of lower grades andlabour strikes in Chile and Peru. Major capital projects alsocame online in coal, but these were offset by Rio Tintossale of its US coal assets. Increasing demand for bauxitespurred increased production by Rio Tinto at Weipa.

Total production

(Using Copper equivalent tonnes2010 closing spot)

Source: PwC Analysis.

55

56

57

58

59

60

2010CopperOtherBauxiteIron ore2009

1.8

1.0

0.5 (0.3)

The graph above shows a comparison of total productionof the Top 40 year-on-year, using one tonne of copperas an equivalent unit, based on 2010 closing prices.This methodology allows for a comparison of relativeproduction across all commodities. The results show a 5%increase in overall production. This is more than globaleconomic growth but less than the economic growthin the developing countries that have been the primarydrivers for higher demand. The increase in production,led by iron ore, stems from large expansion projectscoming online resulting in higher production across anumber of commodities. For those that were willing andable to invest by continuing captial expansions during theglobal nancial crisis, the payoff, in the form of increasedproduction, is beginning to be seen.

We have calculated the remaining mine life of the Top 40using reserves and 2010 production data. When convertedinto copper equivalent units at the end of 2010, the Top 40had a remaining mine life of 35 years. This mine life hasdecreased by two years from 2009 as a result of productionincreasing by more than the additions to reserves.


28/5224 PwC


Share of total revenue by customer location

% of revenue by customer location


20092010

0%

5%

10%

15%

20%

25%

30%

EuropeChinaNorth America

The above chart tells the tale of Chinas inuence onthe mining industry and the dominant role that it playsin demand for commodities. On a percentage basis,China increased its share of revenue from 25% to 27%,

whereas North America accounted for a smaller portionof revenues, providing further conrmation of the shift in

the industry to emerging economies.

CostsTotal operating costs increased 12% over the prior year,

with employee costs the driving factor. Despite a decreasein direct employment, employee benets expense roseby 7% from the prior year, for those in the Top 10 thatdisclose employee numbers and personnel costs. The

actual increase for the same companies, when consideredon a per employee basis, is 18%. The decrease in direct

employment reects a shift to contractor and other formsof labour. There is an increasing scarcity of skilled labourin the industry, as expansion projects to capitalise onbooming prices fully utilise the available human resource.With no let up in sight, these cost pressures will continue.

Foreign currency uctuations continue to create volatilityin the results and played a role in the cost increase. The Top10 reported a negative impact of foreign currency changeson their operating costs, representing 18% of the totalincrease in operating expenses. In particular, movement ofthe Canadian dollar, Australian dollar and Brazilian realrelative to the US dollar contributed to these losses.

Working to partially offset the above increases were costsavings derived from increased efciency in productionprocesses reported by a number of companies. It isdifcult to compare these reported achievements due tothe lack of empirical evidence in market releases, lackof disclosures by some and inconsistencies in approachbetween companies.

Income taxesWhile income tax expense increased by 65% from the prior

year due to increased protability, overall the effective

tax rate declined from 35% to 26%. The lower effectivetax rate is largely attributed to the impact of exchangerate uctuations and limited ability to use tax losses inthe prior year that were absent in 2010. This led to anunusually high effective tax rate in 2009, in particular forBHP Billiton and Vale. The rate of 26% returns to historicalnorms. While royalties are not consistently treated, thesecosts are typically not included in income taxes.

Chilean mining clustersAccelerating the development of world-class suppliers

In Chile, BHP Billiton and Codelco, alongside the Chileangovernment, aim to develop mining sector suppliersthrough a mining cluster program. This program seeks tobuild world class skills and capabilities in approximately250 local suppliers, in order to better support the growthof the mining industry within Chile and export supplyservices to mining projects around the world. By involvingnot only suppliers and mining companies, but also the

government, universities and R&D centers, the industry istaking a collaborative approach to building capability.

