mine review of global trends in the mining industry by kyliemc

VIEWS: 163 PAGES: 48

review of global trends in the
mining industry

may 2004

*connectedthinking   pwc

               Introduction                                          1

               Highlights for 2003                                   2

               Executive summary                                     3

               Aggregated industry income statement                  4

               Aggregated industry statement of financial position   5

               The industry in perspective                           6

               Financial performance                                 10

               Financial position                                    16

               Value                                                 20

               Health and safety                                     24

               Mineral reserves                                      26

               Market values vs book values                          28

               Hedging                                               30

               Exploration                                           32

               Environmental provisions                              34

               Directors                                             36

               Sustainability                                        38

               Political risk                                        40

               Companies analysed                                    42

               Glossary                                              43

               PricewaterhouseCoopers                                44


Over many years, PricewaterhouseCoopers has, often in conjunction with regional industry bodies,
conducted surveys of mining industry activity – looking at aspects such as historical financial performance,
taxation regimes, exploration and development activity, health and safety performance and many other
areas of relevance to the industry.

In 2003, PricewaterhouseCoopers launched the results of research identifying the industry-specific
indicators that mining companies believe are critical to managing the value of their businesses, and
contrasted these with the reporting priorities of investors and analysts. Our publication, Digging deeper
– managing value and reporting in the mining industry, explored areas of importance to stakeholders and
challenged companies to meet the requirements of analysts and investors in reporting results, risks and
strategies in creating value.

This publication, mine* – review of global trends in the mining industry, provides an aggregated view of
trends in the financial performance of the global mining industry in 2003, based on 30 of the largest listed
mining companies across the world. It also looks at how companies have responded to some of the
reporting challenges identified in Digging deeper.

We are confident that our findings will prompt debate across the mining industry and are pleased to provide
the forum for that debate.

Hugh Cameron                                                 Tim Goldsmith
Global Mining Leader,                                        Mining Leader – Australasia
PricewaterhouseCoopers                                       mine* project leader,

    Highlights for 2003

    • Global market capitalisation of US$ 390 billion at March 2004, almost double that of 18 months earlier

    • Revenue increased by 18% to US$ 110 billion, compared to US$ 93 billion in 2002

    • Net profit margin of 10.4%, compared to 6.3% in 2002

    • Capital expenditure increased by 21% to US$ 13.8 billion, compared to US$ 11.4 billion in 2002

    • Return on capital employed of 7.6% compared to 4.7% in 2002

    • Exploration expenditure increased by 9.1% to US$ 1.2 billion from US$ 1.1 billion

    • Improving safety record with fewer fatalities than in the prior year in most territories

                                                                     2003            2002
                                                                                                 movement %

                                                                  US$ billion     US$ billion

            Revenue                                                  110.3             93.2        ↑   18.3%

            EBITDA                                                    29.1             21.6        ↑   34.7%

            Net profit                                                11.5               5.8       ↑   94.9%

            Cash on hand                                              12.0             10.3        ↑   16.5%

            Capital expenditure                                       13.8             11.4        ↑   21.3%

            Exploration                                                 1.2              1.1       ↑    9.1%

            Key ratios

            EBITDA margin                                           26.3%            23.2%

            Net profit margin                                       10.4%             6.3%

            Effective tax rate                                      26.3%            28.7%

            Return on capital employed                                7.6%            4.7%

            Return on equity                                        10.5%             6.7%

            Debt to equity ratio                                    28.4%            30.8%

           (All amounts are for the respective financial years)

Executive summary

The global market capitalisation of the mining            that bringing too much new production on stream
industry as at March 2004 has doubled over the last       in response to such a favourable environment has
18 months and now stands at US$ 390 billion1. This is     exacerbated the start of the decline of the global
due to a number of factors, including the impact of a     cycle. This boom-and-bust cycle has led to capital
significant increase in demand from China. Hopefully      destruction and has driven investors away from
we are seeing the start of the first mining boom of the   the industry over time. The recent concentration of
21st century!                                             ownership (an outcome of the extensive industry
                                                          consolidation over the last five years) should lead
Return on equity has increased from less than 7% in       to better informed decisions on development and
2002 to over 10% in 2003, a welcome improvement.          expansion opportunities, which in turn should better
There is every indication that 2004 will be even better   place the industry to manage the supply-demand
for the industry and should generate enhanced             cycle.
returns for investors. In the long term, the challenge
for industry participants will be to ensure that          Governments are some of the most significant
acceptable returns can be achieved, even in the lower     stakeholders in the industry. Their role can be crucial
points of the commodity cycle.                            in ensuring the appropriate balance of incentives
                                                          to kick-start mining and exploration growth while
Commodity prices have increased significantly over        yielding appropriate returns for their citizens. They
the last twelve months. As most mining companies          have a responsibility to ensure the local population
have operations outside of the US, much of the            obtains sufficient benefit from the mining industry
positive impact of these price increases has been         through jobs, royalties, taxes and social infrastructure.
eroded by the weakening of the US dollar. Historically,
the exchange rates for major mineral provinces such       Governments that assist miners with favourable
as Australia, Canada and South Africa have provided       fiscal terms are far more likely to witness the growth
a natural hedge, such that local denominated              of their industry. In due course, this will lead to
commodity prices have not changed substantially.          higher returns through tax revenue. In a period of
The structural change of global demand, whereby           higher commodity prices, there is a temptation for
Asia is increasingly the key driver rather than the US,   cash-strapped governments to exploit short-term
may have implications for the long-run trend in the       revenue opportunities notwithstanding the long-term
US dollar, but so long as commodities are priced in       impediment this could cause to exploration and
US dollars, then the most important aspects of the        development. We are already seeing some examples
natural hedge should persist.                             of this.

