Roland Berger: Global mining industry holds $91 billion in cash

The mining industry 'sits' on a pile of cash the size of $90 billion, research by Roland Berger shows. In the past 15 years, the mining industry has enjoyed big ups and downs, and while 30% of the mining industry’s capacity is unprofitable, the firm shows that wider fundamentals remain strong. In addition to the cash, both the industry's operating and human capital costs are down.

Mining has in the past decades enjoyed considerable growth, and with the coming online of the BRICs region, demand for a period in the 2000s outstripped supply. As a result, commodity prices increased, allowing for mining companies to expand into what would otherwise have been uneconomical claims, with the general aim of getting the oar as quickly to market.

In a recently released report from Roland Berger, titled ‘Mining Rebound: Why 2015 is the perfect year to prepare your mining operations for the next cycle’, the consulting firm considers the changing fortunes of the mining industry in general.

Mining slow-down
During the period between 2004 and 2012, iron ore seaborne demand increased from 606 million tons to 1,157 million tons. The massive demand, particularly from BRICs, resulted in a 15% per year commodity price increases in the 2000s, and the corresponding fixation on winning oar rather than other considerations. Recent years however, have seen a slump in demand as China and other BRICs fall foul to the dangers of overheating economies. One consequence, according to the firm, is a resultant net oversupply of minerals which has resulted in the commodity metal price index to fall by 40% between 2011 and 2015. This drop has had the further consequence of laying waste to around 30% of capacity that is unprofitable at current market conditions.

Although the down-turn is considerable, it has also come at a time in which the environment on which mining is dependent is relatively stable and abundant. Oil prices continue to be low, which reduce operating costs, while a strong US dollar will generally help all miners with US dollar revenues that have not yet fully optimised their operations to cope with lower commodity prices in the short term. Other positive factors affecting the industry include the relatively cheap cost of key mining equipment, reducing operating costs as well as less competition for skilled labour, reducing capital costs. Furthermore according to the report, with the sometimes inefficient practice of getting the product to market without considering operational costs, many mines still have considerable scope to streamline operations and thereby improve their operating cost profiles.

Cash pile
The consultancy notes that the industry as a whole is – in cash terms – in a relatively strong position. Since the start of 2000 the industry has increased the cash available to mining companies from $7 billion to a record of $152 billion in 2010, before the downturn seeing the industry burn through around $60 billion to plateau at around $90 billion over the past two years.

The authors conclude: “Since the decrease of mineral prices in 2011, savvy operators have been very cautious in not depleting their cash reserves when they first needed time to adjust their cost structure to this new pricing environment. Since then, cost, working capital and CAPEX optimisation programs have started to deliver results and 2015 will be the first year of renewed positive cash generation.”