Indonesian results consistent with global trends
While no Indonesian mining companies made the US$5.3 billion market capitalisation cut-off to be included in the Top 40 global miners in 2017, the mining industry in Indonesia has also performed well following the recovery in commodity prices and improved global commodity demand.
Sacha Winzenried, PwC Indonesia's lead advisor for energy, utilities and mining, commented:
“In this report, we see a definite, measured and patient approach adopted by mining companies to execute their respective strategies to deliver long-term value. This is consistent with the Indonesian mining industry’s improved performance, which follows the recovery in commodity prices and stronger global commodity demand.”
There was a marked recovery in the market capitalisation of IDX-listed mining stocks over 2017 to Rp 310 trillion at 31 December 2017, or a 17% increase compared to the position at 31 December 2016. This increase came mainly from coal stocks which increased by 27%. This has continued into 2018 with the market capitalisation of coal and mineral mining companies increasing by a further 9% and 18%, respectively, as of 30 April 2018.
“The business of mining carries many risks. Although these differ between each mine site, jurisdiction and company. Indonesia, like every other country, has still got homework to do. According to our risk mapping, regulatory certainty is one of the main areas for improvement in Indonesia’s mining investment environment,” Mr.Winzenried added.
The world’s 40 largest mining companies have delivered an impressive financial performance in 2017, increasing revenue by 23 per cent to USD$600bn, according to PwC’s Mine 2018 report released on 5 June 2018.
The report analysis confirms an upswing in the mining cycle, which comes on the back of rising global economic growth and a recovery in commodity prices. Helped by astute cost-saving strategies over the past few years, margins and cash-generating ability has improved significantly, leading to a 126 per cent jump in net profits.
Our 2018 outlook indicates that the Top 40’s improved financial performance will continue as companies continue to benefit from this upward momentum in the mining cycle.
PwC’s Global Mining and Metals leader, Jock O’Callaghan, said:
“The big miners have executed their strategies in a measured and deliberate manner in 2017, and it has paid off handsomely.
“The biggest risk now is giving in to the temptation to meet rising demand by splashing their newly acquired cash balances on deals, projects or assets ‘at any price’, as many have done in previous cycles.
“To deliver value on a sustainable basis, miners must remain disciplined and transparent in the allocation of capital, and stay focused on the goal of mining for profit, not for tonnes,” said Mr O’Callaghan.
Balance sheets in good shape
Miners continued to focus on strengthening their balance sheets in 2017, with $25bn being allocated to the repayment of debt, and capital expenditure at a record low of $48bn. As a result, gearing has fallen from 41 per cent to 31 per cent, which is back in line with the Top 40’s 15-year average.
“With the liquidity concerns that were still lingering in 2016 now largely resolved, balance sheets are strong, and companies have the flexibility to act. Although we expect to see an increase in growth opportunities in 2018, prudent miners must seek to avoid past errors and follow a planned growth strategy to avoid the mad rush for resources at the top of the cycle,” said Mr O’Callaghan.
Record high increase in tax contributions
Tax expenses increased 81 per cent in 2017, with cash taxes paid to governments rising by 67 per cent, despite the fact that corporate tax rates remained relatively stable across most key markets.
The jump in tax expenses was driven mostly by increased profit and the impact of USA tax reforms, which saw a one-off 4 per cent (or $2.8bn) rise in the effective tax rate due to a revaluation of deferred tax. It is expected that USA tax reforms will ease the tax burden on USA operations going forward.
Shareholder windfall to continue, but for how long?
Shareholders returns have almost doubled year-on-year, from $16bn in 2016 to $36bn. Based on current levels of performance, dividends are likely reach to record highs in 2018.
“Shareholders who endured the boom cycles of 2008 and 2012 will be keen to reap the rewards of their patience now that optimism and profits are back. But the immediate temptation for larger returns – for shareholders or other stakeholders – must also be balanced against the on-going need to invest for sustainable long-term value,” said Mr O’Callaghan.
New entrants staking their claim
2017 saw a range of new entrants active in the mining sector. Private Equity (PE) investors took a keen interest in mining investment opportunities, for example, and were active participants in almost every quality coal deal brought to market in Australia during the year.
There are also examples of non-mining companies partnering or merging with miners to secure access to commodities. For example, Agrium, a Canadian fertiliser and chemical wholesale and retail company merged with the world’s largest potash producer, PotashCorp, while Telsa continued to invest in lithium supplies, including their recent transaction with Kidman Resources in Australia.
“We expect that interest from non-traditional players will increase in 2018 and beyond, particularly as operating conditions continue to improve. While some incumbent miners will see these new entrants as a threat, others will look to take advantage of their new ideas, capital and ways of delivering long-term value,” Mr O’Callaghan said.
Safety better, but still room for improvement
In 2017 there was a 36 per cent reduction in the number of fatalities among the 28 companies (of the Top 40) that disclose safety statistics. Of the 22 companies that disclose injury statistics, 15 reported that the number of injuries had either fallen or remained consistent compared to the previous year.
“While an improvement in the safety record of the Top40 is welcome news, there is clearly more work to do to ensure a safe working environment for all employees.
Notes to editors:
PwC’s Mine 2018 analysis is based on the major top 40 global mining companies by market capitalization. The results aggregated in this report have been sourced from the latest publicly available information, primarily annual reports and financial reports available to shareholders. The full report can be accessed via the following link: https://www.pwc.com/id/mine-2018
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About PwC Indonesia
PwC Indonesia’s Energy, Utilities and Mining (EU&M) practice comprises over 350 professionals across our lines of service – Assurance, Tax Services, Advisory, Consulting and Legal Services. The group of professionals has deep industry knowledge providing us with the largest group of industry specialists in the Indonesian professional market. At PwC, we help our clients solve complex business problems by combining a global mindset and local resources with positive actions. Through our involvement with the Indonesian Petroleum Association (IPA), the Indonesian Mining Association (IMA), the Indonesian Coal Mining Association (ICMA), and other industry bodies, we are helping to shape the industry as it progresses towards truly world-class standards.
PwC Indonesia is comprised of KAP Tanudiredja, Wibisana, Rintis & Rekan, PT PricewaterhouseCoopers Indonesia Advisor, PT Prima Wahana Caraka, PT PricewaterhouseCoopers Consulting Indonesia and Melli Darsa & Co., Advocates & Legal Consultants, each of which is a separate legal entity and all of which together constitute the Indonesian member firm of the PwC global network, which is collectively referred to as PwC Indonesia.
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