The safety performance of the industry has improved       Digging deeper – managing value and reporting in
in recent times. However, China’s official record of      the mining industry, PwC’s 2003 research survey of
6,000 fatalities in 2003 is clearly unacceptable, and     mining company indicators and what is reported to
the level of fatalities elsewhere also requires further   investors and analysts, highlighted some significant
improvement. The industry must continue to focus on       gaps between what companies are reporting and
improving the safety of the work environment.             what stakeholders perceive to be important. Our
                                                          analysis in this publication shows there is still some
The positive economic environment for the mining          scope for companies to increase transparency, and
industry has assisted an upswing in exploration (albeit   unlock potential shareholder value, in important areas
from a low starting point) and capital expenditure        like mineral reserves, hedging and environmental
has also increased. However, the industry needs           obligations.
to proceed with caution. History has shown us

    Bloomberg, March 2004
    Aggregated industry income statement

                                                                             2003             2002

                                                                         US$ million       US$ million

        Revenue                                                            110,330            93,169

        Operating expenses (excluding amortisation and depreciation)         81,279           71,573

        EBITDA                                                               29,051           21,596

        Amortisation and depreciation                                        10,283            9,055

        Profit before interest and tax                                       18,768           12,541

        Interest                                                              3,226            4,372

        Profit before tax                                                    15,542            8,169

        Income tax                                                            4,087            2,342

        Net profit                                                           11,455            5,827

       Explanatory notes for aggregated financial information
       We have analysed 30 listed mining companies, representing 80% of the global industry by
       market capitalisation. Our analysis includes major companies in Australia, Canada, Latin
       America, South Africa, the United Kingdom and the United States. Due to lack of availability of
       current information, Russia and China are not represented.

       The results aggregated in this report have been sourced from publicly available information,
       primarily annual reports and financial reports available to shareholders. Companies have
       different year ends and report under different accounting regimes. Information has been
       aggregated for the financial years of individual companies and no adjustments have been
       made to take into account different reporting requirements and year ends. As such, the
       financial information shown for 2003 covers reporting periods from 1 July 2002 to 31
       December 2003, with each company’s results included for the 12-month financial reporting
       period that falls into this timeframe.

       All figures in this publication are reported in US dollars. The results of companies that report
       in currencies other than the US dollar have been translated at the average US dollar exchange
       rate for the financial year, with balance sheet items translated at the closing US dollar
       exchange rate.

       Some diversified companies undertake part of their activities outside of the mining industry,
       such as the petroleum business of BHP Billiton. No attempt has been made to exclude such
       non-mining activities from the aggregated financial information (except where indicated).

Aggregated industry statement of financial
                                        2003          2002
                                     US$ million   US$ million

     Current assets

     Cash and cash equivalents          11,961        10,294

     Inventory                          14,291        11,489

     Other current assets               19,837        16,536

     Current assets                     46,089        38,319

     Non-current assets

     Property plant and equipment     139,773       116,323

     Investments                        16,924        16,345

     Deferred taxation                   2,140         1,934

     Goodwill                            4,620         3,589

     Other non-current assets           13,719        11,390

     Non-current assets               177,176       149,581

     Total assets                     223,265       187,900

     Current liabilities                34,172        31,615

     Non-current liabilities

     Long-term borrowings               43,288        38,711

     Deferred taxation                  13,367        10,686

     Environmental provisions            8,380         6,711

     Other non-current liabilities      14,797        13,238

     Non-current liabilities            79,832        69,346

     Shareholders’ equity             109,261         86,939

     Total equity and liabilities     223,265       187,900

    The industry in perspective

Sources of capital

The global mining industry had a market capitalisation of approximately
US$ 390 billion as at March 2004, with its capital sourced predominantly from five exchanges:

   •   Australia
   •   Canada
   •   South Africa
   •   United Kingdom
   •   United States

This analysis reflects the fact that the three largest mining companies in the world – BHP Billiton, Rio Tinto
and Anglo American, are all listed on the London Stock Exchange. The market capitalisation by primary
exchange is geographically split as shown below.

                                     Market capitalisation by geography

                                                                                                                  The industry in perspective
                                                  Source: Bloomberg, March 2004

                                                                                 Industry structure

Industry structure

As shown on the right, mining companies with
diversified operations account for 58% of the global
industry, whilst the gold sector accounts for 19%. The
diversified operations include significant operations in
base metals, coal, iron ore, diamonds and uranium.

                                                                                  Source: Bloomberg, March 2004

                              How has the industry performed over the last ten years?

                              Until recently, the sustained depression in metal prices restricted growth – as shown in the performance of
                              the HSBC Global Mining Index below. However, the rally in the gold price over the past two years, followed
                              by other base metal prices, has re-invigorated the industry. Much of the increase in industry capitalisation
                              has occurred over the last eighteen months.

                                                                         Global Mining Index
The industry in perspective

                                                                                                                           Source: Datastream
                                                                                                                             Index May 94 = 1

                              Industry consolidation has been significant

                              The past 15 years, and in particular, the last five years, have been a period of significant consolidation in the
                              industry. This is demonstrated by comparing the market capitalisation of the ten largest mining companies
                              in 1990 with the ten largest mining companies in 2004. The top three companies have remained intact, but
                              their asset holdings are very different and their market capitalisations have increased substantially. Also, the
                              only other companies that have retained their position in the Top 10 are Newmont and Amplats. A number
                              of the key players in 1990, such as De Beers, Gencor, Driefontein and Reynolds, have disappeared as
                              separate listed mining entities in their own right.

                              In the past couple of years alone, we have seen some significant consolidations, including Newmont’s
                              acquisition of Normandy Mining/Franco Nevada, Norilsk’s acquisition of Stillwater, and Xstrata’s acquisition
                              of MIM.

  1990 industry structure (top 10 market capitalisation of US$ 55 billion)

                             Source: Xstrata presentation, JP Morgan conference, Sydney 2003

                                                                                               The industry in perspective
Current industry structure (top 10 market capitalisation of US$ 250 billion)

                                                             Source: Bloomberg, March 2004

     Financial performance

The beginning of a commodities boom?