The cluster program will help solve the miningindustrys problems and build a knowledge-based miningservices sector. BHP Billiton is strongly committed tosupporting and incubating these suppliers

Peter Beaven, PresidentBHP Billiton Base Metals



The talent race is back on!The PwC 2011 Annual CEO Survey shows that morethan 83% of CEOs believe there is a need for changein the way they manage talent. Mining is no differentfrom other industries in this respect, but has someparticular challenges given the locations of operationsand type of workforce it employs.

There is a growing mining presence in emerging markets,where there is a dual challenge of incentivisation of staffand talent mobility. Mining companies increasingly seeinternational experience as an important credentialfor top performers and a necessity to support growingoperations in developing countries.

Joint ventures also present a challenge. The prevalenceof joint ventures introduces additional complexity, asHR and compensation policies from JV participantscan conict. Disparities in compensation become moreapparent, a particular issues for emerging marketminers. There is a real risk that for globally mobilestaff, compensation will be increasingly set at thehighest common denominator.

A third issue occurs where companies that downsizedduring the global nancial crisis are now hiringsome of their ex-employees as contractors, payingsignicantly higher rates than previous in-houseemployees. The swift change in the environment toa growth phase presents the question should thesecontractors be put back on the payroll?

20052010 Average returns for the Top 10 ($ billion)


200520062007

200820092010

0

1

2

3

4

5

6

7

8

EmployeesGovernmentCompany

Note: The graph above provide average returns, to the extentavailable, for those in the Top 10. The graph does not include non-income based taxes. Payments to governments that are not based onprot create risk as mining companies generally continue to make

such payments even in years of lower prots. According to PwCs TotalTax Contribution studies, on average corporate income tax is less than50% of all the taxes and contributions made by mining companies.

The returns generated by the mining industrycan be categorised in three notable forms:

Returns to the company- in the form ofnet prots

Payments to governments primarilythrough taxes and royalties

Payments to employees primarily throughsalaries, wages, bonuses and other benets

Of the three forms, returns to miningcompanies inherently carry the most risk,

followed by payments to governments whichare somewhat linked to protability. Paymentsto employees are the least risk-sensitive.

When performance lags, employees andgovernments receive a relatively xed return

whilst mining companies receive little to noreturn. In contrast, in good years miningcompanies receive strong returns - a reward forthe risk undertaken.

The graph for this years Top 10 illustrates thisreality. In 2009 during the nancial crisis thegovernment share decreased by only 2% andthe share for employees increased by 5%, whilecompanies took a signicant hit.

Mining company returnsrisk vs. reward


30/5226 PwC


Cashow statement

2010$ billion

2009$ billion

Change%

Cashow related to operating activities

Cash generated from operations 167 110 52

Taxation paid (24) (20) 20

Other (6) (4) 50

Net operating cash ows 137 86 59

Cashow related to investing activities

Purchase of property, plant and equipment (67) (58) 16

Purchase of investments (24) (19) 26

Sale of investments 8 5 60

Exploration (6) (6) -

Other net investment-related cash ows 10 1 900

Net investing cash ows (79) (77) 3

Cashow related to nancing activities

Issue of shares 6 33 (82)

Share buy backs (5) - -

Increase in borrowings 35 69 (49)

Repayment of borrowings (50) (76) (34)

Dividends (22) (18) 22

Other 1 - -

Net nancing cash ows (35) 8 (514)

Net increase in cash and cash equivalents 23 17 13

Cash and cash equivalents at beginning of the year 81 59

Effect of foreign currency exchange rate changes

on cash and cash equivalents

1 5

Cash and cash equivalents at end of the year 105 81



Operating cashow how will it be spent?In 2010, the Top 40 rebounded from the effects of the

global nancial crisis with operating cash ows breakingthrough the $100 billion barrier again. Higher commodityprices and increased production contributed favourably tothe $51 billion, or 59%, increase in operating cash ow.

With cost containment and cash preservation no longerthe number one issue for industry CEOs, the dilemma nowfor mining leaders is how to most effectively deploy the$105 billion cash on hand to ensure sustained success.

Income taxes paid by the Top 40 increased by 20% this year.Taxes paid typically lag accounting prots. As such, weanticipate a substantial rise in income taxes paid in 2011.

