Successfully reported this slideshow.
We use your LinkedIn profile and activity data to personalize ads and to show you more relevant ads. You can change your ad preferences anytime.

Mining Sector Results Season

281 views

Published on

Analyses and highlights of media coverage of the mining sector's earnings season

Published in: Investor Relations
  • Be the first to comment

  • Be the first to like this

Mining Sector Results Season

  1. 1. Overview Whata difference 12 months makes. Onthewhole, earnings and the extent of free cash flow generation beat consensus. Whattook themarket and commentators by surprise was the level at which companies choseto return cash toshareholders in theform of higher dividends and buybacks. ManyCEO’s held outtheprospect of furtherhigher returns to shareholders in thefuture,but suggested it was too early in thecurrent upswing to go furtherthantheyhave. Returning cash to long suffering shareholders is clearly back on theagenda. Thecentral point is thatmining companies are now generating significant free cash flow for thefirst time in several years, leading many commentators to question whatthe sector will do with thiscash mountain –strengthen balance sheets,return more cash to shareholders or invest for growth either organically or through M&A. Thesuggestion by most in themedia was thatthisincrease in cash and earnings was driven largely by the increase in commodity prices witnessed over thepast 12 months. Individual self-help measures taken by specific companies to improve productivity, reduce debt and cutcosts were less noted. In essence, themedia gave more credit to themacro recovery thantheexecutives' hard work to bring their businesses back to health over thepast several years. This scepticism was also reflected in the media's comments about whether the mining companies havereally learned from past mistakes or will be tempted to spend their "mountain of cash" on big new projects and M&Athus continuing to fuela boom and bust cycle. Similarly, while it wasnoted that companies havetended torationalise their portfolios, there waslittle attempt to assess thereasons for suchportfolio management, or judge thechoices individual companies have made with regard to their strategy in todays and tomorrow’s world. Mining sector results season The last two weeks have seen the vast majority of miners, including the diversified majors and precious metals producers, report their annual or interim financial results. The majority of those results surpassed market expectations and led to considerable widespread media coverage of the sector which was positive for the first time in recent years. This note analyses the response from media and sell- side analysts and highlights the themes that emerged from the coverage and the elements to which journalists and commentators paid particular attention. BrunswickIntelligence
  2. 2. © Brunswick 2017 | 2 Companiesare cautious…. Mostof the majors tooka cautiously optimistictone in their investor presentations,somethingthatwas noted – and appreciated– by the media. Manyof the media commentatorsare concernedthiscommoditypricerally may not be sustainable.Theysuggested thatin a number of casesit hasbeen driven by geopoliticalevents – suchas Chineseindustrialpolicy,particular circumstancesin Chileand Indonesia thathavedriventhe copperprice,and a potentiallymisplacedresponseto the Trump administration- the outcomeand timing of whichare difficultto predict. And whileshareprices areup significantlyin 2016/17, theyremain below the 2011peak whichhasled to a debate in the market asto how much furtherthe rallycouldcontinue. …and shouldbe waryof repeatingpastmistakes…. There is scepticismin the UK pressabout whether the sectorwill learn from past mistakesand will againlurchto boom time and embark on big ticketM&A and /orover investment. The FT’sLEX columnratherunflatteringlyreferred to “transientglobal amnesia”. As commodity pricesrise,the incentive to cutcostshasbeen reducedand the incentiveto bring on supplyhas increased. “The longer the pricerallygoes on, the greater the pressurewill become from equityanalystsfor plansto boostgrowth over the longer term, a situationthatin the pasthasresultedin massive commitmentsof capital that hasnot delivereditspromisedreturns” said ClydeRussell,Reuters. …by focusingon shareholderreturns…. Some companiesmay havereachedan inflectionpointwhere theyare now generating significantcash asa resultof rapidde-gearing (from higherprices, costcuttingand assetsales)and they are in a better positionto return cashto shareholdersor deployit to boostgrowth by buildingand or buying new mines. But theyshouldnot relyon rising prices to boostshareholdervalueand their rhetoric should addressthis. Interestingly,there remainsa debate as to whether buy backsor dividends(or othermechanisms)are the right means to return cashto shareholders, ...andaddressinga "productioncliff" as investorslook for growth... There are somecompanies– and sub sectors- thatare seen to be facinga “productioncliff” overthe next 3-5 years due to a lack of investmentto replace reservesand resourcesduring the recent downturn. Analystsare lookingto how