Mining industry revenue increased by 18% from US$ 93 billion in 2002 to US$ 110 billion in 2003. Over half
the increase in total revenues is attributable to five of the 30 companies analysed. These companies are
listed below:

                                      Note: BHP Billiton’s 2002 revenue excludes their now divested steel business

The increase in revenue is principally the result of commodity price and production increases. Acquisitions

                                                                                                                     Financial performance
in the last two financial years by the companies analysed have also contributed to revenue growth.

Production increases have been driven by improved demand, particularly out of China. The rate of
economic growth in China, coupled with the vast gap between its current level of development and that of
the Western world, indicates that future demand for commodities in this region remains positive.

For the 30 months from 1 July 2001 to 31 December 2003, traded metal prices have shown a consistent
upward trend. Whilst the outlook for each metal has different drivers and therefore expectations, the
consensus view remains bullish.

                                                                                   Index July 01 = 1

                        The bottom line

                                                                                            2003                      2002

                         Net profit margin                                                  10.4%                    6.3%

                         EBITDA margin                                                      26.3%                    23.2%

                         Return on equity                                                   10.5%                    6.8%

                         Return on capital employed                                         7.6%                     4.7%

                        In absolute terms, the aggregate net profit of the mining companies analysed has almost doubled in 2003.
                        Other profit measures, as summarised above, further illustrate the industry improvement experienced in
                        2003. The continued recovery in metal prices should lead to even better returns in 2004.

                        This is great news for an industry that has generated poor returns for many years. Even for 2003, the returns
                        are not spectacular. However, it is encouraging to see an improvement and the industry has an opportunity
                        to move beyond this in 2004 and beyond.

                        Only when the industry can consistently deliver acceptable returns can we expect to see greater weighting
                        of mining investments in global investors’ portfolios.

                        A weaker US dollar has had an impact
Financial performance

                        Most of the 30 companies analysed have assets outside their country of domicile. Relatively few have
                        significant operations in the US. This means that most of the companies analysed are sensitive to
                        fluctuations in the value of the US dollar, with costs at operations outside of the US frequently rising in US
                        dollar terms, to offset some of the positive impacts of an increase in dollar-based metal prices.

                        Those most significantly impacted have been the companies whose costs are denominated in Australian
                        and Canadian dollars and to an even greater extent, the South African Rand.

                                                                                                       Index July 01 = 1

Companies with operations in the natural hedge

Australia, Canada and South Africa have historically benefited from a ‘natural hedge’. The mining industry
is so important to these countries that when the world economy was strong, led by US demand and
commodity prices rose, so too did the AUD/CAD/ZAR exchange rates. As a result, commodity prices in
local currencies were less volatile than they would otherwise have been.

 Natural hedge – an example
 South African company sells an ounce of gold at US$ 350 per ounce when the US dollar exchange
 rate is ZAR 9.0: US$ 1. Subsequently the gold price increases to US$ 400 per ounce and the Rand
 strengthens to ZAR 7.9: US$ 1. Total revenues under both scenarios are as follows:
 Description                                                                            Movement
 US dollar                            350                        400                       -14%
 Rate of exchange                     9.0                        7.9
 Rand equivalant                     3,150                      3,150                       0%

Questions have been raised as to whether this natural hedge will continue in the new global economic
environment. However, for the natural hedge to completely break down, movements in the value of the US
dollar would have to be positively correlated with the value of currencies of commodity-producing countries,
rather than negatively correlated as tends to be the case at present. It may well be that changes in the
structure of the global economy, with increasing demand being driven from Asia, will have implications for
the long-run trend in real US-dollar prices but so long as commodities are priced in US dollars, then the
most important aspects of the natural hedge should persist.

                                                                                                               Financial performance
Who is making the best margin?

Companies that experienced the highest profit margins in 2003 are outlined below. Implats, a low cost
platinum producer based in South Africa, tops the list at 28%. With its primary operations in South Africa,
however, the impact of the weaker US dollar can be seen in the erosion of the company’s profit margin year-

Once translated to local currency, the increase in the commodity price has been negated by the decrease in
the US dollar.

                        Cash costs

                        Digging deeper identified that the disclosure of cash costs is important. Of the companies analysed,
                        however, only half disclosed cash costs in their annual report. With the Gold Institute setting a global
                        standard for the calculation of cash costs, gold companies led the pack in terms of reporting cash costs.

                        This measure clearly has merit in terms of assessing whether positive cash returns can be made from
                        operations, but it does not reflect the value of sunk costs. There is evidence that some mining companies
                        focus too heavily on cash costs, which undermines confidence in the industry amongst investors.

                        Return on total capital employed should receive greater emphasis, since it provides an indication of how
                        effectively a company has invested in new capital.

                        The government take

                        Governments have benefited from the improved profitability of the industry. Corporate income taxes have
                        increased by US$ 1.7 billion to US$ 4.1 billion in 2003. Notwithstanding this, the effective tax rate for the
                        industry decreased by 3% from 29% in 2002 to 26% in 2003.

                        It is dangerous to draw conclusions on the effective tax rates of the industry. Further analysis of PwC’s
                        Effective tax rates in the mining industry provides additional information on income tax rates in the industry
                        and is available from your local PwC mining industry professional.

                        Mining companies have access to a number of tax incentives across many jurisdictions. Typically, incentives
                        include tax holidays and notional tax deductions such as ‘percentage depletion’ in the United States or the
Financial performance

                        ‘double deductions’ for exploration expenditure in Argentina. The global mining effective tax rate of 26%
                        compares favourably with many other industries. For example, a survey of the effective tax rates of 16
                        global technology and media companies showed an average tax rate of over 40% for that industry group.

                        However, mining companies are subject to many other ‘hidden’ taxes that are less transparent and not
                        reflected in their effective tax rate. These ‘hidden’ taxes include, for example:

                           •   Production taxes;
                           •   Royalty severance taxes;
                           •   Employment taxes;
                           •   Customs duties;
                           •   Value-added and sales taxes; and
                           •   Property taxes.

