PwC’s Mine 2021 report released this week forecasts mining profits to hit an 18-year high this year. This comes on top of a 15% jump in net profit in 2020 and a 40% surge in cash on hand.
“The Top 40 mining companies have never been in a stronger financial position to make a big, bold pivot towards the future. And the future is already visible today: the world is in the midst of an era-defining transition to a low-carbon, sustainable economy. Eight of the 10 largest economies have set ambitious net-zero targets. Many global companies, including several of the Top 40 miners, have made similar commitments,” says PwC.
A key finding of the Mine 2021 report is that companies embracing ESG (environmental, social and corporate governance standards) outperformed the broader market during the peak of the Covid pandemic. Investors are increasingly drawn to companies that actively embrace ESG policies.
Companies are shifting away from thermal coal towards the green economy, and that’s likely to drive demand for minerals critical to the green economy six-fold by 2040, according to the International Energy Agency. Eight of the world’s 10 biggest economies have committed to achieving net-zero emissions by mid-century, and mining companies are expected to be front and centre in this transformation.
Companies are looking to drive long-term strategic value by incorporating low-carbon inputs into their products and services, says PwC.
“And many are willing to pay extra to do so. For example, this year the premium for low-carbon aluminium jumped from a relatively small US$10–$15 a metric tonne to highs of US$59 because of a surge in demand for the product in Europe.”
Miners that embed ESG into their strategies are also finding it easier to access capital.
Australia’s Port of Newcastle, the world’s busiest coal export port, recently locked in $318 million in a sustainability-linked loan, which delivers a reduced borrowing rate if the port fulfils its environmental and social commitments.
In another case of cheaper capital being showered on miners committing to ESG policies, Newmont recently announced a US$3 billion sustainability-linked revolving credit facility, which includes a pricing feature based on third-party sustainability measures. The better the company does on ESG, the lower the cost of capital.
According to MSCI ratings, only four of the Top 40 are considered leaders in managing the most significant ESG risks and opportunities. “The rest need to lift their game,” says PwC. “To capture the value that ESG offers, Top 40 miners must focus on two key areas: embedding ESG firmly into strategy and engaging stakeholders.”
The financial position of the Top 40 miners emerged stronger than ever in 2020, and outperformed major market indices, with total market capitalisation rising 64% to $1.46 trillion.
Top 40 revenue was $545 billion (excluding trading) for 2020, up 4% from 2019. Higher prices for gold and iron ore and modest production increases in gold and copper were the main drivers of revenue growth, says PwC.
Copper was the standout performer, contributing $122 billion to group revenue.
“Its higher price points reflected increased demand, which resulted in part from a market shift towards commodities that are valuable in the global transition to a low-carbon future.
“BHP expects the world’s Paris-aligned emissions reduction targets to more than double the demand for copper and quadruple the demand for nickel over the next 30 years.”
If 2020 was a good year for the Top 40, 2021 is shaping up to be a great one, with revenue (excluding trading) forecast to rise 29%. Cash on hand is now up 40% and balance sheets are rock solid.
What will companies do with their cash war chests?
Shareholders are in for a cash windfall, with BHP, Rio Tinto and Fortescue Metals distributing their highest ever dividends for the February 2021 reporting season. Capital expenditure is forecast to expand by 33% this year for expansionary projects and the revival of projects deferred from last year.