companies will manage a return to growth and many are recommendinginvestorsbuy thosecompanies withsolid3-5year growth profiles,a deleveragedbalance sheet,increasingfree cashflow generation and the management team to deliver. We haveseen a number of companies respond(led by the gold sector) by increasingexplorationand capex budgetsfor 2017and 2018. However there remainslittletalk by companiesaboutsignificantM&A or large greenfield investmentin the future. While there are a few mega projects alreadycommitted, thequestionremains - are new mega projects athing of the past? …whilemaintaining financialdiscipline. The return to cost inflationremains a concernto media and analystsalike, namely,localcurrencystrength, increasinginputcosts,and ageing equipment fleetswhichneed replacing. And the scepticsare watchingfor a lapse in financialdiscipline.“Higher commodityprices should notjustify reversinga new found strategyof financialrestraint.”saidAndy Critchlow, BreakingViews. MediacommentatorssuggestthatCEOs need to resistthe urge to spendtheir new foundcashpile on dealsand instead distributeit to long suffering shareholders. Themesthatemerged fromthecoverage
  3. 3. Brunswick Group Mining sector results season From a media pointof view, earnings seasonhas put the mining sector back ontheir agendas given the stellar share price rises over the past 12 months and speculationof what more could augment,or derail, the ascent. With the sectorback in the media and investor spotlight, companieswill needto think about how to bettercommunicate their pointof differentiation. Most companiesare attemptingto tell a similar story and so media are finding it more difficult to explain why they are different from the pack and someare resorting to the “rising tide” explanation rather than giving companies creditfor creatingtheir own financial health. WhatNext? Consider the following: Ensure your point of differentiation doesn't change with the cycle but remains true and is embedded within your corporate culture. Communications plans must be robust in every circumstance. ∎ Think about how you can "show" the difference between you and the rest of the sector and what will ensure it hits home. What will work for you? Site visits/themed Capital Markets Days/Media programme/Conferences/ Social Media? ∎ Think about how you could use emerging technologies to show and tell your story. ∎ Demonstrate how you have listened to the concerns of the investment community around financial discipline, growth or shareholder returns, and either address how you have responded, or if you haven’t, take a direct approach to explain why you think investors or analysts are wrong.
  4. 4. Brunswick Group Mining sector results season Brunswick Group Brunswick is an advisory firm specializingin business critical communication. We helpcompanies buildtrusted relationshipswith all theirstakeholders. Whenclients turnto us,it’s because theyknow that communicating effectively with everyone who hasa stake in thecompany is about more thanmanaging perceptions - it is essential to making business work. Ourbackground in financial communications means weunderstand howbusinesses are wired. It also means integrity is deep in our nature: diligence, openness and accuracy. Brunswick isone firm globally. Delivering anywhere, we havea reputation for high-calibre, highly experienced people who havediverse backgrounds and skills. It means whatever thetask, no matter howcomplex or where it is in the world, we can assemble theright expertise from right across thefirm. Ourpurpose isto helpthegreat value creating organizations of theworld play amore successfulrole in society. For more information CaroleCable Partner,London Tel: +44 (0) 20 7396 7458 Mob: +44(0)7974 982 458 ccable@brunswickgroup.com Carole is a Partner in our London office and is the Co Head of Brunswick’s Energy and Resources offer, specializing in the metals and mining sector DavidLitterick Director,London Tel: +44 (0) 20 7396 7444 Mob: +44 (0) 7974 982455 dlitterick@brunswickgroup.com David is a Director in our London office and a member of the Energy and Resources team AbuDhabi +97122344600 uaeoffice@brunswickgroup.com Beijing +861059608600 beijingoffice@brunswickgroup.com Brussels +3222356510 brusselsoffice@brunswickgroup.com Dallas +12142543790 dallasoffice@brunswickgroup.com Dubai +971(4)4466270 uaeoffice@brunswickgroup.com Frankfurt +496924005510 frankfurtoffice@brunswickgroup.com HongKong +85235125000 Hongkongoffice@brunswickgroup.com Johannesburg +27115027300 johannesburgoffice@brunswick.co.za London +442074045959 londonoffice@brunswickgroup.com Mumbai +912261358503 mumbaioffice@brunswickgroup.com NewYork +12123333810 newyorkoffice@brunswickgroup.com Paris +33153968383 paris@brunswickgroup.com SaoPaulo +55(11)30767620 saopaulooffice@brunswickgroup.com Shanghai+86(21)60396388 shanghaioffice@brunswickgroup.com Singapore +6564268188 singaporeoffice@brunswickgroup.com Stockholm +46841032180 stockholmoffice@brunswickgroup.com Vienna +4319076510 viennaoffice@brunswickgroup.com WashingtonDC +12023937337 washingtonoffice@brunswickgroup.com ContactyourlocalBrunswickenergyandresourcesspecialisthere:

×