Many of the trends evident in South African mining reflect the reality of the sector globally, with investors making new demands on chief executives to deliver on and develop existing investments rather than looking for new growth and acquisitions, new data shows.
This was particularly evident in the gold sector, said Hein Boegman, PWC's mining industry leader for Africa, where there had been a marked divide between the performance of gold mining stocks and the gold price. "This is an indication of a lack of confidence by shareholders in the ability of mining companies to deliver on returns," he said.
The growing disconnect had become even more obvious in the first four months of this year, he said, and shareholder demand has resulted in the replacement of 50% of chief executive officers in the top 10 mining companies.
"The outgoing chief executives were generally 45-year-old chartered accountants who were replaced with 55-year-old mining engineers, who can understand how to get more out of operations and to introduce better efficiencies rather than driving growth," said Boegman.
"On the demand side, the long-term fundamentals are still there but regaining investor confidence depends on how the mining industry responds to its rising costs and, in particular, labour, increasing volatile commodity prices and other challenges, such as resource nationalism – a worldwide problem, and that new chief executives can deliver on promises."
The resignation of Cynthia Carroll as the chief executive of Anglo American is a case in point. Her removal and replacement by mining engineer Mark Cutifani is largely attributed to shareholder dissatisfaction about the number of acquisitions, many of which they felt were poor decisions, and the company's weak performance.
"Not really a bad picture"
The PWC study looked at 40 of the largest listed mining companies by market capitalisation for the reporting periods April 1 2011 to December 31 2012.
"On the whole, it's not really a bad picture – the figures indicate unprecedented growth of both commodity prices and global production volumes," said Boegman.
What the study found was that the market had lost confidence in the mining sector's ability to control costs, implement capital discipline, improve return on capital, and not to "pile back into too many new projects or expensive deals when prices rebound".
In 2013, share prices remained strong but volatile, with the global mining index up 258%.
"But there was a growing disconnect with the broader markets and this widened further in 2013. Since January 2012, the HSBC global mining index fell by 3% while the broader markets rallied and the HSBC global mining index underperformed the Dow Jones and FTSE 100 by 46% and 43% respectively," he said.
The gold miners were hardest hit last year but diversified miners weathered the storm. However, 2013 has seen losses across the board. From the start of the year to April 2013, market capitalisation fell for 37 of the top 40 companies, wiping $200-billion, or 18%, off the total.
Market capitalisation
Last year, market capitalisation remained the same at $1.2-trillion, with the gold miners in the top 40 losing $29-billion. The gold sector lost a further $58-billion in value in the first four months of this year.
Boegman believes that long-term fundamentals for the sector are positive. "We believe that CEOs are looking at taking heed of what investors are saying."
Eight of the top 10 chief executives said that they would maintain or increase dividend levels, and that capital expenditure has been scaled back.
"I do believe there are opportunities for improving productivity and efficiencies, both of which have suffered in recent years, and this can and has been done by global companies," he said.
"Whether it will be as easy for South Africa to cut costs, particularly since labour costs are so high, I am not so sure. That is going to present a real challenge locally."