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Resource boom can be very useful since the search for resources leads
to places that evidence sovereign risk and other complexities of more
remote locations in emerging markets. MPA

Resources boom to keep rolling, says analyst's report
Sarah-Jane Tasker From:The Australian June 07, 2011 12:00AM


Resource boom keeps rolling Source: The Australian
THE global mining boom has shifted into top gear because of growing
demand and surging commodity prices, with profits of the world's 40
largest miners reaching a record $US110 billion ($102bn) last year.

That represented a stunning 156 per cent jump on the previous year and
the start of a new stanza of growth that is forecast to continue as
global demand increases and new projects are brought on stream.

Last year's profits were built on record revenue of $US435bn,
according to a PricewaterhouseCoopers report, "Mine: The Game Has
Changed".

"We can unequivocally say that (the step change in demand) is there,"
said Tim Goldsmith, PwC Australian and global mining leader.

"That is a massive change from where we have been.

"We will still have cycles, but they will now be from a much higher
level."

Mr Goldsmith said another change that would reshape the industry was
the rush to bring new supply to market, including higher production
costs.


"Bringing on supply from higher cost assets is fundamentally changing
the cost curve for the industry, which underwrites a long-term
commodity price," he said.

That was also "a game changer".

"The cost of producing the more marginal product has gone up so
significantly that commodity prices won't drop down to historical
averages, which is very different to what we have seen before," he said.

The report, which includes Rio Tinto, BHP Billiton, Fortescue Metals
Group and Newcrest Mining among the top 40 global companies, also
found that to keep pace with demand the majors had announced more than
$US300bn worth of capital programs, of which more than $US120bn was
planned for this year, doubling last year's capital expenditure.
Australian Bureau of Statistics data showed that locally, miners
expected to boost spending by 86 per cent to $92bn in 2011-12 from a
year earlier.

The top 40 global miners own almost $US1 trillion in assets, including
a $US100bn cash war chest.

Mr Goldsmith questioned the sector's ability to spend $US120bn in the
next 12 months but said the sentiment indicated that most would spend
the cash from their reserves.

"But in a year's time, we won't be much different to where we are
today, because they'll spend the money on capital expenditure but they
will also generate record profits again," he said.

"The industry undoubtedly had a good year last year and I don't think
it is a one-off."

Mr Goldsmith said the game had changed to a better place and it was an
exciting time to be in the industry, but ensuring supply would
continue to be the industry's biggest challenge.

"The need to explore more remote locations, project complexity and new
sovereign risks will compound this issue," he said.

Australia is tipped to be well placed to capitalise on the new era in
mining and benefit most from the "step change" in demand.

"There is no doubt we have all of the natural starting points to say
that there aren't many other countries around the world that are
better placed to satisfy this demand than Australia," Mr Goldsmith said.

"There is then a question of what is the ability of the country to
deliver against that."

The heated debates between Australia's resources sector and the
Gillard government over firstly the mining tax and now the carbon tax
had called into question Australia's reputation as a favoured
investment destination.

"As I travel around the world and speak to chief executives of mining
companies not already in Australia, they would not suggest that
Australia is encouraging the growth in the industry, which its natural
starting point could achieve," Mr Goldsmith said.

"I think they would certainly look at all of the current challenges."

The report also identifies emerging market producers as standout
performers among the top 40 companies.

Over the past four years, companies from emerging markets delivered an
average total shareholder return double that of their peers in more
developed markets such as Australia, the US, Canada, South Africa and
Britain.

"The theme, which will continue, is there will be more companies from
those emerging markets getting into the larger scale projects," Mr
Goldsmith said.

The mining industry recovered from the global financial crisis better
than any other sector and the report highlights that, despite the
surge in production and new developments, assets were funded almost
entirely by equity. Net debt for the top 40 miners is down to $US46bn
and borrowings are at only 16 per cent of total assets.

"This shift also reflects the alternative sources of capital now
available to the industry, as the new era has ushered in an increase
in joint ventures, off-take funding and other arrangements," the
report says.

"The strong cash position has left gearing at just 8 per cent, amazing
when considering that less than two years ago a number of companies
were struggling to refinance short-term borrowings and many raised
equity to help them get through the financial crisis