PWC Aussie Mine Nov12

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Aussie Mine 2012 Staying the course

Aussie Mine November 2012
ii Staying the course
Foreword
Welcome to the 6th edition of Aussie Mine Staying the Course. This report focuses on the annual results of the largest 50 mining companies listed on the Australian Stock Exchange with a market capitalisation of less than $5 billion at 30 June 2012 (the mid-tier 50).
As we completed last years edition of Aussie Mine, some questions were being asked around the macroeconomic environment in the Eurozone and the United States. 2012 has not been easy for the mid-tier 50. They have been battered by falling confidence as concerns around growth in China arose. The subsequent fall in commodity prices has devastated the market capitalisation of the group almost one third of their value has been wiped out from its post Global Financial Crisis (GFC) peak of March 2011. The mid-tier 50 have posted solid results, with revenue, gross profits and operating cash flows all up this year. However, ever rising costs continue to hamper the industry. 2012 saw costs climb again, this time by more than 20%. As we move forward it will be the companies who are able to arrest this trend which will not only survive but prosper, as macroeconomic conditions improve around the globe. We see the leadership transition in China as a key event that will set the scene for the next phase of growth. Things will change as the Chinese economy continues to mature, but we are in no doubt that the development and urbanisation of China still has many years to run. This will continue to be the biggest determinant of the prospects of the mid-tier 50. Tim Goldsmith
Global Mining Leader
Wayne Huf
Partner, Project Leader
With the majors battening down the hatches and deferring projects, opportunities exist for the mid-tier 50 to capture their share of this growth. These companies are not gun-shy and capital expenditure has continued. Projects that are on-line and delivering through the next cycle will create value. Against this backdrop, the mid-tier miner who remains agile and stays the course will reap the rewards for its shareholders over the longer term.
Wayne Huf
Tim Goldsmith
iii
Contents
Foreword i Executive summary 1 2 3 4 5 6 7 8 9 Mid-tier industry in perspective The way I see it Ken Brinsden (Atlas Iron) Aggregated industry financial statements Are gold companies losing their lustre? M&A the time to buy! Movements in the mid-tier 50 Iron ore in focus Changing attitudes to solve the skills shortage Are you ready to dig? 1 3 10 13 27 32 36 39 43 45 48 51 52 54
10 This years mid-tier 50 11 Explanatory notes Contacting PwC Other mining publications
iv Staying the course
Executive summary
Macroeconomic concerns around China, the United States and Europe have weighed on commodity prices. This sent the market capitalisation of the mid-tier 50 into a steep dive, down 26% from June last year. At $51.8billion the total market value of the midtier 50 is at levels not seen since the Global Financial Crisis. Opportunities continue to exist for miners and investors alike if they can remain agile and stay the course.
In the face of pressure, the mid-tier 50 have posted respectable results with growth in revenues of 21% driven largely by growth in production volumes. Cash flows from operations rose 36% to $5.2 billion as new capacity came online and was ramped up. However, net profit has taken a battering falling 44% to $1.6 billion, primarily as a result of impairment charges of $1.2 billion as falling commodity prices took their toll. Supply side pressures are growing. Rising production costs remain a common theme throughout the industry. A strong Australian dollar, productivity challenges and a tight labour market are major contributing factors. Thinking outside the square to resolve the skills shortage remains one of the keys to breaking the cycle of ever increasing costs. As a consequence of rising costs, the margins of the mid-tier 50 producers have fallen from the prior year. An added challenge is the propensity for government to tap the mining industry for a larger share of tax revenues which we have seen most recently with an increase in coal royalties in Queensland. We believe the demand for commodities will remain relatively strong as China continues along its momentous path of urbanisation and industrialisation. The mid-tier 50 is well placed to benefit from the continued growth of China and the other emerging economies, provided they are able to navigate the multitude of risks on the supply side. A buoyant gold price off the back of ongoing economic uncertainty, and the race to feed Chinese demand for crude steel, has resulted in the dominance of gold and iron miners in the mid-tier 50. However, the divergence between the market value of the gold miners and the gold price has grown, and gold producers are fighting to show investors that they have not lost their lustre. For the iron ore miners, access to infrastructure continues as a key determinate of success. Gaining this access provides a competitive advantage and strategic flexibility. Whether the companies producing these commodities can address these concerns and win over the investors remains to be seen. It was a slow year for mergers and acquisitions but with equity prices at low levels it seems that now is the time for those willing to put cash on the table to buy. In recent months we have seen an increase in deal flow, particularly from foreign investors. On the domestic front, the gold sector is likely to generate increased deal activity, as miners enter the race for scale and diversify away from single project businesses. The balance sheet of the mid tier 50 shows that an additional $7.2 billion has been invested into project assets. This is evidence of the fact that the mid tier miners are in for the long haul. In an environment where costs are rising and commodity prices have fallen significantly, project evaluation and risk management have never been more important. Despite the short term challenges facing the mid-tier 50, the future remains bright. The continued emergence of developing nations and increasing wealth that accompanies it will drive this industry for generations. In the face of turbulent times, the mid-tier 50 need to remain confident and stay the course.
2 Staying the course
Mid-tier industry in perspective

The stronger for longer catch cry has been replaced by those calling the end of the boom. Many commentators predict that this will have dire consequences for the mid-tier mining industry as prices retract.
We are not so pessimistic. We believe that there is continued strength in the demand for commodities driven by the industrialisation and development of the bulk of the worlds population. This is a journey with many miles still to be travelled which offers mid-tier miners a bright future, provided they can navigate the multitude of supply side risks. The Australian mid-tier mining industry is Staying the Course. In an era of rising commodity prices, getting volume to the market was the primary concern of the miners. Companies could put cost pressures at the back of their minds. Lessons learnt in 2008 were perhaps set aside when prices rebounded so quickly that many of the cost reduction programs didnt have time to be fully implemented. We have seen commodity prices fall steadily in 2012 while costs continue to rise for both operating and capital expenditure, particularly for projects in Australia.
Cost control, mine optimisation, gaining or building access to critical infrastructure, identifying and retaining skilled employees are just a short list of challenges that the mid-tier miners are faced with. Governments have also added constantly changing fiscal regimes and the occasional threat of resource nationalisation to the list. This also assumes that funds are readily available.
Chinese demand fears hit the mid-tier

The aggregate market capitalisation of the mid-tier 50 at 30 June 2012 was $51.8 billion, falling from a peak of $75.3 billion in March 2011. This represents a fall of 31% almost one third of the market capitalisation of these companies.
Mid-tier 50 market capitalisation (AUD million) June 2009 to 30 September 2012

80,000 75,000 70,000 65,000 60,000 55,000 50,000 45,000 40,000 Jun 09 Sep 09 Dec 09 Mar 09 Jun 09 Sep 09 Dec 09 Mar 11 June 11 Sep 11 Dec 11 Mar 12 Jun 12 Sep 12 $52.8bn $51.8bn $75.3bn $69.8bn
Source: Capital IQ, PwC analysis
Market Capitalisation in AUD $million
China remains the single biggest demand determinant for commodities, despite the emergence of other nations such as India and Indonesia. The Chinese economy has had a challenging year. What started as a tap on the growth brakes to rein in inflation caused by the massive 2008 stimulus package, has spread through shrinking exports to Europe and the United States. Concern has been expressed by many around the globe as to whether a more serious challenge now confronts the Chinese economy. This sentiment, coupled with declining demand growth, has caused commodity prices to fall through 2012. As a testament to the impact of this on equity prices, the market capitalisation cut off for this years mid-tier 50 has fallen to $289 million, down from $463 million last year.
Australian dollar price by commodity June 2011 to August 2012
(16%) Iron Ore (13%) Copper 11% Gold (6%) USD/AUD (24%) Thermal Coal
1.40 1.20
Gold 8%
1.00 0.80 0.60

May-12
Sep-11
Aug-11
USD/AUD (1%) Copper (16%) Thermal Coal (26%) Iron ore (36%)
Nov-11
Dec-11
Oct-11
Mar-12
Source: World Bank, PwC analysis
The prices for major commodities fell from 2011 with gold being the sole exception. Iron ore and coal, the commodities most linked to Chinas industrialisation, suffered the greatest falls. Iron ore spot prices for 62% fines reached a record $US190 per metric tonne in February 2011 but plummeted sharply in August and September 2012 to fall below US$90. Iron ore hasnt traded at that level since the initial recovery from the Global Financial Crisis (GFC) in 2009.
Chinese construction will continue to be the demand driver

The China doubters also point to its twelfth five-year plan (2011 to 2015), which has the stated goal of more sustainable growth and the promotion of domestic consumption. The doubters argue that Chinas efforts to rebalance its economy and shift its focus from investment to consumption will significantly dampen construction and reduce the number of mega infrastructure projects. It is said that this will place significant downward pressure on demand for steel. The point that is lost is that even with a shift towards more domestic consumption, the demand for steel will continue. The driver behind this demand is the unstoppable urbanisation. Chinas urban population now sits at approximately 51%, compared with 82% for the United States, 80% for the United Kingdom and 89% for Australia. Forecasts put the Chinese urban population at approximately 70% by 2035. By any measure that represents an immense movement of people into cities. The five year plan estimates that twelve million people will be moving into cities each year. These cities, greater than Melbourne and Sydney combined, are yet to be constructed.
China is here for the long haul

The negativity that surrounds Chinese growth defies logic. The World Bank is estimating that Chinese GDP will rise 7.7% in 2012. This is a sensational rate of growth for what is the worlds second biggest economy. As often pointed out, but perhaps not always appreciated, the growth in real dollar terms today is significantly higher than the impact of the greater than 10% p.a. growth experienced in the 1990s. This is no hard landing.
Aug-12
Jun-11
Feb-12
Jun-12
Jan-12
Apr-12
Jul-11
Jul-12
Stimulus ready and able

Every 10 years the Chinese congress meets to transition their leadership, with the new leadership taking the helm over the coming months. The incumbents have established their legacy and have more recently been focused on stabilising property prices and controlling inflationary pressures prior to handing over to the new team. The new leaders will move to quickly gain the support of the Chinese people and meeting economic growth commitments will play a key role in establishing their own legacy. With massive cash reserves at its disposal and space for monetary policy stimulus, the Chinese government has the capacity to stimulate demand as required. We have already seen this with the recent package approved to build significant rail infrastructure.
Commodity intensity
India GDP: China GDP: - $3.3k/capita - $7.3k/capita US GDP: - $42k/capita
100 75 50 25 0
0
Source: Xstrata
10
15
20
25
30
35
40
45
50
GDP per capita (real, 2005) Late cycle commodities eg platinum, nickel Mid-cycle commodities eg copper, lead, zinc Early cycle commodities eg steel, iron ore
As the Chinese economy becomes consumption driven demand for mid cycle commodities such as copper, lead and zinc are set to increase. While growth in demand for iron ore may be more subdued over the medium to long term, those in the mid-tier 50 that are exposed to these mid-cycle commodities will see the benefits as China shifts along the development path. While there is short term pressure on demand for commodities, the longer term picture should not be ignored. Investors and commentators today appear less focused on the long term view and more focused on the analysis and reaction to the enormous volumes of economic data that are produced each week. Little wonder then that the longer dated development story of the majority of the worlds population is easily overlooked. What is clear is that the Chinese certainly see the world through this longer term lens.
Green shoots from the Western World?

