Middle market mining industry players continue to contend with fierce conditions in the face of lower commodity prices, lower demand and geopolitical and economic pressures. While profits have plummeted, recent upticks in private equity and increased exploration activity, suggests, according to a new report, that improvement for the industry might be on the cards in the coming years.
The extraction industry has faced considerable hurdles following the fall in commodity prices during 2014. The ROCE for the metals industry fell to 3.8%, well below the cost of capital, while the middle market energy sector continues to face considerable headwinds, particularly in the US. The mining industry as a whole, while sitting on a large war chest, is also contenting with relatively high debts.
According to a new report by BDO, the middle market mining industry has suffered under the effects of a downturn in commodity prices, lower demand and increasing pressure from financers, which have left their mark on the industry. Profits, which until before 2014 were strong, have all but collapsed, while exploration slowed in the face of market uncertainty. Aside from commodity price decreases, geopolitical factors continue to affect market sentiment – particularly the US Presidential elections and the transformation of the Chinese economy, from export investment led to internal consumption.
The report, titled ‘2016 BDO Global Mining Middle Market Monitor’, suggests that there is "light at the end of the tunnel", with a number of metrics suggesting that there is improvement afoot in the mining mid-market. The report is based on financial data of 528 publicly traded middle market mining and diversified metals companies, with revenues up to $1 billion, from 61 countries.
Global mining middle market
The research found that following a bumper year in 2011, with average pre-tax and net income at $9.5 million and $7.3 million respectively, income began to plummet. In 2012, pre-tax income fell to an average $5.3 million and net income to $3.3 million, and by 2014, pre-tax income fell to $1.2 million and net income to $0.9 million. Last year the median company fell into the red, losing -$0.8 million in pre-tax income and -$1 million in net income.
Investors have not been impressed by the industry, with global median market capitalisation falling by hundreds of millions of dollars. In 2010 the middle market median capitalisation stood at $279.5 million, by last year it fell to $76.7 million – a decrease of 72.5% between 2010 and 2015, while the most recent decline, between 2014 and 2015, stood at 32%. The decline mirrors declines in large corporates, which stood at 37%.
The study does highlight some positive sentiment across the industry: median price-earnings (PE) ratios grew 15% between 2014 and 2015, reflecting a longer-term recovery from a considerable fall between 2010 and 2011. The middle market too saw a slight increase in median exploration expenditures, up 17%, reflecting – according to the firm – that companies are again exploring their options in the anticipation of a market upturn.
UK middle market
The UK market, much like the global market, continues to face uncertainty in relation to both geopolitical and economic factors. One marked difference, however, is the effect of Brexit on the UK mining industry.
The firm’s research finds that revenues for UK mining companies has increased slightly on 2010, up 23%, although between 2014 and 2015 industry revenues fell by 13%. Median net income fell considerably harder than the global average, down to almost -$9 million, while pre-tax income too saw a sharp decline between 2014 and 2015, falling from stagnation to -$5 million. The UK industry did see a slight uptick in exploration expenditure, from around $1 million in 2014 to around $2.2 million last year.
Across a range of other metrics, the UK middle market mining industry continues to face challenges. Median PE ratios fell 66% between 2010 and 2015, while between 2014 and 2015 they were down 28%. Market capitalisation was pummelled in recent years, falling 79% between 2010 and 2015, while between 2014 and 2015 it saw a 53% crash. The effective tax rate for the industry, in light of significant losses, has fallen from 17.5% in 2012 to 0% today.
Regarding the industry’s future in the UK, a number of factors remain, according to BDO UK’s Audit Director Matt Crane in play. "The fall in the sterling following the EU referendum result has increased the relative value of investment in UK mining stocks for global investors (although little activity has thus far been booked), particularly for M&A activity in the longer term. The price of gold too saw a hike following the decision, and, given that many of the UK’s mining industry players have a hand in the gold mining industry, higher commodity prices may push up the activity of some market players."