Barrick’s Goldstrike mine in Nevada
Top global miners, including some Canadian resource giants, need to reward investors if they hope to turn around market valuations that have dipped to levels not seen for years.
According to a global mining report by consultancy PricewaterhouseCoopers, published on Wednesday, the price-to-earnings ratio fell below 10 last year, meaning investors are valuing mining shares at levels lower even than in 2008, when the global economic crisis sent stock markets around the world into a tailspin.
"With the price-earnings ratios for the Top 40 at one of the lowest levels seen in years, miners are faced with the challenge of winning back investor confidence," PwC said in its Mine Report, published annually since 2002.
"Despite record increases in shareholder distributions in 2011, falling stock prices suggest that investors expect greater cash returns."
Entitled "The Growing Disconnect," the report said just six of the world's Top 40 companies ended 2011 with higher valuations than at the beginning of the year, including Canada's Goldcorp Inc., Yamana Gold Inc. and Ivanhoe Mines Ltd. The rest saw their market capitalizations fall an average of 25 per cent for the year, even as they reported booming revenues and profits and commodity prices touched record highs.
"Profit is going up and hitting records, while share prices are hitting low points," said John Gravelle, PwC's Canadian mining leader. He predicted more of the same could follow this year unless miners listen to shareholders' demands for value. Mr. Gravelle said one answer could be through share buybacks or dividends. "I think they can have high dividends and still spend money on their projects," he said.
Canadian companies, about a quarter of the world's top 40 miners, were not spared as their market capitalizations were beaten down by the same forces affecting global contemporaries.
Toronto-based Barrick Gold Corp., the country's largest miner, is down 22 per cent since last September, climbing back from deeper losses in recent weeks. First Quantum Minerals, one of Canada's largest pure-play copper producers, is down nearly 40 per cent in the past six months, sparking rumours it could be vulnerable to a takeover. The same kind of talk has swirled around Kinross Gold Corp., the nation's third-largest gold miner, after its stock fell more than 50 per cent in the same period.
Notwithstanding the rumours, the companies are unlikely to be acquired in the current environment because the stock prices of would-be buyers are under the same siege as potential targets.
"I don't think we are going to see big acquisitions, because for big acquisitions you are usually issuing your own stock and mining companies do not want to issue more stock because they are undervalued," Mr. Gravelle said.
The PwC report showed that the world's largest firms returned record amounts to shareholders last year, some $59-billion (U.S.), through dividends or share buybacks. Those same companies are also sitting on about $113-billion in cumulative cash flow, so they have no shortage of capital to deploy.
But they are also being hit by surging operating costs, catching up after lagging the commodity price boom of the past decade.
As costs rise – hit by shortages in everything from materials to manpower – margins are being squeezed and miners are starting to focus spending on select projects rather than across portfolios.
Ever cognizant of investors' risk aversion at a time of economic turmoil in Europe and an uncertain growth outlook in China, mining companies are also keeping a closer eye on resource nationalism. In come cases, they're pulling back from less certain jurisdictions and concentrating their investments in regions considered more stable.
"I think the miners are going to be thinking long and hard about going into jurisdictions that are new jurisdictions in emerging markets," Mr. Gravelle said. "Mining companies can't move, so they are always the targets."