China may be the key to demand for materials, but equity markets continue to look to the West for leads, either through lack of understanding or trust in the information provided by emerging nations. Green shoots have started to emerge from some of these regions. An indecisive and divisive Europe coupled with a sluggish US economic recovery proved to be limiting factors in 2011/12. However more recently positive news has emerged. A coordinated approach to resolving the European Sovereign debt crisis has been announced by the European Central Bank although implementation challenges remain. The US Federal Reserve has promised to provide liquidity until growth targets are met. The latest data also shows that employment is slowly creeping up. The whatever it takes attitude adopted by both regions provides some comfort and assurance that a recovery can be achieved.
Supply challenges abound

Bringing in projects on time and on budget has never been more important
Operating a mine in Australia is expensive. We are faced with escalating capital costs and significant infrastructure requirements, exacerbated by the competition for scarce resources (people and equipment) with a multitude of mega projects around Australia in the oil and gas sector. With the mining majors also completing their own large projects, it has been challenging for the mid-tier 50 to deliver projects on time and on budget. Volatility in commodity prices and fears over a cloudy demand forecast has led to a number of the larger miners delaying major projects. The mid-tier 50 doesnt have this luxury, with many of the companies on our list operating or seeking to develop a single asset. The mid-tier miners must stay the course the impact of reduced supply will be felt in pricing.
Cost management and mine optimisation

Low levels of unemployment in Australia coupled with skilled labour shortages have also resulted in skyrocketing labour costs. In addition to high labour costs the mid-tier 50 have reported increases to other key inputs such as consumables and tyres and reported an increase in the lead times for these critical inputs. All this puts pressure on margins and returns on the funds invested to build mines. We expect cost management to play a much more prominent role going forward.
FX the break in historic negative correlation

Historically the AUD/USD rate has followed trends in commodity prices, in both bull and bear markets. However, with the US moving into QE3, the recent fall in commodity prices has not been matched with a fall in the value of the Australian currency. Not only are the mid-tier 50 facing higher capital and input costs, those in Australia are experiencing an adverse exchange rate which creates an additional drag on export earnings and the bottom line.
A commodity price boom?

Price index by resource AUD
3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00 Apr 08 Apr 09 Apr 10 Apr 11 Oct 07 Jan 08 Oct 08 Jan 09 Oct 09 Jan 10 Oct 10 Jan 11 Oct 11 Jan 12 Apr 12
Apr 12
Jul 07
Jul 08
Jul 09
Jul 10
Jul 11
Gold
Coal
Iron ore
Copper
Price index by resource USD

3.50 3.00 2.50 2.00 1.50 1.00 0.50 0.00
Jul 07 Oct 07 Jan 08 Apr 08 Jul 08 Oct 08 Jan 09 Apr 09 Jul 09 Oct 09 Jan 10 Apr 10 Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Jul 12
Gold
Coal
Iron ore
Copper
Jul 12
The perception of super profits generated on the back of high commodity prices and their own budget challenges has led to governments and communities wanting to claim a bigger share of the pie. The commodity price movements since 2007 show that there was anything but a price growth boom with commodity prices declining for copper (down 23%) and iron ore (down 17%) while staying flat for coal (up 7%). Gold is the only commodity with significant increases in price. The peak pre-GFC 2007 commodity prices are nothing to be sneezed at, however with rising input costs to also contend with the mid-tier 50 miners have had to work hard to generate their strong results.
The funding challenge

Companies that already have funding for projects are in a strong position. During the course of the year we have seen the equity markets support the mid-tier miners by providing additional capital, however the slump in share prices makes equity raisings expensive and deeply dilutive to existing shareholders - forcing them to give away value in order to fund a project. Debt funding has not been the traditional realm of the mid-tier 50. 2012 has heralded a change to this perception as we have seen debt raised by Arrium, Atlas Iron, Lynas, Sandfire and Discovery Metals to assist in funding the development of their projects. Across the world we have seen a flight to safety into government bonds and cash deposits. As the ultra conservative asset allocation unwinds there is likely to be greater funds available. With interest rates at all time lows in many parts of the world, particularly the United States, companies are turning to the foreign debt markets. Recently, for example, Atlas Iron and Arrium, raised US$325 million and US$599 million respectively. The cost of the debt is somewhat lower in the United States than in Australia and may just provide another avenue for the mid-tier miners in the future. With low interest rates and debt funding available, this may just be the right timing for those willing to access this alternative source of capital. The mid-tier 50 are also getting creative and looking to alternative funding arrangements, such as off take agreements, selling partial stakes in projects and agreeing to joint ventures. Companies funding these projects have often been downstream users of the commodity who are willing to inject capital in return for security of supply.
The ever changing landscape

Australia is uniquely placed by having significant natural resources on the door step of the global growth engines and a small population that does not need all of the resources for its own consumption. Securing the benefits of this advantage for Australia over the long term however requires stable and competitive tax and legislative arrangements. Increasing state royalties, the minerals resources rents tax, the carbon tax and other changes to tax legislation all serve to make Australia a comparatively less attractive place to do business. State royalties are revenue based and directly impact the bottom line, whilst federal taxes are generally profit based. Unfortunately we have witnessed opportunistic tax increases as a consequence of tension between state and federal governments and challenging budgets. These are impacting miners underlying profitability. The introduction of additional taxes and increases to the royalty rates have come at a time when there has also been downward pressure on price, coupled with operating and capital costs remaining high. Mining is an investment intensive industry and a long term game. In order to support and foster the massive investment that is required, stability is critical. The Australian mid-tier mining industry operates globally and changing fiscal regimes and resource nationalism are a growing worldwide phenomenon. In an era of perceived high commodity prices and government balance sheets struggling under the weight of stimulus programs, the profile of the industry has lifted and governments are under pressure from local communities and other key stakeholders to increase their share of the returns of mining projects.
PEs time?
Private equity investment has yet to find its way to the mid-tier 50 in a significant way. However, we have seen PEs and sovereign wealth funds, such as the Qatar governments Qatar Investment Authority investment in Xstrata, take a more active role in the mining majors. They have been dragged in by the startling investment returns being generated by these companies. With share prices of the mid-tier 50 in the doldrums and the future potential bright, perhaps now is the time for PE to take a serious step into the mid-tier mining sector....
Where to next?
The investment boom in Australia continues and the flow-on impact on production is just beginning. The mid-tier 50 have invested significant capital in project development during the course of the last few years and the return from this investment is yet to fully emerge. Falls in commodity prices, an Aussie dollar that remains stubbornly high and high capital and operating costs, have seen market sentiment toward Australian mining companies fall dramatically. The market has savaged many companies, as investors fled from perceived risk associated with investing in projects that arent at the bottom of the cost curve in a time of lower prices. Strong underlying demand continues to provide the long term platform for the mining industry and with 1/3 of the value wiped off there is now significantly more upside in the mid-tier 50.
Mid-tier 50 market capitalisation by resource (AUD million)*
70,000
The mid-tier 50 has historically been dominated by gold and coal companies which have consistently comprised over 40% of the total market capitalisation. The noticeable difference this year is coal, which has fallen from 28% in 2011 to 18% in 2012. The mid-tier 50 is less than one third of the size of BHP Billiton and on the global Top 40 miners list, the combined mid-tier 50 would appear 5th, similar in size to Anglo American.
Gold the mover

The most significant development has been the rise of gold in the mid-tier 50. Gold now makes up 26% of the value, the greatest representation that this sector has seen since our Aussie Mine series commenced. With gold being the only commodity to see prices rise in 2012, it is not surprising that the number of gold producers in the mid-tier 50 has increased from 11 in 2011 to 19 in 2012.
Coal consolidation
Mergers and acquisitions have played their part in reducing the number of coal companies represented in the mid-tier 50. Of the eight coal producers that have come off the list, three were eliminated due to acquisitions. The others, at the smaller end, have exited due to falls in their market capitalisation. Coal remains a key component of the worlds energy supply and the world will continue to rely heavily on coal fired generation for many years to come. India, for all its coal reserves and efforts to improve production remains unable to produce sufficient quantities to supply its existing coal fired power stations, leading to load shedding across the nation. The August 2012 AME Group Coal Commodity Outlook suggests that Indian thermal coal imports will grow at 5.3% p.a. In addition, restrictions have been imposed on Indonesian coal exports as that country faces their own power shortages. Indonesia is currently a major supplier of thermal coal to India. These factors may provide the catalyst for a resurgence in the Australian mid-tier coal sector.
60,000
15,297
12,449
50,000
22,964 14,285 9,572
9,984 9,832 4,726 6,325 8,725
40,000
8,362 4,432 9,401 2,575 6,675 7,681 4,803 8,734
3,795 8,999
30,000
7,801
7,018 2.286 5,556 1,742 5,278
9,144
20,000
13,350
13,328 17,856 22,260 9,552
10,000
10,635
14,829 9,350
0 2007 Coal Uranium 2008 2009 Gold Copper 2010 2011 2012 Iron ore Other
Mid-tier iron ore miners emerge

In 2011 we reported a rapidly increasing demand for construction material and the resultant capital investment in the iron ore sector. In 2012 the iron ore share of the total market capitalisation of the mid-tier 50 has increased from 6% in 2008 to 17%. This remains the case even with the decrease in the iron ore price in September 2012.
Source: Capital IQ, PwC analysis * Based on the total market capitalisation published in the annual PwC Aussie Mine publications.
Down, but not out

Uranium producers remain in decline. Extract Resources was sold to China Guangdong Nuclear Power Corp, leaving only Energy Resources of Australia and Paladin Energy in the mid-tier 50. Post Fukushima, the uranium industry has certainly had its challenges. China is continuing with its nuclear energy program and nuclear remains central to Europes energy supply. Higher forecast uranium prices are yet to materialise and producers have been forced to continually reassess their projects and take a longer term view. The Australian governments recent attempts to broker a deal to sell uranium to India may see a number of uranium projects emerge in the future, with Queensland responding by lifting its moratorium on uranium mining.
Throughout 2012 fear drove away investors, leading to a drop in trading volumes across all bourses. Investors seemed to react to economic data on an almost daily basis, creating enormous volatility in the mining indices over the past fifteen months. We think that this nervousness is here to stay. It will only abate once Europe begins to stabilise and confidence in the US economic growth story improves. At the start of September 2012, the European Central Bank detailed its bond-buying plan. This, coupled with the US Federal Reserves move to pump up to US$40 billion into the US economy each month until it witnesses a sustained upturn in the weak jobs market, prompted investors to return to cyclical sectors such as basic resources, metals and mining stocks. In the period from 30 June 2012 to September 2012, all the mining bourses rebounded to end in a better position, albeit still significantly down from 1 July 2011. A Western view continues to drive equity markets, however commodity demand (and therefore the mining industry) is clearly driven by the emerging markets. As such, a significant disconnect exists. The development of the emerging markets is, to some extent, linked to Western economies through the demand for exports. However, provided Europe avoids a deep recession and the United States experiences some growth this provides a stable base for the mining industry to grow on the back of emerging market demand.
Mid-tier 50 vs. other performance measures

Mining industry struggled globally
The Australian mid-tier mining industry, represented by the A&P ASX 300 Metals and Mining Index, has mirrored the performance of that of the TSX Global Mining Index and the FTSE 350 Mining index over the course of the year. This shows that the mining industry has been impacted primarily by global macroeconomic concerns and the Australian mid-tier 50 was no different from its global peers.
Comparison of key mining indices July 2011 September 2012 (July 2011 = 1)
To 30 June 2012: -34% FTSE 350 -32.4% ASX 300 -31.8% TSX GMI To 30 September 2012: -31% FTSE 350 -29% ASX 300 -24% TSX GMI
1.10 1.00 0.90 0.80 0.70 0.60 0.50 0.40
May 12
Dec 11
Aug 11
Nov 11
Aug 12
Sep 11
S&P/ASX 300 Metals & Mining Index

