Commodities, Copper, Features, Gold, Iron ore

What sets Australia’s top companies apart?


Five Australian mining companies have made the cut in the PwC Mine 2021 report’s Top 40 list. Here’s why they are among the leaders.

Coming off a banner year, market conditions look set to only get better for the world’s top 40 mining companies.

Mining was an exception during 2020, being one of the few sectors globally to emerge from the COVID-19 crisis in great financial and operational shape.

PwC’s Mine 2021 report, which analyses the top 40 mining companies in the world based on their financial performance, highlights this admirable position.

In 2020, the Top 40’s net profits improved by 15 per cent, cash on hand by 40 per cent and market capitalisation by nearly two thirds against 2019.

Strong commodity prices propelled the Top 40 to this position, with copper leading the way, contributing $US122 billion ($166.2 billion) to group revenue.

Diversified Australian companies, BHP and Rio Tinto, held their positions as first and second on the Top 40 list.

Perth-based Fortescue Metals Group jumped six spots to fourth on the Top 40 off the back soaring iron ore prices, which increased throughout the second half of 2020 (and into 2021).

Gold company Newcrest Mining (14th to 18th) and diversified miner South32 (28th to 35th) also represented Australia in the Top 40 list.

Despite the nervousness that COVID-19 created, PwC global mining leader Paul Bendall says the industry clearly benefitted from being considered an essential service in 2020. 

“It was that, together with strong commodity prices at the end of the year. Some of the larger miners are also reaping the benefits of automation,” Bendall tells Australian Resources & Investment.

“It would be wrong to think automation was in response to COVID; it has been years and years in the making and they have received a quick return to that.”

Even better days ahead?

If 2020 was a year to remember for the mining industry, 2021 is shaping up to be even better.

Commodity prices have remained in a strong position so far in 2021, with iron ore and copper both reaching new records.

Debate rages on how long iron ore can hover around $US200 ($270) a tonne, but the buoyancy around copper and future demand for the base metal is gathering momentum.

PwC predicts that the average price of copper will increase by 40 per cent in 2021, compared with the average 2020 price.

This is in no small part due to increased demand from a market shift towards commodities in the global transition to a low carbon future, PwC adds.

Gold, while not at its 2020 heights, has maintained a healthy value, while battery metals such as lithium have continued to rebound throughout the year.

But, according to Bendall, there’s more to the Top 40’s improving financial position than surging commodity prices, most notably the current phase of development in mining compared with the ‘boom’ period of a decade ago.

“This is different from that 2010, 2011 and 2012 period. If you look at the forecast capital spend in those years it was very significant,” Bendall says.

“Not quite that amount of money is on the table to be spent in 2022. We see one of the outcomes of that is free cash flow and the potential for dividends is significant.

“There are other stakeholders that will want their fair share, the government included, but we are reporting $70 billion in dividends this year, which is an enormous amount.

“Those three Aussie miners at the top of the order have paid out $22 billion of that already.”

As Bendall alludes to, BHP, Rio Tinto and Fortescue Metals distributed their highest ever dividends to that point during the February reporting season this year, at a time when iron ore prices had not yet peaked.

ESG focus guides growth

While many industries were pre-occupied with COVID-19 in 2020, mining didn’t stop advancing its ESG (environment, social and governance) agenda. 

Overwhelmingly, the Mine 2021 report identifies ESG as the best opportunity for growth. It explains that companies with higher ESG ratings returned an average total shareholder return of 34 per cent over the past three years – 10 per cent higher than the general market index.

The Top 40’s leading company, BHP, has been vocal about how ESG values such as decarbonisation are guiding its growth strategy.

BHP chief executive officer Mike Henry says the drive to more rapidly decarbonise the globe may also accelerate demand for many of the products that the company produces.

“A growing number of governments are committing to tackling climate change with greater ambition and are cooperating to do so,” Henry, presenting at the 2021 Bank of America Metals, Mining and Steel Conference, says.

“A transition to a world where warming is limited to no more than 1.5 degrees above pre-industrial levels is positive for BHP and would allow us to create significant value.”

