PwC says confidence returning to mining sector but dividends under threat

5th Jun 2014 11:49

- Dividends increased despite record write-downs - More cost-cutting required to maintain dividends- Rise of emerging markets trend to continueDividend payouts rose from major mining companies last year despite record levels of impairments, according to a new report from PricewaterhouseCoopers, who observes seeing "traces of calm" returning to the mining sector in 2014.The advisory firm's 'Mine 2014' report into the 40 largest miners in the world found that despite significantly decreased commodity prices and record impairments dragging profitability in the industry to its lowest level in a decade, dividends were ratcheted up to more than double net profits.PwC's Global Mining Leader, John Gravelle, said: "The industry is adjusting to tough times in the short-term with strategies in place to regain confidence. For example, we've seen new faces at the helm of almost half of the largest 40 mining companies in the last two years."Despite diminished profitability and shrinking cash, underlying performance in the industry as represented by adjusted [earnings before interest, tax, depreciation and amortisation], withstood the tough conditions, only down 8% in 2013. Dividend yields also continued to increase, with gross dividends paid up 5% and dividend yields slightly up to 4%."However, payouts could be under threat from the depressed level of commodity prices and still-elevated operating costs at the major miners.The miners have acted on short-term cost reduction strategies but, said PwC, stakeholders were watching to ensure that results were not simply achieved from deferring spending. "Mining companies have historically found sustained productivity improvement to be difficult.""We can expect to see some moves towards consolidation, friendly or otherwise, if only to seek out synergies to reduce costs in this low-price environment, consistent with the new mantra of lower costs and higher productivity," the report said.PwC's UK Mining Leader, Jason Burkitt, quoted in the Financial Times, said: "Commodity prices went down and not enough cost came out the system. If that continues there is going to be concern around dividends. Miners are choosing to fund payouts but if profitability does not improve they will not be in a position to do so."The good news is that signs are emerging that they are taking steps to reduce costs."PwC also found that for the first time, 2013 saw the majority of the 40 largest mining companies come from emerging markets and forecast that this trend would continue due to emerging market companies' current performance and greater recent appetite to spend on capital.The report said the rising importance in the global mining landscape of emerging market companies was likely to continue further. "Against this backdrop, the licence to operate in all corners of the globe is becoming more challenging, with governments increasingly eager to expand their share of royalties and taxes," the report said, pointing to election results in 2014 in Brazil, India, Indonesia and South Africa that may further alter the influence of emerging markets on mining.OH