Source: Capital IQ
FTSE 350 Mining Index
S&P/TSX Global Mining Index
Sep 12
Feb 12
Mar 12
Jun 12
Oct 11
Jan 12
Apr 12
Jul 11
Jul 12
The way I see it Ken Brinsden (Atlas Iron)

Aussie Mine sat down with Atlas Irons recently appointed CEO Ken Brinsden, to talk about the Atlas success story and the companys plans for the future.
Atlas started out with a single employee in 2004 and produced its 10 millionth tonne of iron ore in 2012. What do you see as the most significant factors that have contributed to the Atlas success story? There are three things that I think have laid the foundation for Atlas Davids (David Flanagan, Chairman) strategic vision, a collegial team environment and the confidence to work through the markets ups and downs. On the first point, when Atlas started, Davids strategy was to tap into a niche market we were a junior with projects relatively close to port. We aggregated our projects and consolidated our position through continued acquisitions within reach of the port. This meant we could run an independent operation with other peoples access to infrastructure and keep our costs low. We were able to turn our attention to doing business, rather than wasting time and energy working through infrastructure hurdles. Secondly, we have a very strong team culture. Davids leadership through those years has been genuine and effective there is no ego about him and that has carried through our entire organisation. We all enjoy working here and the team has always stood willing to offer that extra discretionary effort. We have had to expand the leadership team over time to deliver on our growth commitments. More recently we have established clearly defined senior management roles and looked both internally and to the market to recruit the right people for these positions. This will enable us to manage our growth and to continue to expand.
Finally, the market has played a key role in how our business has grown, both positive and negative. In 2008 the global financial crisis hit just as we started production at our first mine. We were confident that our underlying costs were competitive. We had a strong balance sheet and we knew we had our shareholders on board. So we backed ourselves to succeed. At the time of the global financial crisis we built our strongest relationships we started from nothing to achieve the strong trade-ties we have today. What is your view of the current iron ore price, and what do you see as other challenges facing the mid-tier mining industry at present? We believe there is a genuine solid middle ground for WA producers in the current environment. While important, the hype around the iron ore price is somewhat overplayed by the market. China will remain a key buyer of our product. China still needs to grow and their domestic ore is lower grade and more expensive to produce, therefore they are at a competitive disadvantage. Demand from China for iron ore from external sources will remain. New production is also coming on all over the world, including Africa. However the costs to mine are much higher in these locations. Beneficiation, stripping, location of mines and shipping charges all contribute to higher costs. If the price drops, this will clearly impact the margins of these newer players to a much larger degree than most WA producers. But the demand for iron ore is certainly there over the longer term. Infrastructure remains as the key barrier to entry for many producers.
We were able to turn our attention to doing business, rather than wasting time and energy working through infrastructure hurdles.
Rail infrastructure is obviously the key to Atlas expansion plans. There appears to be a great opportunity for some innovative thinking around infrastructure in WA. What do you think are the big opportunities for financing and construction of infrastructure in WA? Thats right. For us, truck haulage has its place but ultimately its scale is limited, so rail makes sense at the right time. Our agreement with QR National is one of the ways we are trying to explore infrastructure solutions in the Pilbara. More broadly, lack of access to infrastructure is a hurdle for many producers. Match the need for rail infrastructure with the needs of strategic investors who are seeking off-take arrangements, and you are likely to inspire clever ways to solve the infrastructure problem. The Government certainly has a role to play in building a framework that paves the way for new infrastructure and encourages competition from the mid-tier producers. How would you rate the performance of the Federal and WA governments in nurturing the resource industry? What are the big changes you would like to see from that perspective? We have worked with both Labor and Liberal Governments through the evolution of Atlas business to date. The Department of Mines & Petroleum in WA has made material changes to the way in which they deal with mining projects in the Pilbara. There has been a noticeable decrease in turn-around times for approvals, while appropriate levels of discipline have been applied in important areas such as the environment, safety and technology. We see this as a move in the right direction it shows an increased understanding of the mining industry and a willingness to work with us.
At the Federal level, the MRRT is a classic example of the opposite. The MRRT impacts investment, its implementation has triggered volatility in the financial performance of mining companies and it has created a significant administrative cost for companies like Atlas. All this now seems likely to result in the collection of very little revenue for the Commonwealth. Our offshore investors are now continually questioning us on what is going on in Australia and what is next. What are the primary concerns of your shareholders at present? The ore price is clearly on the minds of shareholders. The evolution of the iron ore indices has been a good development for the industry, albeit a likely contributor to price volatility. We see the market moving towards shorter term pricing models. Atlas challenge is to take advantage of good market conditions and to be ready to respond to volatility. Infrastructure is also a factor in shareholder value. To grow, we will need more sophisticated infrastructure, including rail. With a strong balance sheet and good cash flows, we feel that we are well placed to take this forward.
11
Atlas has gone through a strong period of M&A activity over the past few years, including the recent divestment of some non-core assets. What are the priorities for the company over the next three years? We now have a critical mass of resource and good position on port capacity to facilitate future growth. This doesnt mean we wont take up opportunities as and when they arise. We have strength in our balance sheet and in a volatile market opportunities will no doubt arise. But right now we are more focused on delivering on our existing growth profile. We would only consider acquisitions that strongly complement our current business.
You have mentioned balance sheet strength the Atlas balance sheet is relatively strong, but some further funding will be required to meet your expansion goals. In your view what are the most attractive funding options for Atlas at present? As a junior explorer, we were understandably conservative in our funding choices. Now, with a stable production base, we have an opportunity to consider alternative sources of funding. In October we secured a fully underwritten commitment for a funding facility of US$325 million. Combined with cash on hand, we now have funding flexibility and confidence to continue with our development and expansion works while maintaining a conservative financial position. With the right level of due diligence further debt or an appropriate joint venture structure might also make sense. We will however continue to maintain a relatively conservative approach to our funding.
Aggregated industry financial statements

3.1 Income statement
Growth in underlying profits but impairment takes its toll
Operating revenues increased by 21% in 2012 on the back of strong production results. However, cost pressures came to the fore with gross margins declining slightly. A 22% increase in operating expenses hindered the bottom line impact of revenue growth. Net profit fell significantly to $1.6 billion in 2012 as commodity price pressures emerging in the latter part of the year across the industry saw impairment charges reminiscent of 2008/9.
2012 A$m
Revenue from ordinary activities - Operating revenue - Non-operating revenue Total revenue Less expenses from ordinary activities Gross profit Exploration expenses Other income/(expenses) EBITDAI* Gain/(loss) on sale of investments Impairment EBITDA Depreciation and amortisation EBIT Net interest income/(expense) Profit from ordinary activities before tax Income tax expense Net profit/(loss)
Source: Company Financial Statements, PwC analysis * EBITDAI = Earnings before interest, tax, depreciation, amortisation, impairments and investments
2011 A$m
17,704 185 17,889 (12,710) 5,179 (493) (79) 4,607 683 100 5,391 (1,560) 3,831 (192) 3,639 (803) 2,834
Change %
21% 67% 22% 22% 21% 20% 362% 15% -90% -1274% -22% 33% -44% -19% -46% -50% -44%
21,484 309 21,793 (15,515) 6,278 (593) (364) 5,321 67 (1,176) 4,212 (2,073) 2,139 (156) 1,983 (401) 1,582
13
Revenue and gross margin by commodity FY12

60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0%
500 1,000 1,500 2,000 2,500 3,000 3,500 4,000 4,500 5,000
Gross margin (%)
Revenue (A$ millions) Copper Coal Iron Ore Gold Other
Source: Company financial statement, PwC analysis *Adjusted to exclude Arrium and Mineral Resources non-mining component. Note: Bubble size reflects the number of producing mid-tier 50 companies in the sector in FY12.
The mid-tier 50 achieved a gross margin of 41%, slightly down on the 42% recorded in 2011. Improved gross margins in the gold sector stood out as the only commodity group to improve year on year. Gold companies achieved the growth in margin on the back of increasing commodity prices and an ability to increase production. The biggest increases in gold production came from Alacer Gold and Evolution Mining following mergers. St Barbara Resources, Perseus Mining, Regis Resources, Kingsgate Mining and Resolute Mining were able to increase production through bringing mines on line or ramping up production at existing mines. The lowest gross margin product is the coal sector, down to 10% in 2012. The coal miners have been hit with both falling prices and higher operating costs whilst only achieving steady production volumes on the previous year. Despite price volatility in iron ore the average realised price was consistent year on year, however iron ore miners suffered a similar fate to their coal counterparts in 2012 with rising unit costs crimping their margins.
Gross margin of mid-tier 50 producers

70% 60% 50% 40% 30% 20% 10% 0
Coal
Copper
Iron Ore*
Gold
Other 2012
Total 2011
Source: Company financial statements, PwC analysis * Adjusted to exclude Arrium and Mineral Resources' non-mining component.
Note: Includes only producing companies in the mid-tier 50 and gross margin defined here excludes non-operating revenues.
Productivity
Aggregate production of mid-tier 50 by commodity
Commodity Unit
Coal Copper Gold Iron Ore 000 tonnes 000 tonnes 000 ounces 000 tonnes
2012
16,415 168 2,769 20,372
2011
16,004 180 1,709 18,272
Change %
3% -7% 62% 11%
The impact of explosives supply issues and bad weather conditions impacted on production at Whitehaven Coal, resulting in the under utilisation of assets. Coal of Africa also reported problems with logistics and higher labour costs. Whilst the average cost per unit of coal was only marginally higher, prices for thermal and coking coal have dropped to dangerous levels of approximately $85 and $150 per tonne, respectively, which is putting a significant amount of pressure on the mid-tier coal miners. Increases in unit costs were seen across the iron ore sector, due largely to operational setbacks, such as the wall slip at Grange Resources and the labour shortages and turnover at Mt Gibson Iron. The start up of new operations, which typically incur higher unit costs as they ramp up to full production, also played a part at Mt Gibsons Koolan Island project. The copper sector in the mid-tier 50 is largely represented by Oz Minerals and PanAust, which experienced the highest increase in unit costs in 2012. Both companies reported higher input costs, particularly in fuel and labour. Severe weather conditions also hampered PanAusts Phu Kham operation in Laos, resulting in lower production levels and increased unit costs. Oz Minerals costs were impacted by declining gold by-product credits due to falling gold grades in the concentrate sold.
Source: Company Financial Statements, PwC analysis
Average cost per unit of production

Commodity Unit
Coal Copper Gold Iron Ore tonne tonne ounce tonne
2012 $/unit
94 4,601 794 76
2011 $/ unit
86 3,564 808 67
Change %
9% 29% -2% 13%
Unit costs in the gold sector held steady. The decrease in gold unit costs was disappointingly small in light of the massive increases in production. Generally, increases in production volumes without having to expend plant or infrastructure, lead to a reduction in costs per unit due to a reasonable expectation of cost being fixed. However, higher input cost pressures combined with some companies still ramping up operations meant that despite rising production the cost per unit remained relatively stable. All other major commodities have shown significantly rising unit costs of production. Copper and iron ore stand out as the greatest concern for the mid-tier 50 based on the 2012 result. Whilst the reasons for the unit cost increases were varied for each company there were common areas impacting unit costs for the industry as a whole: Labour shortages leading to high salary costs and turnover Higher input costs for logistics, explosives and fuel Challenges in ramping up projects to nameplate capacity Reduction in grades Declining productivity
15
Movements in aggregated mid-tier 50 revenue by sector

