Australia lacks exploration?

Australia is a major theme of International Mining’s forthcoming August issue. According to PricewaterhouseCoopers (PwC) in its Aussie Mine report, the Australian mid-tier mining sector had a spectacular 2006 by any measure. Aggregated market capitalisation increased by 81% for the 50 companies analysed. Confidence in the sector was high during the year ended 31 December 2006 and has continued in 2007. This has been fuelled by strong commodity prices and rising production levels. Share price increases have been dramatic for many companies and investors have been well rewarded for their faith in the mid-tier Australian mining industry.

Revenues from operations for the 50 companies increased by more than 50%. This was a reflection of the across-the-board increase in commodity prices as well as increased production. Costs rose by almost the same proportion as revenues and this is a warning sign for all mining companies. Input prices, lead times and just about everything else needed by mining companies are rapidly increasing in price. These cost increases can be glossed over while commodity prices are increasing, but the key question is whether they can be sustainably removed if prices were to fall.

The cash generated by the industry was substantial and was reinvested into mine developments and expansions. The aggregated balance sheet of the 50 companies is strong and there is still borrowing capacity. In total the top 50 companies hold over $3 billion of cash, almost enough to pay off all debt. Over $700 million was paid out as dividends. Interestingly, more than double this amount was raised as fresh capital. This reflects the desire of investors to be a part of the mid-tier mining sector.

Exploration expenditure rose, but is not keeping pace with levels elsewhere in the world. This has already been the subject of extensive comment, and PwC’s analysis does not highlight any new trends. Whilst exploration expenditure does not guarantee success, its absence certainly guarantees no new deposits being discovered.

In summary, all facets of PwC’s analysis point towards an exuberant mid-tier Australian mining sector. It is increasingly profitable, generates good cash flows, and has a strong balance sheet. Not surprisingly the stock market value is outperforming other sectors. In addition, trading conditions in the first three months of 2007 support a similar story.