The world's top miners lost a massive $US27 billion and more pain is coming

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The world’s top 40 miners last year posted their first collective loss of $US$27 billion, according to PwC’s Mine 2016 report.

Their combined market capitalisation in down 37% to $494 billion, in some cases below net book value. The current market value of the top 40 is only a third of what it was five years ago.

Total impairments of $53 billion were also booked, for a total of $US200 billion over five years.

And the big miners delivered their lowest ever return on employed capital (after adjusting for impairments) at 4%.

Some face high debt as the industry in general focuses on costs and pushes output higher, trying to meet falling commodity prices.

PwC Australia’s mining leader, Chris Dodd, says there could be more pain to come on impairments, with 15 of the top 40 miners’ market capitalisations dipping below their book values, up from 12 the year before.

Source: PwC

“A 25% year-on-year decline in commodity prices had the top 40 chasing even the most incremental productivity improvements, with many turning to asset sales in the fight for survival,” he says.

“Investors punished the group for what they perceived to be poor investment and capital management decisions, and in some cases a feeling that the benefits of the boom had been squandered,” Dodd says.

“The focus was on production at a time when more rigorous investment assessments would have been prudent.”

However, the fall in market cap was disproportionately greater than the fall in commodity prices, suggesting that investors are focused on short term returns.

“Mining is a cyclical game and different industries ultimately attract the investors they deserve,” Dodd says.

“Hopefully those investors who are getting on board now are taking a long-term view. However if the current short-term focus continues that will ultimately curtail the capital that’s available for investment, and constrain options for growth.”

Dodd says the big miners are down but not out, pointing to the recent rebound in market capitalisations and commodity prices.

“This might simply be a case of more volatility in the sector, but there’s a chance we are looking at the early stages of a rebound,” he says.

PwC says the top 40 appear to have worked smarter and implemented more productive methods to drive greater volume growth from existing plant and equipment at a lower cost.

The two Australia companies, BHP and Rio Tinto, first and second on the top 40 list, have led the way in cost cutting and efficiences.

BHP cut operating cash costs by $2.7 billion and generated productivity-led volume efficiencies of $1.2 billion.

And Rio Tinto, after reporting $2.9 billion in cost savings in 2015, announced it would further cut cash costs by $1 billion a year in 2016 and 2017.

Another bright spot is lithium, with a miner of the key component in battery technology entering the top 40 for the first time.

“Lithium is what everybody is quite rightly talking about, with the price effectively doubling in the last 12 months and demand for advanced battery technology skyrocketing,” he says.

“This sector of the industry is most definitely one to watch.”

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