Gold: leading the way
Gold lived up to its reputation as a safe haven in 2012, leading the mid-tier 50 in both price and volume performance compared to 2011, with an increase of $1.9 billion in revenue for the year.
Price volume analysis gold
4,500 4,000 3,500
1,309 4,263
The major contributing factor to the increase in revenue for 2012 was a 61% increase in production, equating to an additional 1 million ounces due largely to the ounces produced by the newly formed Alacer Gold and Evolution Mining. Production grew across the sector as the mid-tier gold miners brought new projects online and expanded existing operations. The biggest increases were seen at the following companies: Alacer Gold (up 404,000 ounces) the company merged with Avoca Resources in the prior year. Evolution Mining (up 193,000 ounces) primarily due to the acquisition of the operating Mt Rawdon and Pajingo mines and remaining interest in the Cracow mine in 2012. St Barbara (up 105,000 ounces) due to improved grade at its existing Gwalia mine, as well as the King of the Hills mine completing its first full year of production. Perseus Mining (up 99,000 ounces) first year of production for the company, all production came from its Edikan Gold Mine in Ghana.
A$ millions
3,000 2,500 2,000 1,500 1,000 500

FY11 Revenue 2,412
542
Price
Production
FY12 Revenue
Whilst the price of gold plateaued in the second half of 2012, it experienced strong growth in the first half of the year.
Iron ore: still growing...for now

With all the doom and gloom surrounding the recent downturn in the iron ore market, some may find it surprising that 2012 delivered 16% growth ($391 million) in revenue in the iron ore sector. The mid-tier iron ore miners achieved an 18% increase in production in 2012. The average realised price of iron ore only decreased marginally between 2011 and 2012, as the worst of the price falls came subsequent to June 2012 and thus did not impact the current year figures.
Price volume analysis iron ore*
3,500 3,000 2,500
Coal: the tough times are yet to come

There was little movement in the coal sector this year, with revenue only increasing 9% or $149 million in 2012, the majority of which was driven by New Hope Corporation (up $117 million), as it rebounded from its flood-affected state in 2011.
Price volume analysis coal
2,000 1,800 1,600
1,578 73 75 1,727
A$ millions
1,400 1,200 1,000 800 600 400 200

FY11 Revenue Price Production FY12 Revenue
486 2,482 (97)
2,871
A$ millions
2,000 1,500 1,000 500
FY11 Revenue
Price
Production
FY12 Revenue
Source: Company Financial Statements, PwC analysis *Adjusted to exclude Arrium and Mineral Resources non-mining component.
The biggest contributors to and detractors from the increase in iron ore revenue were: Grange Resources (up $217 million) due to a higher realised price on higher quality pellets sold and an increase in production volumes from the Savage River operation. Mineral Resources mining business (up $191 million) due to the Carina mine entering production in November 2011. Northern Iron (up $84 million) due to the significantly higher quality ore produced and sold in 2012 providing higher prices for saleable commodity coupled with increase in production volumes Atlas Iron (up $33 million) increase in production volumes contributing an increase of $165 million offset by a $132 million decrease in price for hematite Direct Shipping Ore (DSO) shipped. Arriums mining business (down $113 million) due to a lower realised price on ore sold in 2012 on hematite DSO.
Whilst it is acknowledged that coal prices have experienced a relatively steep decline since March 2012, the 2012 average realised coal price still improved slightly on the 2011 average, contributing $73 million to the total increase in coal revenue. In particular, the two largest thermal coal producers in the mid-tier 50, New Hope Corporation and Whitehaven Coal, benefited from approximately 10% higher realised prices in 2012, whilst Coal of Africa suffered a 9% decline in their average realised price due to the higher proportion of low quality coal in the 2012 sales mix. However, the story may well be different next year.
17
Impairment rears its ugly head

Whilst gross margins held up reasonably well for the mid-tier 50 in 2012, the same cannot be said for net profits, which dropped 44%. The primary driver behind this change is impairment charges. After a stellar 2011 in which there was a net impairment reversal of $100 million, the mid-tier 50 suffered impairment losses in excess of $1 billion in 2012. This is reflective of the downward revision of forecast commodity prices.
Largest individual impairment expenses in the mid-tier 50

Company
Independence Group Brockman Resources Paladin Energy
Year-end Category
June 30 Diversified (Copper, Nickel) Diversified (Iron Ore, Copper) Uranium Coal Iron Ore
AU$ m
(372)
Description
Impairment of the Jaguar/Bentley operation due to weakening commodity prices and the strengthening AUD. $312 million of this relates to mine properties, driven primarily by a reduction in iron ore prices, as well as project delays that occurred during the year at the Marillana Iron Ore Project in Western Australia. Consisted primarily of write downs to PPE and mine development at the Kayelekera mine as a result of a deteriorating uranium price. Relates to goodwill from acquisition of Boardwalk Resources. Relates to the PPE and mine development at Balla Balla and Yerecoin projects after the company entered into agreements that indicated carrying values were in excess of fair value.
June 30
(314)
June 30
(180) (120) (67)
Whitehaven Coal June 30 Atlas Iron June 30
It is evident that deteriorating commodity prices was a common theme. As reflected in the table above, virtually all impairment losses have come from 30 June reporters, which is not surprising given that the outlook for commodities other than gold started deteriorating more significantly from around March 2012 and thus we wont see the impact of this for 31 December reporters until their 2012 reporting. Any further deterioration in prices in the next year may see companies having to revise long term prices once again and take on further charges.
Depreciation and amortisation continues its sharp rise

The mid-tier 50 incurred depreciation and amortisation expenses 33% higher than in 2011. This was to be expected given the significant capital exploration and development expenditure we saw in previous years has now translated to depreciation as projects came online during the year. Combined with this was the production growth achieved for the major commodities in 2012, increasing the rate at which these larger depreciable balances were being amortised - case in point being the gold sector, which contributed over half of the midtier 50 increase on the back of its significantly higher production in 2012.
3.2 Balance sheet

2012 A$m
CURRENT ASSETS Cash and cash equivalents Inventories Receivables Other current assets Total Current Assets NON-CURRENT ASSETS Investments in associates Investment in joint ventures Property, plant and equipment Capitalised exploration expenditure Capitalised development expenditure Goodwill Other non-current assets Total Non-current Assets TOTAL ASSETS CURRENT LIABILITIES Accounts payable & accrued liabilities Interest bearing liabilities (short term borrowings) Provisions Other current liabilities Total Current Liabilities NON-CURRENT LIABILITIES Interest bearing liabilities (long term borrowings) Provisions Other non-current liabilities Total Non-Current Liabilities TOTAL LIABILITIES NET ASSETS SHARE CAPITAL & RESERVES Share Capital and premium Reserves Retained Earnings/(Accumulated loss) Other Equity Total Equity
Source: Company financials, PwC Analysis
2011 A$m
7,884 3,153 2,348 774 14,159
Change %
8,324 3,683 2,342 926 15,275
6% 17% 0% 20% 8%
3,920 1,315 18,795 5,404 4,860 2,549 3,297 40,140 55,415
4,108 742 13,959 4,168 3,747 2,505 2,735 31,964 46,123
-5% 77% 35% 30% 30% 2% 21% 26% 20%
3,461 1,475 621 518 6,075
2,731 852 501 463 4,547
27% 73% 24% 12% 34%
5,739 1,826 2,272 9,837 15,912 39,503
4,657 1,235 2,171 8,063 12,611 33,512
23% 48% 5% 22% 26% 18%
33,557 1,135 4,610 201 39,503
29,825 1,403 1,894 391 33,512
13% -19% 143% -34% 18%
19
Putting cash back to work

The mid-tier 50 continued to invest heavily in their projects. Their decisions have been supported by shareholders that have contributed more capital or accepted scrip for deals. This has allowed the mid-tier 50 to maintain a strong balance sheet with adequate cash reserves. The strong cash position is impressive given the significant investment in projects made during the year. Cash increased by $440 million and represents more than 15% of total assets on the balance sheet. The increase in cash year-on-year highlights the liquid and stable position the mid-tier 50 have adopted since the depths of the GFC. Total assets have increased by more than $9 billion or 20%. This growth in assets has been driven predominantly by increases in investment related activities, which contributed $7.7 billion. Specifically, property plant and equipment and capitalised exploration and development expenditure, have all experienced individual growth rates of 30% or more from 2011 levels.
Capitalised exploration and development

Capitalised exploration and development expenditure increased significantly during 2012, adding more than $2.3 billion to the mid-tier 50 balance sheets. Gold miners were the largest contributors as a result of acquisitions as they raced to ramp-up production while the gold price was still buoyant. Share price volatility during the year did not appear to dampen the mid-tier 50s appetite for new investment. The mid-tier miners continue to be the project development engine for the industry. Their fortitude will be tested further in light of recent commodity price declines. Will they have the courage to stay the course?
Debt no longer a dirty word

The aggregate debt to equity ratio of 18.3% has grown from previous years, but remains at manageable levels. A net debt to equity ratio of negative 2.76% reinforces the balance sheet strength of the mid-tier 50. Short and long term borrowing positions increased by $624 million and $1.1 billion respectively. This renewed appetite for debt stands in stark contrast to recent years, when miners frantically extinguished debt. The move to embrace debt appears to be driven by its cost effectiveness when compared to tapping equity markets, which remain close to post-GFC lows. Arrium, Atlas Iron, Sandfire Resources, Discovery Metals and Lynas all raised debt to fund projects. It now appears that debt is no longer a dirty word and the mid-tier 50 are embracing leverage again to fund development activities.
Property plant and equipment

Total PPE assets increased by almost $5 billion or 35% from 2011 levels. A significant portion of this rise can be attributed to acquisitions made by both Whitehaven Coal and Alacer Gold. Excluding these, the largest additions to PPE by the mid-tier 50 are shown in the table below:
Company
1. Lynas
Spend $m
346
Activity
Rare earths project development in Malaysia and Western Australia Iron ore project development Carina mine Koolan Island, Extension Hill and Geraldton Port capital expenditure Completion of the four metre Tailings Storage Facility Ngezi phase 2 expansion project
Key Balance Sheet Ratios

2012
Debt to Equity Net Debt to Equity Current Ratio Quick Ratio 18.31% -2.76% 3.48 1.76
2011
16.49% -7.06% 3.66 2.25
2. Mineral Resources 3. Mt Gibson Iron
265 250
4. Energy Resources 202 Australia 5. Zimplats 198
As a group, the mid-tier 50 experienced a slight deterioration in both their current and quick ratios, reflecting an increase of $730 million or 27% in accounts payable over the prior year. In fact, 32 of the mid-tier 50 recorded an increase in account payable balances during the reporting period. However, with a substantial cash position and both the current and quick ratios remaining above one, short term liquidity does not appear to be a concern.
Share swap support

Throughout 2012 several of the mid-tier 50 increased share capital. The three largest increases in share capital were due to scrip based acquisitions. Investors were willing to back the mid-tier 50 by accepting scrip for deals.
Company
Whitehaven Coal Alacer Gold Evolution Mining
Amount Activity ($m)

2,525 1,141 860 Acquisition / merger with Aston Resources Acquisition of Avoca Resources Merger of Catalpa Resources and Conquest Mining and issue of scrip to Newcrest for Mt. Rawdon and 30% of the Cracow Mine Construction of Ranger 3 Deeps and water management facilities Primarily acquisition of FerAus
Energy Resources Australia Atlas Iron
492
274
21
3.3 Cash flow

