China surge lifts mine profits

Profits in the global mining sector more than doubled in 2004, according to a recent report by PricewaterhouseCoopers.

And the boom is set to continue into the foreseeable future, which is good news for the Western Australian economy.

The report, Mine: Enter the Dragon, said the major contributing factor to the profit boost was the emergence of demand from the rapidly growing Chinese economy.

“The world’s 40 largest mining companies reported a 111 per cent increase in aggregate net profits for 2004, up from $US13.2 billion in 2003 to $US27.9 billion,” the PWC report says.

“This is the result of increased demand worldwide, particularly from China, and a weaker US dollar, pushing up commodity prices.”

Investor confidence in the mining industry has continued to strengthen, with mining stocks over the past three years outperforming both the S&P 500 and the Dow Jones Industrial Average.

Other financial highlights for the companies analysed include:

• revenue increased by 39 per cent to $US184 billion;

• net profit margin of 15 per cent compared to 10 per cent in 2003;

• return on capital employed of 14 per cent compared to 7 per cent in 2003;

• net cash flow from operations increased by 88 per cent to $US41 billion;

• capital expenditure increased by 24 per cent to $US23 billion; and

• exploration expenditure increased by 31 per cent to $US1.7 billion.

Increasing commodity prices, particularly in base metals and energy commodities, are driving this outstanding performance, reflecting continued increases in demand.

Return on equity in the sector has increased from less than 7 per cent in 2002 to more than 18 per cent in 2004.

The PWC report says that, rather than being at the top of the commodity cycle, the industry may be undergoing a structural change in global demand.

“Early indications are that the outlook for 2005 remains positive and the report suggests the first mining boom of the 21st century appears ready to continue,” it says.

“Many companies are now implementing growth strategies to take advantage of the buoyant market conditions.

“The 24 per cent increase in capital expenditure, which includes the impact of a weakening US dollar, remains modest.

“This reflects caution being exercised by mining companies and a shortage of attractive investment opportunities for many commodities.

Tim Goldsmith from Pricewater-house-Coopers said Mine had, in 2004, raised the prospect of the first mining boom of the 21st century.

“The results of this year’s analysis indicate that the boom has arrived and looks set to continue,” he said.

“Australia is well placed to continue to benefit from China’s increased demand for mineral products, particularly iron ore and coal.

“However, Australian operators in particular must ensure we do not become complacent in the boom and lose focus on developing infrastructure and ongoing exploration.

“The challenge now facing all companies in the sector is how to make best use of their growing cash balances, with increased pressure for money to be returned to shareholders unless it is reinvested quickly.”