The rise in income taxes paid is signicant, especiallywhen coupled with the Top 40s total economiccontribution to the government, including income andnon-income based taxes, royalties, and infrastructuredevelopment.

Investing cashow home is where the heart isAs expected, the Top 40 continued to devote cashresources to purchases of property, plant and equipment.The behaviour of the Top 40 indicates optimism abouttheir own projects. Investments in organic growth

opportunities including sustaining capital, represented85% of net investing cash ows.

The Top 40 have announced expansion capital programsof $311 billion. We expect this trend to continue over the

medium term.The deal market is waking up, with a 26% increase incash payments for investments in 2010. While the volumeof deals was up, the value still lags well below the recordof 2007, as mega-deals become harder to close. For moredetail on mining industry transactions, refer to our MiningDeals publication at www.pwc.com/mining.

Exploration spend remains at and relatively low amongstthe Top 40. At just under $6 billion and only 8% ofnet investing cash ows, the Top 40 are not investingsignicantly in exploration activities, instead effectively

outsourcing these activities to the junior sector. Givenongoing supply-side challenges, few new world-classprojects, and those that have been identied largely beingin remote, challenging-to-operate environments, the lackof expenditure on exploration remains surprising.

Financing cashow it is better to give thanto receiveFinancing cash ows turned in 2010, moving to a netoutow of $35 billion demonstrating the shift in fortunes.Capital raised decreased by 32%, coupled with a 22%increase in distributions to shareholders in light of strong

operating results, contributed to the net cash nancingoutows of $35 billion.

The push for capital expenditure

With record high commodity prices,top mining companies are lookingto add capacity as quickly aspossible. With mega-deals proving

difcult to execute, in-housegreeneld and expansion capitalprojects have become a top priority.

In recent months the Top 40 haveannounced plans to invest $311billion in capital projects in thecoming years, of which $120billion is scheduled for 2011. Theseannouncements represent a majorincrease over the $67 billion spent bythese same companies in 2010. The

increase is even more pronounced asthe 2010 spend includes sustainingcapital expenditures, which are

generally not included in announcednew projects.

Interestingly, although many of the

Top 40 companies have providedtheir capital plans for 2011, detailson which projects will be persuedand at what expected cost is oftennot forthcoming.

Supply and demandCapital projects in the miningindustry often are slower to reachfull output than companies initiallypredict. Unforeseen complexity candrive delays to new production,

tightening metal supply againstforecasts. This can ultimately leadto increasing prices.

Can it even be done?The projects announced by theTop 40, in addition to a numberof projects planned by other

companies and in other industries,could push the worlds abilityto deliver capital projects to thelimits. So, the question remains,is there enough skilled labour,equipment, and material to deliverall of the projects that are planned?The likely answer is no and asconstraints materialise, projects

will likely be delayed and moremarginal projects or those thatcannot secure resources could be

delayed or cancelled.


32/5228 PwC


Balance sheet

2010$ billion

2009$ billion

Change%

Current assets

Cash 105 81 30

Inventories 50 43 16

Accounts receivable 51 37 38

Other 36 41 (12)

Total current assets 242 202 20

Non-current assets

Investment in associates and joint ventures 35 33 6

Property, plant and equipment 511 436 17

Goodwill and intangibles 91 75 21

Other 64 52 23

Total non-current assets 701 596 18

Total assets 943 798 18

Current liabilities

Accounts payable 49 40 23

Borrowings 21 20 5

Other 56 42 33Total current liabilities 126 102 24

Non-current liabilities

Borrowings 130 143 (9)

Other 131 112 17

Total non-current liabilities 261 255 2

Total equity 556 441 26

Total equity and liabilities 943 798 18

Ratios 2010 2009

Gearing (%) 8 16

Current (times) 1.92 1.98

Quick(times) 1.52 1.56

Net debt ($ billion) 46 82



Disappearing debtWith total assets increasing to $943 billion, the industry

is poised to break through the $1 trillion mark in 2011,as the Top 40 continues to grow in size and scale.Noteworthy is that these assets are funded almostentirely by equity, with net debt down to $46 billion andborrowings at only 16% of total assets. This shift alsoreects the alternative sources of capital now available tothe industry, as the new era has ushered in an increase in

joint ventures, off-take funding and other arrangements.