2012 $m
CASH FLOWS GENERATED FROM OPERATIONS Cash generated from operations Net borrowing costs Other Income taxes (paid)/refunded Net operating cash flows CASH FLOWS RELATED TO INVESTING ACTIVITIES Purchases of property, plant and equipment Exploration and development expenditure Purchases of investments and intangibles Other Proceeds from sale of property, plant and equipment Proceeds from sale of investments Net investing cash flows CASH FLOWS RELATED TO FINANCING ACTIVITIES Proceeds from ordinary share issues Net borrowings Distribution to shareholders Other Net financing cash flows Net increase/(decrease) in cash and cash equivalents
Source: Company financials, PwC Analysis
2011 $m
Change %
5,358 (31) 291 (422) 5,195
3,996 (46) 138 (275) 3,814
34% -31% 111% 54% 36%
(3,289) (1,807) (1,879) (911) 528 1,085 (6,274)
(2,194) (974) (1,885) (817) 289 715 (4,865)
50% 86% 0% 12% 82% 52% 29%
2,322 1,543 (1,885) (162) 1,818 739
1,785 1,019 (762) (113) 1,929 877
30% 51% 147% 44% -6% -16%
Generate, invest and return

Against a backdrop of declining commodity prices and rising costs of production the mid-tier 50 has managed to post an impressive 34% increase in cash flow from operations to $5.2 billion from $3.8 billion in the last year. The companies with more mature operations rewarded shareholders by paying $1.8 billion, an increase of 147%, through dividends and other distributions. The mid-tier 50 as a group invests to build the mines of the future. This year the group increased their investment in PPE by approximately $1.2 billion and increased exploration and development spending by $900 million, which is a doubling of last years spending.
Major operation and investing activities cashflow components by commodites 2012 vs 2011
6,000 Cash generated from operations Purchase of property, plant and equipment Exploration and development
128 5,000 960
4,000
244 417
753 A$ in millions
3,000
991
202 675
1,844 2,000
244 316 352 213 242 765 777 329 468 351 812 213 180 227 3 589 111 146 246 15 290 166
1,000 1,430 1,263
471
592
594
2012
2011
2012
Copper
2011
Coal Other
2012
Gold
2011
Iron Ore
Nickel, Uranium and Diversified

Source: Company financial statements, PwC analysis
23
Operating cashflows: the dominance of gold

Cash generated from operations increased by an impressive 34%, with gold producers accumulating cash at a faster rate than their peers in the mid-tier 50 on the back of higher production and increased prices. 13 of the 19 gold miners in the mid-tier 50 experienced an increase in operating cash flow. The increases are most apparent in Alacer Gold ($286 million), Evolution Mining ($148 million), Resolute Gold ($142 million), Kingsgate Gold ($136 million) and St Barbara ($121 million).
While larger players such as BHP Billiton and Fortescue Metals announced decisions to defer major investments, the mid-tier 50 have remained relatively confident in growing their businesses. The willingness by mining executives to invest in exploration, mine development and PP&E should be applauded. Boards and management are taking a longer strategic view when making investment decisions and have proactively placed cash into growth opportunities, ensuring they are in a position to deliver for shareholders when the commodity price cycle swings once again.
Major financing cashflow components by commodites 2012 vs 2011
2,500
Investing cashflows: moving forward with confidence

Amongst the mid-tier 50, spending on exploration and development rose by 86% from $974 million to $1.8 billion, while spending on property, plant and equipment (PP&E) rose 50% from $2.2 billion to $3.3 billion. The boost to exploration and development is a positive sign, despite the pessimism surrounding much of the industry. Iron ore and gold producers have posted the largest increase in exploration and mine development spending. Spending in the iron ore sector increased by $422 million as miners set out to firm up their reserves and deliver key infrastructure. Atlas Iron spent $118 million on mine development (2011: $31 million), with $48.5 million of this spent on the expansion of its existing Wodgina mine (2010: nil), while Mineral Resources increased its mine development to $70.2 million (2010: $5 million) developing the Carina mine. The gold sector posted a $300 million increase in 2012. Evolution Mining increased its spending to $161 million (2010: $28 million) whilst Kingsgate lifted its spending to $75 million (2010:$12million).
Proceeds from ordinary share
Distribution to shareholders
2,000
708 47 192
1,500
82 132 9 336 715
A$ in millions
131 1,000 927 241 488 379 500 282 76 464 505 276 0 95 94 227 102 51 193
2012
2012
2011
2011
Iron Ore Copper
Gold
Other
Coal
Nickel, Uranium and Diversified
Source: Company financials, PwC analysis
Financing cashflows: cash is king

During 2012, the proceeds from ordinary share issues amongst the mid-tier 50 has risen by 30% from $1.8 billion to $2.3 billion, primarily driven by $548 million invested in the gold sector. Despite the difficult equity market, the mid-tier 50 have successfully raised capital from shareholders, with significant equity raisings undertaken by: Energy Resources of Australia $488 million for the construction of a concentrator as well as exploration and development of its Ranger uranium project Gindalbie Metals $209 million towards the development of the Karara iron ore project in Western Australia Indophil Resources $183 million to fund the Tampakan Copper-Gold project Gold One International a share placement of $156 million to a consortium of Chinese investors to fund future development projects Sphere Minerals $121 million to fund studies and early work programmes at its iron-ore assets in Mauritania Independence Group $115 million to fund construction and development at its part-owned Tropicana gold project
Summary of Dividend Payments and Dividend Yield

Commodity Dividend Paid 2012 (A$m)
276 42 488 227 329 1,363
Mark Cap at 30 June 2012 (A$m)

8,999 13,328 9,552 6,325 13,627 51,831
Dividend Yield
Dividend Paid 2011 (A$m)

193 51 227 94 197 762
Mark Cap at 30 June 2011 (A$m)

13,648 12,923 11,592 8,622 23,007 69,792
Dividend Yield
Iron Ore Gold Coal Copper Others Total
3.1% 0.3% 5.1% 3.6% 2.4% 2.6%
1.4% 0.4% 2.0% 1.1% 0.9% 1.1%
(Notes: Dividend paid excludes share buy-backs of $489 million by Oz Minerals and $31 million by Resolute Mining)
25
Distributions to shareholders have increased markedly from $0.8 billion to $1.9 billion in 2012, a 138% increase. Investors are demanding cash distributions and the midtier 50 have responded, returning cash through increased dividends and share buy-backs. Dividend yield has more than doubled from 1.1% in 2011 to 2.6% across all commodities. Interestingly despite having a difficult year coal companies provided the best dividend return with a solid yield of 5.1%. On the other hand the gold companies that had benefited the most from price rises contributed only a 0.3% yield. This is reflective of the fact that the coal companies are more mature with developed operations where as the gold sector remains at the more junior end of the spectrum with a number of single asset operations and companies that are still looking to develop mines. The top 5 dividends for 2012 were as follows:
2012 ($m)
Whitehaven Oz Minerals New Hope Coal Alumina Iluka 272 227 216 165 117
Investment worthy?
Aggregate ratio analysis
2012
Share price PE Ratio EPS DPS Dividend yield $1.68 32.31 5.21 cents 3.80 cents 2.6%
2011
$2.54 24.87 10.22 cents 2.47 cents 1.1%
2011 ($m)
30 94 197 102 0
If the mid-tier 50 traded as a single entity, then based on shares on issue and overall market capitalisation, this conglomerate would have been valued at $2.54 per share on 30 June 2011, but by 30 June 2012 the share price would have fallen by 33.7% to $1.68 per share. This decline exceeds the overall fall in market capitalisation of 26%. The additional decline in the share price compared to market capitalisation can be explained by additional share capital issued during the year. Mining companies around the world have heard the call from shareholders to return cash. The mid-tier 50s dividend yield of 2.6% is at unprecedented highs for this sector. When you consider that this is the engine room for early stage exploration and development projects, the ability to return cash back to shareholders is no small feat. The price to earnings multiple of the mid-tier 50, although high by broader market standards, is consistent with the view that this is a growth sector. With a significant representation of explorers and developers with limited underlying earnings, the earnings multiple for this group reflects higher growth expectations.
Additionally, during 2012, Oz Minerals and Resolute Mining returned $489 million and $31 million respectively via a share buy-back.
Are gold companies losing their lustre?

Historically investors viewed a listed gold producer as a proxy for direct exposure to gold. However, since the Global Financial Crisis (GFC) this appears to have changed.
Over the centuries, gold has been a symbol of wealth and power. In times of economic uncertainty, it has been seen as a safe haven against inflation or deflation. This is no different today, for example: During recent economic turbulence investors and central banks alike have used gold as an alternative to investing in US dollars (USD). 1 The US Federal Reserves open-ended stimulus program is set to push gold to record highs as inflation fears and currency devaluation drive investors to safehaven assets. 2 Gold is a true store of wealth. Given it is priced in USD, gold is directly influenced by the strength of the US currency. The USD Index3 has fallen 11% since its 5 year peak in March 2009. Increasing quantities of gold are held in reserve as a hedge against the USD, inflation and general economic uncertainty. Central banks have again become net gold buyers after being net sellers for the past two decades. In 2011 central bank buying of gold was at levels not seen since 1964. The weakening USD and increased gold demand have driven a 142% increase in the USD gold price over the past 5 years. With a strong Australian dollar (AUD) this has equated to an increase of 90% in AUD terms.
US Dollar weakens 11% over 5 years (USD Index)
140 120 100 80 60 40 20 0
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
March 2009 89 points July 2001 121 points
11% decline
Sep 2012 80 points
2011 2011 2010
Source: Dow Jones Factiva
Gold price skyrockets (16% CAGR) during last 12 years (USD/oz)

2,000
1,500
Sep 2009
1,000
21% CAGR
500
12% CAGR
0
2001 2002 2003 2000 2005 2008 2007 2009 2004 2006 2010 2012 2011
Source: Perth Mint
Central Banks and States become net gold buyers from 2008 (Tonnes of world gold reserves)
125,000 120,000 115,000 110,000 105,000 100,000
2000 2001 2002 2003 2004 2005 2006 2007 2008
Source: World Gold Council
Net sellers
Net buyers
2009
2012
27
While a strong increase in the gold price has occurred, the same cannot be said for the price of shares in listed gold producers. This disconnect is most evident amidst the larger multinational gold producers, with shares in Newmont Mining, Newcrest Mining, Barrick Gold and Gold Fields (Global Producers), increasing in market value by only 11% on average, over a 5 year period.
Our basket of listed Australian mid-tier gold companies has demonstrated greater elasticity by recovering rapidly from the GFC, but has seen a decline in the value of their stock over the last 24 months, resulting in a 60% increase in value over the same 5 year period (in AUD terms). There is now a significant disconnect between the value of shares in these smaller producers and increasing gold prices.
Australian major and mid cap gold companies underperform gold price over the past 5 years (Index, USD/oz)
3.00 2.50
2.00
1.50
1.00
0.50 0 Sep 07 Mar 08 Jun 08 Sep 08 Mar 09 Jun 09 Sep 09 Mar 10 Jun 10 Sep 10 Mar 11 Jun 11 Sep 11 Mar 12 Jun 12 Dec 07 Dec 08 Dec 09 Dec 10 Dec 11 Sep12
USD Gold price

Source: Dow Jones Factiva, PwC Analysis
Mid-tier 50 share price
Global Producers share price
Index is a compilation of mid-tier 50 companies during 2007-2012, weighted by volume traded on the ASX base dated at 11/9/2007.
What has driven the disconnect?

