Setting the Stage: Global Context for Mining and Extractive Industries

Keynote speech for the First International Mining Conference, Phnom Penh, Cambodia, May 2010. Organized by the United Nations Development Program

I was invited by the UNDP to be the keynote speaker at the first international mining conference to be ever held in Cambodia.

The purpose of my speech was to discuss the key characteristics of the international mining industry – its size, its profitability, capital requirements and its ability to generate revenues to Governments.

The study is largely based on analysis of CRU’s Mineral Industry Competitor Analysis (MICA) database – which has financial data on 323major mining companies over the period 1978-2009.

Key observations were that the mining industry is:

  • Global in nature – with companies operating across several countries and products being sold around the world
  • Huge in scale – producing over $800 billion per annum in sales, $100 billion in after-tax profits and paying 40 to 55% of its profits in the form of taxes, royalties and duties
  • Very cyclical – with commodity prices (and profits) varying by over +/- 30% in a year
  • Very capital-intensive – requiring large amounts of cash to grow. In practice, most of the profits get re-invested back in the industry to build new mines
  • On average only generates a modest return on its investment – especially given the business risk involved. For much of the last 30 years the average return was no better than investing in (risk-free) US Government Bonds. This has improved in the last 5 years
  • The industry’s profitability is closely tied to the Chinese economy. In the last 5 years, 80 to 90% of the total increase in world mineral demand came from China. This is set to continue for at least the next two decades as China urbanises
  • The world’s economy is forecast to return to its pre-GFC levels by 2012-2013
  • Commodity prices are set to remain strong over the next few years – with the “hottest” minerals of interest being – iron ore, copper, coking coal. Gold will also do reasonably well

The bottom line is that the industry, after 20 years of doing it tough is actually making a reasonable profit now – thanks to China.

More importantly though, a couple of defining characteristics of the industry is the volatility of its earnings and its capital-intensiveness. In terms of return on capital, the industry only makes a modest return (at best 5 percentage points above the cost of financing), and more significantly most of the profits generated by the industry gets re-invested back into new projects …. Meaning that, contrary to popular opinion, there isn’t much spare cash left over for Governments to take.

Note: Will note that I did the presentation as a representative of the consulting firm CRU Strategies. I did this as recognition of the extensive use of CRU-derived in the presentation (both on commodity forecasts and their MICA database – which has financial information on 300 mining companies over the last 35 years). I also regularly work as an Associate Consultant to CRU on their projects.

Return to Publications