                        Royalties for the extraction of non-renewable resources are promulgated across the world by governments.
                        Some jurisdictions, such as Australia, have implemented royalty taxes based on a gross sales value of
                        commodities rather than profit. South Africa has recently proposed such a regime and the United States has
                        debated a royalty tax on hard-rock miners. Governments prefer gross sales-based royalty taxes because
                        they are simple and stable.

                        Not surprisingly, the industry considers such ad valorem royalty taxes to be disadvantageous, since they
                        ignore the profitability of companies and are payable even in loss-making situations. As illustrated by the
                        US coal mining sector, a gross sales-based royalty severance tax can impede the early recovery of the
                        capital investment required in mining, increasing the risk and therefore the cost of capital of mining projects.

                        The majority of these additional taxes are ‘hidden’ in operating expenses and therefore the total contribution
                        that the mining sector makes to governments could not be quantified as part of this report. However,
                        the Minerals Council of Australia in conjunction with PwC in their 2002/2003 Minerals Industry Survey,
                        calculated that these additional taxes amounted to 126% of the direct tax expense in Australia.

The protracted debate between the mining industry and governments over tax is as certain to continue as
the payment of tax itself. While governments may argue that the mining industry is receiving the lion’s share
of tax breaks compared to other industries, this is rarely the case when direct taxes are combined with the
‘hidden’ tax burden.

The tax regimes of individual countries are particularly important in the determination of where to explore or
where to develop. Governments that assist miners with favourable fiscal terms are far more likely to witness
growth in their mining industry. In due course this leads to higher tax revenue. An interesting challenge to
governments arises when a mining boom occurs. Cash-strapped governments may see short-term revenue
opportunities and may take decisions that inadvertently impede long-term growth. Already, governments in
New South Wales, Australia and Chile are considering new royalty regimes, which could have a damaging
impact on future capital investment in these regions.

                                                                                                                 Financial performance

     Financial position

Shareholders’ equity

The companies analysed in our study have increased their aggregate shareholders’ equity by 25% from
2002 to 2003. This increase is a result of a number of factors, including earnings reinvested in development
projects, mergers and new equity issues.

Some of the notable equity raisings during 2003 were:

   • Xstrata – takeover of MIM
   • Newmont – equity offering
   • Kinross – merger with Echo Bay Mines and TVX Gold


                                                    2003                                 2002
 Debt to equity ratio                               28.4%                               30.8%
 Current ratio                                       1.35                                 1.21
 Quick ratio                                         0.89                                 0.80

In general, the liquidity of the industry improved in 2003. Increases in shareholders’ equity led to a reduction
in the debt to equity ratio, despite the fact that the industry increased long-term borrowings by US$ 4.5
billion in 2003.

Capital expenditure

The aggregate capital expenditure of the companies analysed totalled US$ 13.7 billion, up 21% when
compared to 2002.

The five companies with the largest capital spend in 2003, accounted for 60% of aggregate expenditure

                                                                                                                   Financial position
across the companies analysed, as shown below right.

In comparison, these same five companies
accounted for 64% of capital spend in

Increasing capital investment across
the industry has partly been in response
to higher commodity prices and better
access to market capital. The benefits of
this investment will only be realised in the
medium to long term due to the long-term
lead times inherent in the industry. Care
must be taken to ensure that increases in
production do not outpace the expansion
of demand. Otherwise the price increases
we have seen in recent times will quickly
reverse and, as we have seen so many
times in the past, the new investments will
deliver poor returns.

                     Total Shareholder Return (TSR)

                     Total Shareholder Return measures the total returns to a shareholder in any given period including
                     dividends, against the opening share price. It provides a measure of value creation.

                     Looking at the one-year TSR to March 2004, the five top-performing companies all have a significant base
                     metals focus, particularly copper. The improvement in copper prices has clearly had an impact.

                                                           1-year TSR top performers
Financial position

                                                                                       Source: Bloomberg, March 2004
                                                                               Note: 3-year TSR for Xstrata not available

                     In contrast, the three-year TSR to March 2004 identifies companies with a gold focus as the best
                     performers, reflecting the recovery of gold price over that period. The one exception is Companhia Vale do
                     Rio Doce (CVRD). Freeport successfully straddled both the 1-year and 3-year TSR top performers – we note
                     that it produces both copper and gold.

                                                           3-year TSR top performers

                                                                                        Source: Bloomberg, March 2004



When investors are valuing companies, they routinely look at:

   • market indicators: how much market value has improved (TSR); how volatile the share price is; and
     how liquid the market is;
   • internal financial statistics: profit margins and revenue growth;
   • statistics familiar to valuation analysts: intangible value; PE ratios; and the Altman z-score, an
     aggregate measure of financial health.

PricewaterhouseCoopers has developed the ValueWeb to provide a pictorial representation of these
measures. For each measure, the population is standardised and a company’s quartile positioning is
determined. The ValueWeb summarises, for each company, these quartile positions. The company is
positioned close to the edge of the web for measures in which it scores more highly than its peers. If
positioned close to the centre, it means that there is room for improvement compared to the rest of the

From its ValueWeb, a company can therefore quickly identify which indicators need most attention in order
to build and sustain overall value.

We have collated these indicators for all 30 companies analysed and rated them against each other. Based
on this analysis, the Top 5 industry performers for 2003 are as follows:

              PwC ValueWeb Top 5

                 1                                     Newmont

                 2                                   Placer Dome

                 3                                Freeport-McMoRan

                 4                                     Newcrest

                 5                                      CVRD


        Newmont’s first place ranking reflects its position as the largest gold mining company in the world, with
        significant reserves and a record 2003 performance. Newmont has benefited from recent increases in
        the gold price with its un-hedged philosophy, illustrated by having substantially eliminated its acquired
        Australian gold hedge books. It also strengthened its balance sheet by disposing of non-core assets and
        with a new equity offering in November 2003 generating over US$ 1 billion.


        At number 2, Placer Dome experienced significant revenue growth in 2003, which, in part, reflects increases
        in production through its acquisition of Aurion Gold in Australia in 2002 and the expansion of its South Deep
        operations in South Africa. In addition, revenues benefited from an increase in realised gold prices.