1. Shares in listed gold producers face growing competition for the investor dollar Over the past 5 years, the options available to investors seeking to include gold in their portfolio have increased beyond merely acquiring shares in a gold producer. More alarmingly for gold companies, one of the alternative investments for those seeking exposure to gold has steadily increased its share of the market. Since their creation in 2003, gold backed Exchange Traded Funds (ETFs) have provided investors with an alternate means to invest in gold, via a liquid and tradable market as readily accessible as listed company shares. Gold ETFs are directly linked to the price of gold and provide investors with exposure to the price of gold, without the challenges of holding the physical asset. Investing in an ETF also liberates the investor from the various risks typically faced by a producer (e.g. exploration and project development risk, geological risk, country risk, industrial relations, adverse weather conditions, etc.). Since 2007 the appetite for buying and holding physical gold has also increased markedly. For example, the Perth Mint saw 2012 demand reach levels some four times higher than five years ago.
What do these shifting market dynamics mean for the gold companies?
With exposure to the physical gold price no longer the primary draw card for investors, a focus by gold producers on creating shareholder value through sound company management to attract shareholder investment is now more critical than ever. Gold producers have to tackle a series of issues.
Escalating costs
While the gold price has increased, rapidly escalating operating costs in the area of labour, commodity input costs and infrastructure charges, have greatly tempered margin growth. The Australian mid-tier gold miners have demonstrated the most elasticity, capitalising upon a rising price between 2008-2010. Recently though, they have significantly dropped behind the pace of growth in the gold price.
Gold price increases have not correlated or been fully captured by operating margin, especially in the last 24 months
100% 1,500
These developments in the gold market may well have caused a diversion of investor dollars away from gold stocks toward ETFs and physical gold. 2. The emerging low cost base recycled gold market With high gold prices and increasing economic uncertainty, an ever-increasing quantity of gold, largely in the form of jewellery, is entering the market after being recycled. In 2011, recycled gold represented almost 40% of the global supply, having increased in volume by 74% from 2007. With 43% of the 2011 annual demand for gold coming from jewellery, this is set to perpetuate increased recycled gold production for some time.
Market supply from recycled gold has increased faster than supply from mining activity
15% CAGR
484 956
1,000
60%
40% 500 20% 0
2007
2008
2009
2010
2011
Mid-tier 50 EBITDA margin Global Producers EBITDA margin Gold price (USD/oz)
1665
+74% over 5 years
9% CAGR
2832 2031
+39% over 5 years
2007 (tonnes) Central banks and State sales

Source: World Gold Council
2011 (tonnes) Recycled gold Mine production
EBITDA MARGIN
80%
US$/oz
29
Decreasing ore grades

Quality gold reserves are harder to find. Gold companies, like many across the mining industry, often have to spend more just to stand still. A higher gold price encourages acquisition or development at lower ore grades. This means a commensurate increase in productivity is required to remain economical when prices decline. Potentially future lower gold prices will expose the worst performers, rendering some operations marginal.
Impact of a high Australian dollar

As gold is priced in USD, a stronger AUD makes Australian gold production less competitive. However, our mid-tier gold producers have generally reduced their exposure to Australian revenues in recent years.
Low use of bank capital

Gold companies have typically had low debt to equity ratios (10-15%). Historically, they have used a high level of equity funding and recycled free cashflow back into exploration and working capital to support growth ambitions rather than paying out dividends. This strategy results in a higher cost of capital than similar sized capital intensive companies which have ratios of 25% plus. This lower leveraging of balance sheets, and the low (if any) payment of dividends, requires shareholder returns to be achieved through share price growth. In an environment where share price is not keeping pace with the gold price, this return to shareholders via share price growth results in a lower return on equity than shareholders may otherwise be seeking, making an investment in a gold producer less attractive than other avenues for investing in gold.
Changing geographical focus

Gold miners are continuing to expand their geographic coverage in search of resources. The African continent is the dominant location for the Australian mid-tier gold miners resources (33%), while Australia still holds the highest noted reserves at 34% compared to Africa (26%) and South East Asia (28%). Looking forward, the Americas and South East Asia both see combined resources being 4 times reported reserves, indicating two regions where proportionally higher growth of new gold projects may be likely to occur. This search for gold deposits in countries with less mature mining regimes introduces a variety of risks including nationalisation, political instability, infrastructure, and permitting. In turn, investors are exposed to risks they may not be willing to accept.
Average ore grade in reserves has declined
2.2 2 1.8
1.6 1.4 1.2 0
2007
2008
2009
2010
2011
Mid-tier 50
Global Producers
With exposure to the physical gold price no longer the primary draw card for investors, a focus by gold producers on creating shareholder value through sound company management to attract shareholder investment is now more critical than ever.
(g/t)
Where to from here?

No longer can gold companies assume that they are seen as the most efficient and direct path for investors to gain exposure to the gold price; ETFs, physical gold purchases and a readily available supply of recycled gold have taken at least a portion of investor demand from them. Even with the incentive of quarterly, sometimes monthly dividends, gold companies are recognising that they will be assessed on their performance as a manager of investments, the quality of their projects, growth of revenue streams and capital growth. A concerted effort is needed to focus on productivity, setting and achieving management targets to build shareholder confidence, using debt to leverage higher returns, and prioritising capital investment only in projects that provide robust returns and avoiding chasing reserve increases at any cost. Investors are still looking at mid caps for exposure to gold due to their transparent and agile management structure, and potential upside elasticity from gold price movements. However, during a period of rapid price increases, losing sight of realistic project feasibilities, achievable and ongoing productivity targets and saleable ore grades is a risk to even the most conservative miners. Companies who are able to demonstrate solid company fundamentals, achieve high levels of productivity, and build up economically attractive resource holdings and ore grades will set themselves up to be attractive investment targets for shareholders and gold majors alike.
For further information please contact:

Robert Hughes Director T: +61 7 3257 8022 E: robert.a.hughes@au.pwc.com Chris Sullivan Senior Manager T: +61 7 3257 8429 E: chris.x.sullivan@au.pwc.com Enrique Reyna Senior Consultant T: +61 7 3257 8378 E:enrique.reyna@au.pwc.com
1 PwC 2011 Mine. The game has changed 2 Australian Financial Review, 27th September 2012 3 The USD Index measures the performance of the USD against a basket of currencies: EUR, JPY, GBP, CAD, CHF and SEK. Aussie Mine November 2012
31
M&A the time to buy!

In what has been a slow year, we have seen an uptick in deal activity in recent months, particularly in the gold sector. The mid-tier miners and foreign investors have emerged to take advantage of falling stock prices and lower valuations.
We anticipate in the short to medium term that consolidation of the mid-tier miners will drive M&A activity, particularly for gold producers. The challenge, of course, will be convincing target companies to sell at prices which are impacted by the slump in equities over the past twelve months. Australias mid-tier miners are in much better shape than they were following the Global Financial Crisis, with more cash and stronger balance sheets. A number of the mid-tier 50, with very strong balance sheets, have been actively assessing acquisition opportunities. Companies that have recently expressed interest in acquiring assets within the next 6 to 24 months include: Gold One Iluka Resources Integra Mining Kingsrose Mining Northern Star Resources Perseus Mining Resolute Mining Sandfire Resources Silver Lake Resources Troy Resources.
In 2012, the mid-tier 50 were named in 25 transactions totalling $25.1 billion. This is down from 34 transactions totalling $40.2 billion in the twelve months to September 2011.
Gold to lead future M&A

We have seen an increase in corporate activity in the gold sector over the last twelve months. The coal industry has led M&A activity in previous years leaving us with just four producing coal companies in the mid-tier 50. The gold sector led the transaction tally in the twelve months to September 2012. The Australian mid-tier gold miners have begun a race to scale, seeking to shift from being largely single asset companies. The consolidation in the gold sector is evidence of an emerging trend for gold miners to diversify from single project operations. As Evolution Mining Executive Chairman, Jake Klein, stated, We think were at an inflection point in the gold industry where well see a significant and fundamental paradigm shift driven by investors demanding consolidation. Consolidation between local players will grow a new breed of globally competitive mid-tier miners.
We think were at an inflection point in the gold industry where well see a significant and fundamental paradigm shift driven by investors demanding consolidation. Consolidation between local players will grow a new breed of globally competitive mid-tier miners
Jake Klein, Executive Chairman, Evolution Mining
In August 2012, Silver Lake Resources offered $417 million for Integra Mining. Senior executives from Integra commented that the rising cost of mining gold in Australia would drive merger activity amongst mid-tier gold producers in the short to medium term. On 29 June 2012, gold producers St. Barbara and Allied Gold announced the formation of a $1 billion mid-tier mining company via a merger. We expect mergers and acquisitions to be increasingly commonplace in Australias gold mining sector, as desire for asset diversification and rising costs push miners to pool their resources, while larger global producers eye acquisitions to replace consumed reserves. Chinas earlier mining-focused investment was in industrial commodities such as iron ore, coal and copper but they have recently become significant investors in gold as they look to increase their reserve of the precious metal, and move away from the US dollar. Corporate activity in the gold sector will continue as a theme over the next twelve months.
Offshore investors were part of some of the larger deals in 2012 and have remained active, particularly in recent months. Notable deals include: the failed $3 billion bid by Hong Kong based Noble Group and Korean Giant POSCO for iron ore producer Arrium the $1 billion acquisition of Sundance Resources by Chinas Hanlong Mining, which has been delayed by a series of regulatory and financial hurdles a Chinese-led consortium has bid for Discovery Metals, valuing the Australian-listed copper miner at $830 million the $506 million acquisition of Gold One International by BCX Gold Investment (a Chinese Consortium comprising Baiyin Non-Ferrous Group Co, the ChinaAfrica Development Fund and Long March Capital Group) Meijin Energy Groups failed $434 million offer to acquire diversified miner Western Desert Resources Shandong Golds $228 million tilt for control of gold miner Focus Minerals Zijin Minings $223 million acquisition of Norton Goldfields. With commodity prices having declined over the last twelve months, we anticipate that foreign buyers are likely to take advantage of lower valuations in the Australian M&A mining sector.
Domestic companies drive deal numbers but foreign acquisitions are larger
In the twelve months to September 2012 domestic consolidation dominated, with 15 transactions involving all Australian companies. However foreign investors have played at the larger end with deals emerging out of China, the United States and more recently Korea. With China going through a leadership change towards the end of 2012, many Chinese State Owned Enterprises (SOEs) have placed their overseas expansion plans on hold for the immediate short term. We expect investment from China to return and once again be a significant driver for Australian mining M&A in the medium to long term.
33
Completed M&A Activity in the mid-tier 50: Deals greater than A$15 million (September 2011 to September 2012)
Target Acquirer Sector Acquirer Ownership country interest
United States Australia China 100% 100% 100%
Approximate Announcement Completion deal value date date (AUD$m)

4,950 11/07/2011 2,090 12/12/2011 1,521 23/12/2011 20/12/2011 19/04/2012 27/06/2012
Macarthur Coal Aston Resources Ltd Gloucester Coal
Peadbody Energy Whitehaven Coal Ltd Yancoal Australia Pty Ltd China Guangdong Nuclear Power Whitehaven Coal Ltd Evolution Mining Ltd
Coal Coal Coal
Extract Resources
Uranium
China
100%
1,270 09/12/2011
16/04/2012
Boardwalk Resources Pty Ltd Conquest Mining Ltd Cracow Mining and Mt Rawdon Gold Mines Gold One International Ltd Isaac Plains Coal JV (Seller: Aquila Resources Ltd)
Coal Gold
Australia Australia
100% Merger
698 12/12/2011 687 15/06/2011
02/05/2012 18/10/2011
BCX Gold Investment Holdings Ltd Sumitomo Corporation
Gold
China
82%
506 16/05/2011
28/11/2011
Coal
Japan
50%
430 03/04/2012
12/07/2012
Rand Uranium (Pty) Gold One Ltd International Ltd Brockman Resources Ltd Coalworks Ltd Kagara Nickel Pty Ltd (Seller: Kagara Ltd) Ezulwini Mining Company (Pty) Ltd Northern Energy Corp Ltd The Balla Balla Project (Seller: Atlas Iron Ltd) Total
Gold
Australia
100%
237 24/05/2011
06/01/2012
Wah Nam International Holdings Ltd Whitehaven Coal Ltd Western Areas NL Gold One International Ltd
Diversified
Hong Kong Australia Australia
45%
195 12/12/2011
16/03/2012
Coal Nickel
83% 100%
142 07/05/2012 68 05/03/2012
21/08/2012 14/03/2012
Gold
Australia
100%
67 02/04/2012
27/07/2012
New Hope Coal Corporation Ltd Forge Resources Ltd; Todd Capital
Australia
19% 100%
53 29/08/2011 40 19/03/2012
11/11/2011 31/05/2012
Magnetite, Australia/ vanadium NZ and titanium
12,954
Pending or Unsuccessful M&A Activity in the mid-tier 50: Deals greater than A$15 million as at 30 September 2012
Target Acquirer Sector Acquirer country
Australia China
Ownership Approximate Announcement Status interest deal value date (AUD$m)

