Mining has a crucial role to play in providing the materials necessary for economic recovery in a post-COVID-19 world, according to the ‘Mine 2020’ report from consultancy PwC. While the industry had taken a hit from the pandemic, it would be a leading driver of recovery, particularly the major miners.
Apart from the regular majors BHP, Glencore, Rio Tinto, Anglo American and Barrick Gold, new entrants in the top 40 list ranked by market capitalisation include South African operators Impala Platinum and Sibanye-Stillwater as well as Hindustan Zinc and Kinross Gold. Due primarily to COVID-19, earnings before interest, tax, depreciation and amortisation (EBITDA) of the top 40 firms would fall 6% in the current year, although PwC says this is not as bad as it could have been with the extensive restrictions and lockdowns.
Total market capitalisation of the top 40 companies included in the report increased 19% year-on-year to $898 billion as of December 31, 2019. By April 30, however, the market value of the top 40 had fallen nearly $150 billion to $752 billion, reflecting the initial impact of the pandemic.
PwC’s Africa Energy, Utilities and Resources leader Andries Rossouw said: “The sector is weathering COVID-19 better than most.” He said mining was viewed as crucial in providing the materials necessary for economic recovery in a post-COVID-19 world.
A sign of the sector’s strength was that of the top 40 companies included in the report, only three had either stopped dividend payments or adjusted payouts. “This is a sign of the confidence that the mining sector has.”
Less clear, however, was how mining firms will tackle capital allocation. Rossouw said the top 40 would be sitting on significant cash piles but might step back from weighty deal-making, preferring perhaps smaller transactions “closer to home”. This was despite pronounced activity in the gold sector where a period of consolidation was underway, especially in West Africa. The enterprise value of “mega gold deals” totalled $19.2 billion in 2019, PwC said.
Capital expenditure was forecast to fall by 20% this year compared against the relatively high base of $61 billion last year, an increase over 2018 of 11%, the report said. “We expect mining firms to sit on their cash this year owing to constraints,” Rossouw said.
International labour organisation Roskill concurs with PwC in stating that mining equities have outperformed those of many other sectors despite the COVID-19-related economic dislocation, with prices in several metals markets going up year-to-date.
In its White Paper this month, the consultancy compares the COVID-19 effects to that of the world economy during the 2008/9 global financial crisis (GFC), which is considered to have been “particularly traumatic” for the global mining industry. While the global mining sector, as a whole, has “performed more robustly” this time around, Roskill thinks metals markets will be challenged over the coming two quarters as a number of potential new forces come into play, or are accelerated, as a result of the current crisis, which the mining sector will need to navigate in the years ahead.
In acknowledging that the two occurrences are somewhat different, Roskill notes that a key difference in the world economy today compared with the GFC that is important for metal markets, is that China is now a more developed economy which accounts for a much larger share of the world economy than it did a decade or so ago with 19% of global GDP on a purchasing power parity basis compared to 11% in 2007.
Metals markets are even more skewed towards China, and the country accounts for over half of total world consumption for most metals, up from around one-third in 2007. But while China represents a larger share of the world economy than it did, its underlying rate of economic growth is significantly slower than it was a decade ago.
Yearly GDP growth in China in the three years prior to the GFC averaged 12.8% compared with 6.6% between 2017 and 2019. The rate of growth in Chinese industrial production has also slowed even more between these two periods; from an average of 16.6% a year in the three years prior to 2008 to 6.1% a year.
The economic effects of the GFC in China were largely confined to two to three quarters and even during that period the economy continued to expand at a significantly positive rate. In fact, Roskill says that when spread over 12 months, the effects of the GFC in China are difficult to isolate compared with regular volatility in GDP.
The effects of COVID-19 on the Chinese economy are likely to be much more notable given the extent of the contraction in GDP already reported in the first quarter this year – a 9.8% quarter-on-quarter decline. PMI data for China has rebounded back even faster than in 2008 and 2009 though and industrial production and electricity output were already back into positive territory year-on-year in April. While this is not necessarily the “end game” for the effects of COVID-19 on China, considering that some restrictions on the economy remain, Roskill says that a second wave of infections still represents a significant risk.
As with the recovery in China after the GFC, Roskill says that the pick-up in activity will need to be internally generated. In 2009 and 2010 an important driver for the pick-up was a major government stimulus package, and unlike its position before the GFC though, the Chinese government was running a “sizeable fiscal deficit” ahead of COVID-19 and stimulus measures taken by the government have, so far, been limited.
On the positive side, China’s economy is more mature than before and is 2.2 times its size in 2007. While it has a slower rate of underlying growth, this growth still has a fair degree of momentum behind it given the per capita GDP in China is still only one-third that of the US. However, high levels of domestic savings allow for considerable scope for domestic consumption-led growth.
Overall, the initial hit from COVID-19 has been “larger, more sudden and more global” than the GFC, according to Roskill, who adds that “there are some good grounds for thinking that the recovery will be equally sharper and with less persistent negative effects on metals demand”. Roskill also notes that economic policy responses have been less globally coordinated but they have benefitted from previous lessons learnt and have been much faster than those taken during the GFC.
Yolanda Torrisi is Chairperson of The African Mining Network and comments on African mining issues and the growing global interest in the continent. Contact:email@example.com