The PwC Mine 2021 report identifies two more reasons for why the Top 40 miners should have ESG at the top of their growth agenda:

• Products and operations differentiation – higher premiums for low-carbon commodities, as companies seek to incorporate greener inputs into their products and services.

• Improved access to capital – companies with an embedded ESG strategy are increasingly frontrunners for accessing capital at generous rates, while ESG is also driving investment capital as investors seek to cash in on the wave of ESG opportunities.

Bendall says it has become clear that those mining companies that are graded well for ESG strategy and disclosure are commanding a premium over their peers. 

“This certainly didn’t start in 2020; it had started earlier around a premium for a product that has lower carbon in it,” Bendall says.

“Partnering for Scope 3 emissions is also important – it leads very clearly into acquisition and investment activity.

“It means, very simply, that the top miners are exiting thermal coal. We expect that when acquisitions are made or projects are being developed that the energy profile for them will be more important considerations.”

Taxing times

Tax transparency has also emerged as an integral part of the ESG strategies of the Top 40 mining companies in the PwC report. 

According to the Mine 2021 report, the concerns of mining CEOs over tax regulations has skyrocketed over the past 12 months.

The report reveals that metals and mining CEOs are far more likely to be extremely concerned about tax policy uncertainty (39 per cent) than their global counterparts (31 per cent).

Despite the concern over tax policies, Bendall says it is clear that not many mining companies are doing much about it. However, there are high achievers in this area setting an example for the rest of the industry to follow.

“If you look at our two biggest miners and their tax transparency reports, we regard them as very good,” Bendall says.

“They have been producing them for 10 years at least and we see that as a good way for miners to tell their story. It tells the width of the taxes they pay – where the money goes is a really good story to tell.”

And while Australia is often viewed as a low-risk jurisdiction for mining companies to operate in, that doesn’t mean that tax regulations aren’t cause for concern in the industry.

Bendall says it would be a mistake to think it is just in overseas jurisdictions where mining companies face volatility over tax policy.

“It is the sector (in general),” Bendall emphasises. “PwC runs a CEO survey each year across many sectors and tax is a topic in it. A clear comeback among metals and mining CEOs was a doubling of them calling out tax policy uncertainty as an extreme concern.

“That, to me, signals it is across the board and it is understandable; some countries where mining is a big part of it like Australia, their balance sheets are under stress.

“The uncertainty is on if special or specific tax measures will be put in place, however they might be dressed up. We saw this in Australia a decade ago with the MRRT (Mineral Resources Rent Tax).” 

Leaders of the pack

The agility of the Australian companies in the Top 40 has enabled them to either maintain or reach their current standing on the PwC list. 

Top 40 leaders, BHP and Rio Tinto, continue to strengthen their diversified portfolios in the commodities of the future, particularly copper and iron ore, while abandoning thermal coal.

BHP expects the world’s Paris-aligned emissions reductions targets to more than double the demand for copper and quadruple the demand for nickel over the next 30 years.

“They are diversified heavily into copper as being very tied to green outcomes, that has great prospects (for BHP and Rio Tinto),” Bendall says. 

“I don’t think anyone believes the iron ore price is going to stay where it is forever, but there’s still a lot of margin there between their cost of production, and that includes FMG (Fortescue) too.”

Fortescue’s incredible rise up the rankings as a single-commodity miner is, of course, largely tied to the strength of the iron ore price. However, Bendall has confidence in the company’s future near the top.

“I’m not sure Fortescue is going to stay at fourth, but I think they have marked out some ground now as a very big player,” Bendall says.

“They don’t have the diversification of other two, but they do have access to a lot of iron ore and their costs are good, so there’s no reason why they won’t be in and around the top 10 for a long time.”

Despite the operational differences between Australia’s contingent of companies in the Top 40, if there are notable similarities, they would be how they responded to COVID-19 and the development of their ESG strategies.

Bendall congratulates these miners for the agile approach they have shown in this regard.

“They were granted essential services classification and they have adapted that well to their assets to continue production. That has required nuance and they should be rewarded for doing a good job,” he says. 

“I’d also expect the focus will only pick up on the elements of ESG as well. That message is here to stay and there’s some good work being done, but that doesn’t mean there’s still room to improve.” 

This story also appears in the August issue of Australian Resources & Investment.

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