79% 81% 4,113 13/06/2012 991 18/07/2011 Unsuccessful Pending
Whitehaven Coal Ltd Sundance Resources Ltd CGA Mining Ltd Northern Iron Ltd Northern Iron Ltd Integra Mining Ltd Southern Iron Ltd; Central Iron Ltd; Coober Pedy Resources Ltd Phillips River Mining Ltd Total
Tinkler Group Pty Ltd Hanlong Mining Investment Pty Ltd B2Gold Corporation Prominvest AG Aditya Birla Mgmt Corp Pvt Silver Lake Resources Ltd Arrium Ltd (formerly OneSteel Ltd)
Coal Iron Ore
Gold Iron Ore Iron Ore Gold Iron Ore
Canada Switzerland India Australia Australia
100% 100% 100% Merger 100%
942 19/09/2012 616 30/07/2012 530 10/05/2012 417 06/08/2012 346 22/08/2011
Pending Pending Pending Pending Pending
Silver Lake Resources Ltd
Gold
Australia
100%
16 25/01/2012 7,970
Unsuccessful
Source; Capital IQ, PwC analysis
Pending M&A Activity in the mid-tier 50: Deals greater than A$15 million post 30 September 2012
Target Acquirer Sector Acquirer country
Korea
Ownership Approximate Announcement Status interest deal value date (AUD$m)

100% 3,153 01/10/2012 Unsuccessful
Arrium Ltd (formerly OneSteel Ltd) Discovery Metals Total
Consortium led by Noble Group and POSCO Chinese Consortium
Iron Ore
Copper
China
100%
830 04/10/2012 3,983
Pending
35
Movements in the mid tier 50

The composition of the mid-tier 50 has rapidly transformed in 2012 with 16 companies changing in the group, a 33%churn. Coal made way for gold, with the exodus of eight coal companies from last years list and the admission of nine gold companies into this years analysis.
Consistent with prior years BHP Billiton, Rio Tinto, Fortescue and Newcrest remain outside the mid-tier 50. With a decline in market value, Iluka Resources and Alumina have fallen below the $5 billion ceiling and have re-entered the mid-tier 50. The mid-tier 50, has been the domain of the coal miner in years gone by, however the number of coal producers has been whittled away by a combination of ongoing consolidation in the coal industry and a decline in coal prices over the year to 30 June 2012.
The Australian coal companies in our mid-tier 50 are shadows of their former selves, even taking into account that Yancoal Australia has been excluded from this years list. Yancoal has been excluded as it has not reported a full year result. Intrepid Mines made a controversial exit from the midtier 50 when its joint venture partner, Indo Multi Niaga, suspended operations and ordered employees to vacate the Tujuh Bukit copper and gold deposit. The companys market capitalisation fell to approximately $270 million and was below the threshold for this years mid-tier 50 list. This once again highlighted sovereign risk as a key issue for the industry. Arrium Ltd (formerly OneSteel), enters our list this year as an iron ore mining company because a significant part of its earnings and revenue is now generated from mining. The number of entrants and exits from the mid-tier 50 are presented below:
Mid-tier 50 exits
Aditya Birla Minerals Ltd Aquarius Platinum Ltd Aston Resources Ltd Bandanna Energy Ltd Bathurst Resources Ltd Extract Resources Ltd Gloucester Coal Ltd Gryphon Minerals Ltd Guildford Coal Ltd Intrepid Mines Ltd Ivanhoe Australia Ltd Kangaroo Resources Ltd Macarthur Coal Ltd Minara Resources Ltd Mirabela Nickel Ltd White Energy Company Ltd
Reason
Market capitalisation below threshold Market capitalisation below threshold Merged with Whitehaven Coal Market capitalisation below threshold Market capitalisation below threshold Acquired by China Guangdong Nuclear Power Corporation Merged with Yancoal Australia Ltd, the local unit of Yanzhou Coal Mining Co Market capitalisation below threshold Market capitalisation below threshold Market capitalisation below threshold Market capitalisation below threshold Market capitalisation below threshold Acquired by Peabody Energy for a total value of $5.1 billion Glencore acquired outstanding shareholding in Minara Resources after successful closure of its cash offer Market capitalisation below threshold Market capitalisation below threshold
Mid-tier 50 entrants
Alacer Gold Corp Alumina Ltd Arrium Ltd Brockman Resources (Wah Nam International Holdings Ltd) Evolution Mining Ltd Gold One International Ltd Iluka Resources Ltd Indophil Resources NL Integra Mining Ltd Kingsrose Mining Ltd Mineral Deposits Ltd Northern Star Resources Ltd Silver Lake Resources Sphere Minerals Ltd Syrah Resources Ltd Troy Resources Ltd
Commodity
Gold Aluminium Iron ore Iron ore Gold Gold Mineral Sands (other) Copper Gold Gold Other Gold Gold Iron ore Graphite (other) Gold
37
The 10 mid-tier 50 companies with the greatest increase in market capitalisation in the year to 30 June 2012
1000%
1905%
750%
500%
250%
0%
N Re or so the ur rn ce S Si s tar lve Lt d rL ak e Re so ur ce Re s gi s Re so ur ce s Lt Re d so lu te M in in g Lt d
Source: Capital IQ
In
do
Sy
The mid-tier 50s tough year is further demonstrated in the top 10 market capitalisation increases. The rises in market capitalisation often came from mergers and equity raisings rather than share price improvement. Syrah Resources stunning result is a bright spot for the non-gold companies. Their sensational share price performance comes off the back of initial results from their graphite project in Mozambique. Evolution Minings rise in market capitalisation was a function of the merger of Catalpa Resources and Conquest Mining. Whitehavens increase in market capitalisation came as a result of a merger with Aston Resources and belied the fact that the combined companys share price has fallen sharply. Although gold producers made up six of the top ten increases in market capitalisation, it should be noted that all of these, excluding Regis Resources, had capital injections during the year. Regis Resources was the stand out gold stock ramping up production at its Duketon Project, bringing the Garden Well Gold Project close to commissioning on time and on budget and increasing reserves at its Rosemont Gold operation.
Resolute Mining and Silver Lake Resources delivered a strong operating performance, with increasing production volumes resulting in a drop in unit costs of production. Northern Stars rise came from a solid operating performance due to an upgrade to its resources. An often quoted statistic provides compelling support for the gold price the US has 74.5% of its currency backed by gold compared to just 1.7% for China. Central banks around the world are purchasing physical bullion reserves in response to the massive debasement of the worlds unofficial reserve currency the US dollar. As a result we expect to see further gold acquisitions driven from China. Interestingly, of the 19 gold companies in the mid-tier 50 only one sits in the top ten by market capitalisation. There are a number of companies vying to be the large mid-tier gold miner, by building a diversified portfolio of projects both in and outside Australia.
rn G at old io O na n W lL e hi td te ha ve n Co al Lt Sp d he re M in er al s Lt d
Lt
Lt
ce
in
ur
in
so
Re
io
ut
il R
es
ou
rc
es
NL
ra
ph
ol
Ev
In
te
% Price
% Capital transactions
Iron ore in focus

In 2012 the mid-tier iron ore miners increased their production by approximately 60% to 36 mtpa. Despite recent turbulence on global iron ore markets, a further 30 mtpa of supply is scheduled to come on line by 2015.
In addition to this, longer term plans show the mid-tier iron ore miners increasing production almost 200% to approximately 170mtpa by 2019 - assuming all projects go ahead as planned. These are lofty plans by the midtier as they seek to capitalise on demand from emerging markets.
7
2% 8%
Demand side risk leading to price volatility

Global steel production (Btpa)
1.6
1.2
0.8
0.4
The challenge facing the mid-tier iron ore miner

Given increasing price volatility, growing cost pressures and substantial new supply from the majors in the next few years, the future for the mid-tier iron ore producer now appears more uncertain.
Production profile (Mtpa)
180
0.0
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E
Source: PwC analysis
Recent sluggish demand for steel has been the catalyst for falls in the iron ore price. From 2001 to 2007 global annual steel production grew at an average 8% p.a. (see chart above). Since the GFC, growth has moderated to around 2% p.a. The obvious question for iron ore miners is how much steel the world will need in the coming years.
120
60
As demand for crude steel plateaus, the Australian iron ore miners felt the ripple effects. Iron ore inventories in major ports in China accumulated, reaching the equivalent of 28 days of production in August 2012.
0 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 Potential Projects
Current and Commited Projects
Given increasing price volatility, growing cost pressures and substantial new supply from the majors in the next few years, the future for the mid-tier iron ore producer now appears more uncertain.
39
2012 iron ore cost curve for delivery to China (US$/t 62% Fe) CFR China
200 150
Marginal cost of production: -US$125t
US$/t
100
Australian mid-tier
50 0 0
Source: JP Morgan
100
200
300
400
500
600
700
800
900
1000
Mt iron ore
The decline in the iron ore price has caused even the more cost competitive players to reconsider their future plans. For example, BHP Billiton and Fortescue Metals have announced the deferral of capacity expansions. Some iron ore producers in the fourth cost quartile have been forced to suspend production. For example, by late September, an estimated 40% of iron ore mines in China halted production. Even so, Chinese producers continue to be subsidised and operate, despite being uneconomic. This is clearly unsustainable over the longer term. A pull back in production by these producers helped the iron ore price rebound to almost US$120/t in October 2012 in many circles this price is viewed as a natural floor. These are positive signs for the mid-tier iron ore miner. The Australian mid-tier producers sit adjacent to the marginal producers from China and the less efficient producers from Canada, the US and Europe. A return to a price below US$100 per tonne will once again place pressure on this third quartile of producers, particularly those who carry debt on their balance sheets.
Potential risk of oversupply diminished

The major iron ore players have bowed to the pressure to review capacity expansion. Around 480 mpta of global capacity scheduled to come online by 2018 , representing 27% growth from current production levels, has now been deferred. The demand for iron ore up to 2018 is expected to climb at a CAGR of approximately 3%, representing approximately 120 mtpa. The recent deferrals by the big players have diminished the risk of global oversupply, although this remains a real threat if the big 4 iron ore producers deliver on their remaining expansion plans.
Cost risk: cost inflation

Apart from potential price pressures, the mid-tier iron ore miners are also experiencing increased cost pressures from an increasing tax burden and inefficiencies in the Australian labour market. None of these factors are likely to change in the near future. The Western Australian governments increase in royalties combined with the federal governments carbon tax has added to the burden carried by the mid-tier iron ore miners. The design of the Minerals Resource Rent Tax (MRRT) means that lower iron ore prices have reduced the likelihood of significant MRRT payments. As federal and state governments tackle structural deficits it appears likely that they will continue to look to the mining industry. Finally, labour cost inflation in the mining industry has grown over the five years to May 2012 at 6.6% p.a. It appears to be continuing to increase, with demand for skilled construction staff forecast to remain fairly constant over the medium term . Limited access to skilled foreign workers and the continuing strong role of trade unions in some sub-sectors, mean that labour costs seem unlikely to fall in the short to medium term.
2002/3 2010/11 minerals sector tax paid and commodity prices