The strong cash position has left gearing at just 8%, amazingwhen considering that less than two years ago a numberof companies were struggling to renance short-termborrowings and many raised equity to help them get throughthe nancial crisis. In 2010 70% of the Top 40 reduced theirgearing, with 14 companies having no net debt.

With the Top 40 planning to spend $311 billion on capitalprojects in the coming years, the industry has signicantcapacity to fund the growth and to add some debt withoutstressing the balance sheet too much.

Some shareholders are already asking what companies aredoing with excess cash and whether they should return it.Companies are already responding with signicant sharebuy-backs launched by a number of companies in the rst

half of 2011.

Buy, Build, DistributeCash on hand has increased 30% to $105 billion in2010, a remarkable achievement given the challengesexperienced through the nancial crisis. This positionhas been built with steady and consistent performance,despite the volatility experienced in market capitalisationover the past three years. The build-up of cash could beseen as a reection of strong performance or equally asconservative balance sheet management. The question is:how will the cash be used in 2011buy, build, distribute?

Or all of the above?

Net assets increased 26% or $115 billionstaggeringnumbers particularly when similar growth was observedin 2009, increasing total equity by more than 50% intwo years.

Organic GrowthThe Top 40 continued to value organic growth as a meansfor expansion, with a 17% increase in plant, property andequipment. The graph below shows the capital expenditureon mining assets by commodity and the continuing focus

on the largest three, iron ore, coal and copper.

Capital expenditure by commodity ($ billion)


2009

2010

0

2

4

6

8

10

12

Other

metals

Zinc

Diamonds

Platinum

group

minerals

Fertiliser

Aluminium

Nickel

Gold

Copper

Coal

Ironore

Goodwill risesWith stronger market conditions, impairment charges allbut disappeared in 2010. Goodwill remains on balancesheets but is concentrated within a small number ofcompanies, with Rio Tinto representing 32% and Xstrata14% of the total. The most notable increase in goodwillcame from Kinross acquisition of Red Back Mining ($5billion goodwill) with Vale and Rio Tinto each also adding$1 billion. Of the total intangible asset balance of $91billion, goodwill comprised $47 billion.

CustomersAccounts receivable increased 38% on the prior year.With Days Sales Outstanding only increasing by two to43 days, the rise is more of a reection of the increase incommodity prices on fourth quarter sales than decline inthe cash collections from customers in the industry.


34/5230 PwC


07

Reserves



Freeport McMoRans addition of copper reserves at itsNorth American properties. New reserves havesignicantly exceeded depletion of ore as production wasdown, resulting in an extension of the life of the coppermines by about eight years over 2009.

Pressure on zinc and nickelZinc and nickel reserves remained at about 2009 levelsas exploration programs have not discovered signicantnew ore bodies in the last few years. The remaining zinclife of Top 40 companies has decreased from 13 years atthe end of 2009 to 12 years and nickel has declined to 21

years the shortest remaining lives of all commodities.We note that a number of major zinc producers are notcurrently included in the Top 40, such as VedantaResources plc and Minmetals Resources Limited.

Pay dirtThe huge iron ore investments by the majors inexpanding their operations to meet ever growingdemand has hit pay dirt in 2010 with a signicantincrease in reserves leading to overall growth inremaining mine life to 22 years. Signicant additions

were recorded by all major iron ore players.

Successful conversionIn some commodities mine life was extended in 2010, butoverall our analysis shows that on a copper equivalenttonnes basis, the industrys remaining mine life decreasedby two years to 35. This demonstrates that while the Top40 experienced exploration success, it was not as much asthe increase in production during the year.

Gold exploration gainsPwCs annual Global Gold Price survey for 2010 againhighlighted the use of higher gold prices in reservecalculations which lead to lower gold cut-off grades. Theaverage gold price used in the calculation increased from$974 per ounce in 2009 to $1,227 per ounce in 2010. Thesurging gold prices have made higher cost mineseconomically feasible. Furthermore, successfulexploration results throughout the year have also pushedgold reserves higher, such as the gold contained at OyuTolgoi in Mongolia, Goldcorps South American andCanadian projects and Kinross projects in Mauritaniaand South America.