                                                      Placer Dome

     Health and safety

Health and safety

The global mining industry safety record has come a long way over the last 10 years, especially in South Africa,
for example. The number of fatalities across major mining regions has been steadily declining over the past
decade, but still remains too high. The target must be zero fatalities.

                                                Source: National government an industry bodies statistics

The mining industry’s response to the health and safety challenge can be seen in the decline in fatality
statistics shown above. South Africa, where mines are deep and operations labour intensive, still has a much
higher fatality rate than in Australia and the US but has in the last 10 years halved the total number of deaths.
China has not been included in our analysis, but continues to remain a blot on the mining industry’s safety
record. Over 6,000 mine workers lost their lives in China in 2003, an average of 18 mine workers per day. The
fatality rate per million tons of coal produced in China during the first half of 2003 was 40,000 times higher than
in the US or Australia.

Digging deeper, published in 2003, reported that company executives rated health and safety performance
as very important in delivering value. In stark contrast, investors and analysts reported that they placed little
importance on them as value drivers. This may account for why one third of companies we analysed did not

                                                                                                                        Health and safety
report safety statistics in their annual reports.

With respect to international accident statistics there is limited data available for direct comparisons. There is
also a delay in the reporting of aggregated national/state-wide statistics. Based on Fatality Injury Frequency
Rates (FIFR – the number of fatal injuries per one million man hours worked), South Africa’s fatality record in
2002 is disproportionately high:

                                 Australia                                0.03
                                 Canada                                   0.21
                                 Chile                                    0.12
                                 Mexico                                   0.12
                                 South Africa                             0.34
                                 US                                       0.13

The mining FIFR for the US of 0.13 compares to a US national FIFR across all industries of approximately 0.08
per million man hours as reported by the US Department of Labor (2000).

The comparison of international lost time injury data is virtually impossible because of significant differences in
the definition of injuries and variations in the levels of reporting. However, the industry is working in a proactive
way to reporting broader outcome measures, such as Total Recordable Injuries.

In summary, whilst the industry has come a long way on safety, it still has a significant way to go and should
continue rigorously pursuing improvements.

     Mineral reserves

Mineral reserves

Reserves and resources are the life blood of the mining industry. As a result, they also have a large role in
determining equity market values as well as accounting profits. Indeed, much of the value of the mining
industry is derived from reserves and resources that are not recorded on companies’ balance sheets.

Most of the companies analysed reported details of their proven and probable reserves. With the exception
of companies listed in the US, where disclosure is restricted by the SEC, most also disclosed details of their
mineral resources.

The SEC’s stance of prohibiting resource disclosure continues to be questioned by the industry. Resources
have a very important role in assessing the long-term health of an organisation and for some long-life mines
an amount for a substantial portion of the mines economic value. Companies listed solely in the US are
therefore working at a serious disadvantage to their global peers in communicating their achievements and

There is no global standard governing the classification and reporting of mineral reserves and resources.
The 30 companies analysed report under the following codes:

• Canada – Canadian Institute of Mining “Standards on Mineral Resources and Mineral Reserves,
  Definitions and Guidelines” and National Instrument 43-101 “Standards of Disclosure for Mineral
• United States – SEC Industry Guide 7
• South Africa – South African Code for reporting of Mineral Resources and Mineral Reserves (SAMREC)
• Australia – The Joint Ore Reserves Committee Code (JORC)

Companies have provided a relatively consistent level of quantitative disclosures with respect to estimated
ore tonnages and contained metals and minerals. However, such information is inherently dependent upon
a number of key assumptions, including:

   • commodity prices and exchange rates;
   • recovery yields; and

                                                                                                                        Mineral reserves
   • cut-off grades.

Any one of these assumptions can significantly impact the reserve numbers reported. In practice, however,
the assumptions used by companies are rarely disclosed. This severely restricts investors’ abilities to
interpret the data properly and conduct their own sensitivity analyses and valuations.

This was a key finding from Digging deeper, where one third of investors surveyed did not feel companies
were meeting their information requirements in this area.

Most companies report details of their current and future exploration activities, either through further
expansion and development of brown-field sites or in pure grassroots or green-field exploration. However,
the quality and specificity of such disclosures varied amongst the companies analysed.

The mining industry’s future profitability and value creation is intrinsically linked to its ability to both identify
and recover resources economically. A great opportunity exists for companies to capture more shareholder
value by increasing transparency in this area.

     Market value vs book value

Market value vs book value

Intangibles make up an increasingly large part of the market value of many industries. In some industries,
this value is derived from intangible assets such as brand names or intellectual property. In the mining
industry, the main sources of value include:

   •   Mining licences
   •   Property rights
   •   Mineral reserves and resources
   •   Exploration potential

In many cases, these assets are recorded in a mining company’s accounts at a fairly nominal value. But
with significant industry consolidation in recent years, a greater proportion of the value attributable to these
assets has been recorded on the industry balance sheet.

Typically, the excess of acquisition cost over the net assets acquired is allocated to identifiable assets
such as mineral properties and exploration projects. Only after all such assets have been valued is the
remainder recognised as goodwill. So whilst recognising goodwill remains technically possible, most mining
acquisitions have not led to significant amounts of goodwill. As a result there is only a limited amount of
goodwill on the aggregated balance sheet, with US$ 6.0 billion in 2003 and US$ 4.7 billion in 2002.

A good indicator of the unrecognised value attributable to reserves and resources and exploration potential
can be found by comparing the market capitalisation of a company to its book value.

The graph below plots market value as a multiple of book value for the 30 companies analysed. Companies
with a high multiple have delivered significant value to investors, which is not reflected in the historic costs
of their net assets. Companies with a multiple of less than one have a market value that is actually lower
than the carrying value of their net assets. Amongst the 30 large listed companies analysed, three fall into

                                                                                                                   Market value vs book value
this category.



The use of derivative instruments by the global mining industry is a relatively recent phenomenon. The
complexity of these instruments can lead to some unforeseen outcomes, for example where cash calls are
made to cover unrealised losses.

High-profile corporate failures across many industries have shown that some companies fail to establish
proper discipline and control over the use of derivatives. There have also been deficiencies in the way of
which companies communicate their hedge strategies to shareholders.

Typically, mining companies use derivative instruments to hedge commodity, currency and interest rate
risk. The derivative instruments used to do this can be complex and difficult for investors (and even the
companies themselves) to understand. To ensure that investors properly understand the value of the hedge
strategies and positions, companies need to clarify:

   • The nature of the risks they are seeking to mitigate
   • The strategy put in place to mitigate those risks
   • Whether the strategy is effective, or whether unexpected losses can occur.

Further details can be found in Hedging in the mining industry, a 2003 PricewaterhouseCoopers

Industry analysis

The majority of the mining companies analysed continue to use derivatives of interest rates or currency
if not for production to some extent. However, a number of companies have indicated that they intend to
reduce their commodity hedge books in future years (notably Barrick and AngloGold).

Disclosure of the risks being hedged and the strategies adopted to mitigate those risks are not consistent
across the industry. Companies often included generic descriptions of risks with limited information about
hedging strategies applied to address them. Only a handful of companies we have analysed described
their long-term hedging objectives and provided details of internal policies on the authorisation of hedging
activities and hedging limits.

A good example of disclosure of hedging strategy and internal controls is provided by Inco in their annual
report. They provide details of their risk management policies, the internal limits they apply and the level of
review by internal committees.

Most companies apply hedge accounting to some or all of their derivative instruments. However, the
application of divergent accounting practices across different reporting jurisdictions makes it very difficult
to quantify the impact of derivatives on the industry’s result for 2003.

Over and above the impact of hedging on current year results is its potential impact on future results. All
of the companies analysed disclosed details of the fair value of their hedge books, but twelve companies
elected to do this in narrative form only. Only those companies that provided tabular summaries of the fair
value of their open hedge books made it clear to investors what impact the hedge book could have on
future annual results.

Even where this information is clearly disclosed, however, the values do not reflect subsequent changes in
commodity prices, interest rates or exchange rates. A useful disclosure that companies do not provide, but
perhaps should consider, would be the sensitivity of the company’s hedge book to changes in prices and

Digging deeper highlighted that the investment community does not receive all the information it would like
in relation to mining companies’ hedging strategies. Companies have an opportunity to respond to these



   We are starting to see signs of a recovery in global exploration spending. However, it is starting from a low
   base and it is widely acknowledged that the industry has seen a period of significant decline in the level of
   exploration expenditure over recent years.

   The reasons for this decline have been hotly debated amongst industry participants. Larger mining companies
   have not seen exploration expenditure add value to their share price and have often reduced their spend. Also,
   smaller companies have not always been able to raise the funding to explore. To top it off, issues surrounding
   land access and uncertainty over whether successful exploration can be converted into production have also
   deterred exploration spending in some countries.

   The 30 companies analysed reported an 11% increase in exploration spend from US$ 1.09 billion in 2002 to
   US$ 1.20 billion for 2003. In addition, the larger companies have historically encouraged juniors to undertake
   exploration, with a view to acquiring successful ventures. Acquisition of these entities is not captured as part
   of exploration spend. A better comparison of industry trends can be found in the global study of budgeted
   exploration spend undertaken by Metals Economics Group (MEG) of Canada. MEG reported that budgeted
   exploration spend had increased from US $ 1.73 billion in 2002 to US$ 2.19 billion in 2003 although a portion
   of the increase in exploration spend is attributable to the greater number of companies included in the survey.

                    2003                                                           2002
(917 companies’ budgets totalling US$ 2.9 billion)            (724 companies’ budgets totalling US$ 1.73 billion)

Source: Metals Economics Group

   Whilst we hear much about the exploration in Russia and China, exploration spending in traditional mining
   regions still accounts for 85% of total exploration spend. Latin America remained the top destination in 2003,
   although second-place Canada’s surge has closed the gap. To a large extent, Canada’s significant increase in
   exploration spending is a result of the federal and provincial governments’ ‘sweetening’ of their flow-though
   shares arrangements, coupled with a flurry of activity in the diamonds sector. In contrast, Australia’s declining
   exploration spend over the past two and a half years has prompted the Australian government to commission
   four reports on this issue. The latest of these, the Prosser Report, recommends that flow-through shares,
   similar to those in Canada, should be investigated as a vehicle for stimulating exploration growth. We look
   forward to the Australian government’s response to the commission’s recommendations.

   As always, if investment in exploration is not a priority today, there will be no industry growth in the future.

     Flow-through investments – a Canadian perspective

     To encourage investment in speculative, resource-based ventures, the federal and provincial governments
     of Canada have created flow-through incentives, which allow exploration companies to transfer to their
     investors their rights to tax deductions for exploration. The reduction of paid income tax effectively lowers
     the net cost of the investment in such companies.

     Environmental provisions

Environmental provisions

Mining operations exploit finite mineral resources, so by definition each operation will eventually have to
close. The cost of closing down operations and cleaning up environmental damage was viewed as the cost
of complying with environmental regulations. Increasingly however, the industry is accepting that these
costs make a positive contribution to the environments in which they operate and are a necessary part of
sustainable mining.

Our analysis shows an aggregated accumulated liability for rehabilitation and restoration costs of US$
8.5 billion (2002 US$ 6.9 billion). The 17% increase from the prior year is partly a function of translation
differences from a weaker US dollar, but is also consistent with an ever increasing focus on environmental
rehabilitation by the mining industry.

Unfortunately, due to divergent accounting practices for restoration accounting, the accumulated liability
does not necessarily illustrate the full costs of environmental clean-up for the companies analysed.
Currently, mining companies are adopting one of three methods in relation to rehabilitation and restoration

   • expensing as incurred;
   • accrual of the estimated future rehabilitation costs over the life of the mine on an incremental basis;
   • provision for the present value of future costs expected to be incurred in rehabilitating past damage
     (the method applied under IFRS, US GAAP and UK GAAP).