Copper in focusIncreasing long-term price assumptions following the

run up in the copper price fueled a uniform increase incopper reserves across the Top 40. The increased copperreserves were primarily attributable to Ivanhoe and RioTintos massive Oyu Tolgoi project in Mongolia as well as

Reported reserves

Gold Platinum Copper Zinc Nickel Iron oreMetallurgical

CoalThermal

Coal Bauxite Potash

(million oz) (million tonnes)

No. ofcompanies

15 5 19 7 5 7 12 12 3 2

2009 reserves 582 211 271 40 19 14,939 11,449 67,822 1,177 746

(Depletion) (34) (4) (7) (3) (1) (716) (226) (1,273) (40) (13)

Other net

addition/(reduction)

71 3 36 3 - 1,278 336 831 (31) 25

2010 reserves 619 210 300 40 18 15,501 11,559 67,380 1,106 758

Change (%) 6% (1%) 11% 0% (4%) 4% 1% (1%) (6%) 2%

Remaining life(years)

18 51 41 12 21 22 51 53 27 57


36/52


Coal keeps risingWith global steel production increasing by 17% in 2010,according to the World Steel Association, metallurgicalcoal was in high demand and production increasedlockstep with steel. Similar to iron ore, prices showedsome volatility mid-year, generally increasing duringthe year to close strongly, but still below record highsseen in mid-2008. Anglo American added the mostsignicant new reserves at its Grosvenor project in

Australia.

Production of thermal coal was stable, with additionsoffsetting production. New reserves were reported byBHP Billiton (due in part to the resource conversion atMt Arthur), Xstrata (whose reserves increased due to

reclassication from resources in Rolleston West andapproval of the Bulga project) and China Shenhua (dueto new drilling at Shendong Mines). These additions forthe Top 40 were slightly offset by Rio Tintos divestitureof its North American coal assets.

Bauxite challengesProduction of bauxite was relatively stable year on year.However due to the changes in Brazilian environmentallaws, BHP Billiton and Rio Tinto have reduced part oftheir bauxite ore reserves. These resources will bereclassied back to reserves once new license approvalhas been granted. This change reects the impact of the

challenging operating environment in many countriesdue to the heightened focus on the mining industry.

After a severe drop in exploration spend last year, 2010saw a moderate increase to just below $6 billion by theTop 40. In our analysis we noted that the focus of theTop 40 remained on browneld exploration. With pursestrings remaining tight some companies spendingremained at only 50% of previous levels however plansfor further increases in 2011 and 2012 have beenannounced by many. According to Metals EconomicsGroups World Exploration Trends 2011 the total globalspend reached $12.1 billion, up from $8.4 billion in2009. The Top 40, therefore, accounted for less than halfof the total spend, showing the continued importance ofthe junior sector to worldwide exploration.

Gold and base metals dominated 2010 explorationexpenditure, comprising almost 85% of the total,according to Metals Economics Group:

In 2010, global economic fundamentals kept the spotlighton gold, and historically high prices prompted goldexplorers to increase their aggregate budget by $1.9billion. This increase lifted planned spending on the yellowmetal to $5.4 billion and its share of the total budget to51% - the rst time since 1999 that Gold accounted formore than half of the total planned spending.

Exploration expenditure

32 PwC


37/52

2010 Worldwide exploration budget by commodity

Source: Metals Economics Group: World Exploration Trends 2011.

3%

11%2%

51%

33%

Gold

Base metals

Diamonds

PGM

Other

Exploration expenditure

Source: Metals Economics Group: World Exploration Trends 2011.

Nonferrous exploration totalUranium exploration total

$0

$2

$4

$6

$8

$10

$12

$14

100908070605040302010099989796959493

Nonferrousexploration

(US$

bil.)

Annualindexedmetalsprice(1993=1)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Annual indexed metals price



38/52

08

Whatsmineismine

34 PwC

changed policy. It is clear that thereare a number of different motivationsat play in these territories andmining companies have to becomeincreasingly adept in dealing withthe inuencers behind changes inregulations.

The questions around who paysfor resource development, whobenets and how these benets

are distributed remain. This is notnew for miners or for authoritieswho have always had to balancethe elements of control over minesand resources with the ability tosustainably develop assets in theinvestment climate. What hasemerged recently is a greater voicefrom stakeholders on all sidesto challenge whether there is abalanced, equitable outcome for allparties and a question to miners, can

you prove your worth?

Across the industry there are amultitude of examples of activity

where miners are doing just this,from Anglo Americans Zimele

In todays world governmentsin many of the traditional andemerging mining countries arelooking at reforms to their miningcodes, reviewing their views on

sustainability and refreshing theirapproach to royalties and taxation.At the same time non-governmentstakeholders inuence is growing.Naturally this has focused attentionon the drivers for this activity and

what this all means to a minerslicence to operate.

With these issues in mind, miningexecutives operating around the

world face increased demands whenassessing new and emerging markets

for investments, acquisitions or newprojects. In the attached article, thegeopolitical risk company EurasiaGroup have highlighted severalexamples of where governments have

programme for local procurementthrough to Vales partnership

with the Earth Institute for thedevelopment of sustainability goalsfor international foreign directinvestment. The trend is clear andit will continue, with regulationsaround traceability of products,human rights, carbon emissions,

energy consumption, biodiversitymanagement and water usage, toname but a few, all playing a partin the story. Each issue comes witha number of focused groups ofstakeholders keen to ensure theiropinions are heard.

It is interesting how the mining storyhas been told and how integrationinto a countrys industrial supplychain is playing a greater role ininvestor presentations and speeches.The scale of mining projects has beenincreasing as mineral grades arechallenged and projects have to lookto new, often more remote locationsrequiring infrastructure, to expand.Infrastructure is not only the obviousrail, port and power networks but alsothe human infrastructure, such asmedical healthcare and communitysupport programs. There are alreadymany examples where miners are

working with local partners further

along the supply chain, which isoften not fully described in the storyof the total economic impact thata miner generates. It is here thatthe collaboration between private


39/52

sector and society, along with thehistoric relationship with publicsector and policy intervention, needsto continue to evolve. Where therehas been successful collaborations,these should form key stories to tell,to ensure that the equitable outcome

message is clear.

Looking to the future, with a greaterfocus on sustainability, will minersbe able to address stakeholder

issues and ultimately inuencegovernments to manage issuesof resource nationalism, statecapitalism, community relations andtransparency? What is perhaps clearis whilst it is a judgement call forcompanies as to where they invest

and how to manage their relativeappetites for risk, when operatingin a country the relationships withall stakeholders that they have inthat country will be scrutinised

increasingly on the global newswiresand social media sites. It will betheir actions and behaviours beinganalysed as much as nancialresults and balance sheets. Theinterplay of corporate and society indeveloping opinion is greater than

ever and along with a greater needto address regulatory and increasedstakeholder power, companies havea real opportunity to help the debatearound resource development.

State capitalism: The promotion of national champions hasbecome a growing trend in the mining industry. As miningcompanies increasingly nd themselves competing againststate-owned or state-backed companies, governments maytake a more statist approach to their mining sectors andpromote national champions. In Russia, a long-standingbattle for control over Norilsk Nickel will over time likelygive way to Kremlin intervention to create the foundation of

a metals national champion. In South Africa, an importantnear-term priority for the government is the development of astate-owned mining company, the African Exploration Miningand Finance Corporation. In the near-term, the outt poses alimited competitive threat to established players, but reectsthe governments increasing involvement in the sector.

Sustainability/community relations: Local oppositionto mining projects on environmental or social groundshas led to a number of recent shutdowns of mines bygenerally pro-mining regimes. In Guatemala, human rightsaccusations led the government to order the shutdownof the Marlin gold mine, while in Panama, PresidentRicardo Martinelli overturned passage of a new miningcode that would have promoted investment in the sectorfollowing a series of protests by indigenous communities.Canadian company Greystar is also facing environmentalopposition to developing its copper mine in Colombia, andin the Philippines the South Cotabato local governmenthas banned open pit mining preventing the developmentof Xstratas giant Tampakan copper-gold project. Localsecurity risks can also challenge mine operations, as minersin Cote dIvoire and Mexico are currently experiencing.