A few industry participants, particularly Latin American companies, are not recognising any liabilities in
relation to environmental rehabilitation and restoration. In addition, whilst some companies recognise both
constructive environmental obligations, some only account for legal obligations.

Of the companies analysed, 7% did not disclose their accounting policies with respect to rehabilitation
costs. These companies were domiciled in Latin America. 24% of companies adopted the incremental

                                                                                                                      Environmental provisions
method and 69% adopted the discounted present value approach. In Canada, the discounted present value
basis becomes compulsory for all financial years commencing after 1 January 2004. However, nearly half of
the Canadian companies analysed have elected to early adopt the method in 2003. Australia will also move
to the discounted present value method in 2005 under its IFRS convergence programme.

Inevitably there is some uncertainty about the reliability of cost estimates for rehabilitation costs that will not
be incurred for many years. These estimates are dependent on a number of assumptions and are expected
to change over time because of factors such as:

   •   changes in life of mine plans;
   •   improvements in technology;
   •   changes in legislation; and
   •   changes in long-term inflation and discount rates.

Surprisingly, assumptions are rarely disclosed amongst the companies surveyed and this lack of
transparency limits the usefulness of the information disclosed.

This is supported by the research conducted for Digging deeper, which identified an information gap of 55%
between the value placed on information surrounding environmental liabilities to investors and the adequacy
of the information being provided to them.

Also, whilst some companies now use third party consultants to examine their cost estimates, this is by no
means the norm.

An opportunity exists for companies to meet this reporting challenge by increasing the quality and relevance
of the information they provide to investors about environmental obligations.


Corporate governance

The theme of improved corporate governance runs through many of the annual reports analysed, both
through the publication of expanded corporate governance statements and as a component of the Chairman
or President’s report.

Companies are keen to demonstrate that they are adopting corporate governance best practices, and are
providing more background information on directors as well as details of the composition and meetings of
the Board and its sub-committees.

The contribution from non-executive directors is also being bolstered. They now account for the majority of
the Board in most of the companies analysed with an average ratio of 3:1 between non-executive directors
and executive directors. A number of companies have also taken steps to strengthen the independence of
non-executive directors by ensuring they have no direct involvement in the day-to-day operations of the
company or stock options.

The audit committees of the companies analysed are all made up exclusively of non-executive directors. This
level of independence has become established as best practice around the world.

CEO remuneration

South American companies do not generally disclose the remuneration of their executives. CEO
remuneration of the other mining companies analysed ranged from US$ 0.5 million to US$ 8.5 million.
Excluding severance bonuses, it totalled US$ 49 million in 2003, an increase of US$ 16 million or 48% over

We have analysed in the graph to the
right CEO remuneration relative to the
size of the company as measured by
market capitalisation. The majority of
CEOs are remunerated between US$
100 000 to US$ 400 000 per US$ 1

billion market capitalisation.

The chart to the right compares the
annual growth in CEO remuneration
to the company’s Total Shareholder
Return (TSR) in 2003. This shows
that CEOs’ remuneration increased
by less than the TSR for 65% of the
companies analysed, and for 18% of
the companies, the CEOs’ remuneration
increased by more than double the TSR.



Corporate sustainability requires open and meaningful reporting of the ‘triple bottom line’, comprising
economic activity, environmental activity and social concerns. The benefits to local stakeholders from
sustainable mining are clear. The debate continues as to whether investors also benefit. With the growth in
social funds and social indices, many now believe that a company’s share price will suffer if it focuses too
heavily on its financial results – to the exclusion of social and environmental issues. There is also a clear
risk that a poor social/environmental performance could create unrest and, in the longer term, threaten a
company’s ability to operate.

Twenty of the thirty companies analysed prepared separate sustainability reports for 2003. The most notable
exceptions were companies located in North and South America, although most of these companies all
provided some information about their social and environmental performance within the Annual Report.
Some companies include a third party opinion within their sustainability reports to provide assurance that
the data has been verified. However, this is still very much the exception rather than the norm. Also, there
is no internationally recognised standard for reporting on such data, and in some cases it is difficult for a
reader to understand how much assurance is actually being given.


     Political risk

           Political risk

           In an industry where the redeployment of assets is not practicable and investment is long-term in nature, the
           impact of political risk can be enormous.

           The Fraser Institute, an independent Canadian research organisation, conducts an annual survey of mining
           companies to assess how public policy factors affect exploration investment. They prepare a Policy Potential
           Index, which is a report card on the attractiveness of governments’ mining policies. The Index takes into
           account factors such as existing regulations, environmental regulations, taxation, native title land claims,
           infrastructure, socioeconomic agreements, political stability and labour issues.

                                                                                     Against this background, it is not
Excerpt from the Policy Potential Index
                                                                                     surprising that the level of new
                                                                                     mining investment in countries
                                                                                     such as Indonesia has declined

                                                                                     The laws and policies on land rights
                                                                                     and tenure vary from country to
                                                                                     country. However, there has been a
                                                                                     clear trend towards increasing the
                                                                                     rights of indigenous peoples.

                                                                                     In Australia, the Native Title Act was
                                                                                     introduced following the landmark
                                                                                     Mabo court judgement in 1992. In
                                                                                     South Africa, the government has
                                                                                     introduced the South African Mining
                                                                                     Charter. It lays down certain social
                                                                                     and sustainable development criteria.
                                                                                     In addition, it requires each mining
                                                                                     company to ensure 15% Black

                                                                                                                               Political risk
                                                                                     Economic Empowerment (BEE)
                                                                                     ownership of their assets within five
                                                                                     years, and 26% BEE ownership
                                                                                     within 10 years.