Government stability/transparency: Tumultuous or

murky political environments can also have signicantimpacts on mining companies. For instance, in Kyrgyzstan,although the parliaments approval of Almazbek Atambayevas Prime Minister in December 2010, followed by theestablishment of a cabinet, were positive steps towardrestoring political order in the country, the majoritycoalition is likely to be unstable over time, given thedivergent political views of its member parties. Frontiermarkets also tend to be more vulnerable to generalgovernment instability, particularly around elections. Forexample, ahead of a 7 November 2010 presidential run-off

vote, mounting tensions and violent clashes in Guinea casta large shadow over the future of mining operations, whichdepend, in part, on President Alpha Conds ability to securea smooth political transition from military to civilian rule.


By Divya Reddy, The Eurasia Group

As the global economy emerges from the nancial crisis,governments are reassessing their economic priorities

with an overarching goal of maximising economicgrowth and addressing budget decits. In this context,many governments are considering or actioning a moreinterventionist approach to the mining sector, particularly inlight of a strong outlook for commodities demand and weakbudgetary outlooks in a number of minerals-rich countries.Operations are also receiving heightened attention at thelocal level and as such miners are required to be mindful ofcommunity and environmental obligations as well.

Resource nationalism: On the heels of stimulus spendingto counter the effects of the nancial crisis, governments

worldwide accrued budget decits that they will now

seek to plug as they look ahead to longer term economicgrowth and scal stability. Importantly, while politicalrisk is traditionally considered in a developing countrycontext, resource nationalism in the form of taxation androyalty revisions is also gaining ground in industrialisedcountries. In Australia, the government appears likely topass the Minerals Resource Rent Tax on iron ore and coalcompanies in 2012, although the scope was signicantlymoderated from an earlier proposal due to successfulindustry lobbying. At the same time, a rise in populistrhetoric in the run-up to this years elections in Peru ledto all major candidates supporting increased taxes on

the mining sector. A victory by Nationalist candidate,Ollanta Humala, would increase the likelihood that miningcompanies will be required to pay higher taxes in Peru.

Elsewhere, resource nationalistic policies are being driven byindustrial policy priorities. For example, Brazils upcomingmining reform, likely to pass in 2012, is designed to alignmining investments to the countrys industrial policy goals.

Along with royalty hikes, the reform will impose tighterinvestment requirements and introduce tax mechanisms toincentivise the industrialisation of minerals domestically.Similarly in India, the federal government in February raisediron ore export taxes with an eye to expanding domestic

steel production, while a number of state governments aretrying to impose export taxes for similar reasons.


40/5236 PwC

Thegoldenrules09



The price of gold always receives a lotof attention and this was denitelytrue during 2010, when it increased

for the tenth consecutive year to$1,421 per ounce, up 23% year on

year. As the price continues to rise tonew highs in the rst part of 2011, thequestion is; what will happen next?Because gold is indestructible and notconsumed in the way othercommodities are, it is not as inuencedby typical supply and demand factorsbut rather as a means for storing

wealth. There are a number of othermacro-economic factors that arekeeping prices at the current leveland which could continue to driveprices even higher, including theEuropean sovereign debt crisis, unrestin the Middle East and increasedcentral bank buying of gold.

As gold is priced in US dollars,changes in the value of the dollarinuence the price of gold. The USdollar remained weak in 2010, partlyas a result of U.S. monetary policy,such as the US Federal Reserves

second round of quantitative easing.With gold utilised as an alternativecurrency to the US dollar, this has theeffect of driving up the price of gold.

Gold ETFs experienced substantialgrowth as investors looked to suchfunds to either speculate, or as analternative to US treas

Mine 2011 Game Has Changed

Documents

Transcript of Mine 2011 Game Has Changed