                                                                                     Digging deeper identified political
                                                                                     risk as one of the main indicators
                                                                                     for which investors are dissatisfied
                                                                                     with the information disclosed by
                                                                                     mining companies. In 2003, less than
                                                                                     half of those companies we have
                                                                                     analysed referred to the impact of
                                                                                     political risk in their annual reports.
                                                                                     Of these, most only made a brief
                                                                                     mention in either the Chairman’s
                                                                                     report or Management’s Discussion
                                                                                     and Analysis – with no assessment
                                                                                     of how management are addressing
                                                                                     the risks identified. South African
                                                                                     companies generally disclose the
                                                                                     most information on political risk,
                                                                                     with Harmony Gold’s annual report
Source: Fraser Institute, 2003                                                       standing out as a good example.

     Companies analysed

                                 Company1                              Country                      Year end
         Anglo American plc                                         United Kingdom                 31 Dec 03
         AngloGold Limited                                            South Africa                 31 Dec 03
         Anglo American Platinum Corporation                          South Africa                 31 Dec 03
         Antofogasta plc                                            United Kingdom                 31 Dec 03
         Barrick Gold Corporation                                       Canada                     31 Dec 03
         BHP Billiton Group  2
                                                                       Australia                    30 Jun 03
         Cameco Corporation                                             Canada                     31 Dec 03
         Cia de Minas Buenventura Inc                                    Peru                      31 Dec 03
         Companhia Vale do Rio Doce                                      Brazil                    31 Dec 03
         Consol Energy Corp                                          United States                 31 Dec 03
         Falconbridge                                                   Canada                     31 Dec 03
         Freeport-McMoRan Copper & Gold Inc.                         United States                 31 Dec 03
         Glamis Gold Limited                                            Canada                     31 Dec 03
         Gold Fields Limited                                          South Africa                  30 Jun 03
         Grupo México, S.A. de C.V.                                     Mexico                     31 Dec 03
         Harmony Gold Mining Company Limited                          South Africa                  31 Jun 03
         Impala Platinum Holdings Limited                             South Africa                 31 Dec 03
         Inco Limited                                                   Canada                     31 Dec 03
         Kinross Gold Corporation                                       Canada                     31 Dec 03
         Lonmin Plc                                                 United Kingdom                 30 Sep 03
         Newcrest Mining Limited                                       Australia                    30 Jun 03
         Newmont Mining Corporation                                  United States                 31 Dec 03
         Noranda Inc.                                                   Canada                     31 Dec 03
         Peabody Energy Corporation                                  United States                 31 Dec 03
         Phelps Dodge Corporation                                    United States                 31 Dec 03
         Placer Dome Inc.                                               Canada                     31 Dec 03
         Rio Tinto Group2                                           United Kingdom                 31 Dec 03
         Teck Cominco Limited                                           Canada                     31 Dec 03
         WMC Resources Limited                                         Australia                   31 Dec 03
         Xstrata plc                                                United Kingdom                 31 Dec 03

       State-owned mining operations have been excluded from our analysis. We have also excluded companies in the
       metals refining and processing industry.
       Dual-listed entity


Current ratio                Current assets

                             Current liabilities

Debt to equity ratio         Borrowings

                             Borrowings plus shareholders’ funds

EBITDA                       Earnings before interest, tax, depreciation and amortization. A measure
                             that is close to the underlying cash earning stream of the company before
                             servicing the capital base.

EBITDA margin                EBITDA

                             Total revenues

IFRS                         International Financial Reporting Standards

Market capitalisation        The market value of the equity of a company, calculated as the share price
                             multiplied by the number of shares outstanding.

Net profit margin            Net profit

                             Total revenues

P/E ratio                    Price earnings ratio. The price of a share divided by the annual
                             earnings attributable to each share.

Quick ratio                  Cash plus accounts receivable plus other financial assets

                             Current liabilities

Return on capital employed   Net profit

                             Property plant and equipment plus current assets less current liabilities
                             (average of opening and closing balances)

Return on equity             Net profit

                             Shareholders’ equity
                             (average of opening and closing balances)

TSR                          Total shareholder return as measured by dividends and capital gain
                             during the period over the opening share price. Comparable to investment
                             fund performance in any given year.


     PricewaterhouseCoopers (www.pwc.com) provides industry-focused assurance, tax and advisory services for
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     working on solutions to mining industry issues.

     Contact us

     For more information on this publication or how PricewaterhouseCoopers can assist you in managing
     value and reporting, please speak to your current PricewaterhouseCoopers contact or telephone/e-mail the
     individuals below, who will put you in contact with the right person.

     Global Mining Group Leadership Team:

     South Africa and Global                                  South America
     Hugh Cameron, Johannesburg                               Anthony Dawes, Santiago
     Telephone +27 (11) 797 4292                              Telephone +56 (2) 940 0064
     E-mail: hugh.cameron@za.pwc.com                          E-mail: anthony.dawes@cl.pwc.com

     Asia-Pacific                                             United Kingdom
     Tim Goldsmith, Melbourne                                 Brian Taylor, London
     Telephone: +61 (3) 8603 2016                             Telephone +44 (20) 7213 2518
     E-Mail: tim.goldsmith@au.pwc.com                         E-mail: brian.taylor@uk.pwc.com

     Canada                                                   United States
     Paul Murphy, Toronto                                     Steve Ralbovsky, Phoenix
     Telephone +1 (416) 941 8242                              Telephone +1 (602) 364 8193
     E-mail: paul.j.murphy@ca.pwc.com                         E-mail: steve.ralbovsky@us.pwc.com

     For copies of the report, please contact:
     Rashree Maharaj
     Global Marketing Manager – Mining
     2 Eglin Road, Sunninghill,
     Johannesburg, South Africa
     Telephone: +27 (11) 797 5663
     E-mail: rashree.maharaj@za.pwc.com
     Or visit our website: www.pwc.com/mining

Key contributors to the survey:

Tim Goldsmith – Australia
Debbie Smith – Australia
Michael Cinnamond – Canada
Orlando Marchesi – Peru
Ian Campbell – South Africa
Brian Taylor – United Kingdom
Michael Ruyter – United States
             Your worlds   Our people*

*connectedthinking            pwc

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