25,000 20,000 15,000 10,000 5,000 0 2002-03
120 100 80 60 40 20 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10 0 2010-11
Royalties (LHS)
Company tax (LHS)
Commodity prices (RHS)
Firing on all cylinders: Implications for the mid-tier iron ore miners
To best weather the current period of uncertainty in the iron ore market and fire on all cylinders, the mid-tier iron ore miners should mobilise their efforts around controllable factors.
Factor
Access to infrastructure
Reason for importance

Key driver of operational efficiency and competitive advantage. Strategic flexibility and agility paramount for supply chain logistics.
Our analysis of current state

100mtpa of capacity expected to be added by the midtiers with approximately 70mpta depending on significant rail and port infrastructure investment. None of this is confirmed for development at present. Difficult and expensive to refinance debt obligations due to perceptions of reduced demand and increasing supply.
Capital structures
Managing total cost competiveness through optimising and regularly reviewing their capital structure.
Gap between production costs and the price of iron Equity markets in the doldrums raising funds ore will remain tight and will be tighter if saddled with through capital raisings unattractive. significant debt. Cost efficiency and operational excellence If margins moderate, executives will need to transform their organisations on a number of dimensions to ensure cost competitiveness. As industry becomes more mature value is created through optimising operations rather than expanding capacity. Transformation will not be smooth given that for some time now organisations have been wired for growth rather than cost efficiency and effectiveness
41
Where to?
From our experience the following are key dimensions that need to be tackled to respond to emerging market and operating conditions: Strategic: Reassess tradeoffs between cost and production output Operational: Reduce waste in cost intensive processes Procurement: Take a stronger position with suppliers and negotiate better deals Business model: Bring high margin contracted processes in-house Organisational: Develop internal capability around cost management HR: Retain key talent and reduce spare capacity Those that have guaranteed infrastructure, a sound capital structure and rigorous cost management will take the competitive high ground. The highly successful iron ore producers of the future will tackle these challenges head on.
For further information please contact

Aleksey Podkhyneychenko Director, Consulting T: +61 8 9238 3602 E: aleksey.podkhyneychenko@au.pwc.com Craig Knox Lyttle Director, Consulting T: +61 8 9238 3125 E: craig.knox.lyttle@au.pwc.com
Changing attitudes to solve the skills shortage

As the resources sector has found, not only has the lack of skilled professionals, tradespeople and others proven to be a difficult issue to resolve, its one that has kept growing, despite the industrys best efforts.
We have recently seen high profile job cuts in iron ore and coal, however strong growth in Australias Liquefied Natural Gas, Coal-Seam Gas and Shale gas industries is still driving demand for workers in skilled trades and professions. As a result, skill shortages continue, threatening the growth, productivity and competitiveness of a sector that generates more than 7 per cent of Australias GDP. Its clear that Australia needs to find new ways of viewing the problem. Recent PwC research shows that resolving Australias skills shortage requires a change to long-held and entrenched attitudes within the industry and the broader Australian community including: The view amongst many women and younger Australians that the energy and resources sector is not the place to develop a successful long term career. Attitudes about the suitability of overseas talent to work in Australia, which have left Asias large pool of high quality engineers and scientists largely untapped. Changing these attitudes is a task the industry is unable to tackle on its own. Success demands coordinated effort from industry, the community, governments and academia.
The central issue is that too few skilled workers are choosing employment in the resources sector, relative to other sectors of the economy. Less than four per cent of Australias engineering graduates and barely two per cent of our tradespeople work in the resources industry. From a PwC survey of top executives across the industry nationally, 80 per cent of respondents agreed that the sector needs to do more to attract and retain women. Resources, and mining in particular, lag other industries in employing skilled women. Women hold only 18 per cent of jobs in mining, compared with 45 per cent of jobs across the entire Australian workforce. Our analysis of the top 50 ASX-listed mining and minerals companies reveals women hold only 6.3 per cent of key management positions. A lingering belief that mining is still a male-dominated industry, means that many of the 1500 female engineers that graduate annually from our tertiary institutions still see the resources industry as one where the hurdles are too high to develop a satisfying and successful career. To help change this perception companies need to create a culture that is more attractive to, and inclusive of, women. This might include providing more childcare or early education facilities, or allowing greater flexibility with scheduling and work rosters. Some companies are even paying return-to-work bonuses in a bid to encourage new parents to return to the industry.
Energy and resources leaders identified the top 5 root causes of Australias skills shortages
Top 5 root causes
Sector doesnt do enough to attract women People are reluctant to move geographically for work
Percentage of interviewees
52 48 80 88
There arent enough experienced workers to recruit in the Australian market
48
72
Not enough young people are graduating from relevant educational programs We dont offer clear and/or compelling career paths
Source: PwC; Interviews with 30 senior executives in the energy and resources sector
44 40 Priority issue
80 88 Agree this is an issue
43
Two-thirds of the resources leaders we interviewed believe that their organisations are not tapping all the best sources of talent. This includes a greater emphasis on fostering an indigenous workforce. Employers know, for instance, that including local Aboriginal and Torres Strait Islander people within a workforce can help secure local support for an operation and reduce the operations reliance on costly fly-in, fly-out (FIFO) workforces. Yet unemployment in Aboriginal communities living near mining operations remains high, and Australian mining workforces are reported to be only 8% indigenous. Attracting and retaining young workers in the resources sector also poses a significant challenge. According to a survey PwC conducted in 2011, mining is not perceived as a desirable sector for new graduates. One reason is the poor image of the resources sector among young Australians. For young people, the sector is often seen as one where boom and bust conditions prevail, and not an industry promising secure and long term career paths. To dispel this notion the industry needs to be seen to be capable of managing through the cyclical ups and downs. It also needs to communicate more effectively with the people that influence the career choices of young people and women, including parents, friends and teachers. Recent high profile job cuts in the resources sector havent helped build its reputation as a stable, long term employer. Another hurdle to be overcome is how foreign workers are perceived, including their language skills and work ethic. The 2012 PwC CEO survey found that 88 per cent of respondents prefer to hire locally to meet market needs. But it seems inevitable that Australia will need to call more and more on the vast pool of skilled labour being generated in China and India.
pwc.com.au
It is also an Australian peculiarity that our workers are reluctant to relocate for jobs in resources, even to take up attractive and lucrative offers. Its a fact that only 2.5 per cent of tradespeople work in remote regions, despite the lure of high pay. Nearly nine out of ten executives we spoke to cited their concerns about this reluctance to move for work. Workforce mobility is an issue governments need to address. For example, governments could have a significant role in changing stamp duty regimes and introducing concessions for people relocating interstate to take on new jobs. While the battle to attract and retain critical skills may have significantly raised wages across the industry and increased accommodation costs, it has not necessarily achieved higher levels of retention and productivity. It is now time to focus on the less tangible aspects of an organisations employee value proposition (EVP) the reasons why a smart, energetic and ambitious person might want to work for one company as opposed to another. No single stakeholder group has within their grasp a solution to the skills shortage. Its causes are deep seated and based on long-held beliefs. The industry understands better than any group what needs to be done to solve this crisis. What is now needed is for government, the education system and the community at large to listen and act.
Solving the skills shortages in resources June 2012
Further reading
Mind the Gap Solving the skills shortages in resources 2011
For further information please contact
Mind the gap
2012 PricewaterhouseCoopers. All rights reserved. PwC refers to the Australia member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. Liability limited by a scheme approved under Professional Standards Legislation. PwC Australia helps organisations and individuals create the value theyre looking for. Were a member of the PwC network of firms in 158 countries with close to 169,000 people. Were committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com.au.
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pwc.com.au
Dr Matt Guthridge Partner, People and Change T: +61 3 8603 3160 E: matt.guthridge@au.pwc.com
Are you ready to dig?
The mining industrys track record of Risk management: a critical pillar in capital developing major capital projects to meet cost, investment evaluation and delivery time, quality and operability expectations By their nature, capital projects are not part of day-to-day is chequered at best. Therefore, instead operations. They higher levels of risk for an organisation and require separate financing, management, governance of placing undue attention on the market and assurance arrangements. Consequently, it is timing of major capital investments, senior important to understand what your risk appetite is across management could alternatively provide these areas, and to ensure that it is discussed and aligned greater focus on underlying project quality across the organisation. That is where high quality risk when determining the readiness to proceed. In and opportunity management comes into its own. essence, answering are you ready to dig? Good risk management results in good Local and International Market Uncertainty decision making A Complex Backdrop
Global capital project development conditions have never been more complex, a truth that is no different in the mining sector. As painful macroeconomic adjustments are being made around the world to restart many struggling economies, many governments are revisiting mining royalty and resource tax schemes, in addition to devising new ones. In the middle of these economic changes is an increasing volatility for commodity prices. Against this complex backdrop, thinking in terms of the opening and closing of project windows for fear of missing a commodity pricing window is fraught with danger and creates an ideal environment for failure when companies prematurely accelerate capital projects and/or follow a prevailing trend. Good risk management processes link directly to organisational decisions, actions and forecasts. They help you to assess your Plan A, to challenge it, and to compare it to the next best alternative. In addition, important questions to ask when assessing capital project investment decisions include: What are your exit thresholds, your Plan Bs, and your triggers to review strategy and chart a different course if necessary? What is the value of changing plans? Have you performed a series of pre-mortems? Have you evaluated projects under different price environments, and charted different courses of action. Adopting better risk management practices makes it easier to differentiate between high-risk and low-risk projects. This in turn helps decision-makers, financiers and shareholders to better understand if the potential returns justify the capital requirement, especially under different commodity price scenarios.
Look beyond current market conditions

In addition to interpreting current market price signals, including distinguishing between whether they have greater impact on the project cost or project revenue line, there are a myriad of different variables to consider when evaluating a major capital project investment. These variables must be carefully considered and managed throughout the project life cycle. Beyond asking the right evaluation questions, project proponents and stakeholders need to be able to differentiate between sound and unsound project development practices.
45
Speed v precision: have you got the balance right?

An important theme in evaluating capital investment is whether speed versus precision has been valued in the same way. Overpromising (cost, schedule, quality and operability) is rampant and strongly incentivised. We considered approximately 50 mining or mining-related infrastructure megaprojects currently in feasibility or under construction in Australia. Data for these projects shows an average pre-completion overrun of 86% above the original budget. Importantly, overrun refers to realised cost increases during feasibility studies and contracting (obtaining a true cost) and construction (actual + forecast cost realised during execution).
Mining Mega-Projects in Australia - Budget vs Forecast or Actual cost
$8 $7 $6 AU $ Billion $5 $4 $3 $2 $1 $0 A B C D E F G H I J K L M N O P Q R S T U V W X Y Z AA AB AC AD AE AF AG
Mining Capital Project ($1 billion or greater)

Sorted by original budget (declining)
Original budget
Total budget including overrun
Are you ready?

Why do the projects fail? Only 2.5% of the companies delivered their projects within the deadline, costs, scope and with the benefits expected for the business.
Data: PwCs Boosting Business Performance through Programme and Project Management report
Technical and managerial aspects

Technical problems Suppliers failures Inappropriate/ inadequate resources Inadequate project environment Inadequate planning monitoring Lack of clear objectives 4% 4% 10% 11% 15% Directly related to managerial aspects
8%
Directly related to technical aspects
20%
92%
Lack of management (organisational)
36%

While speed to market and price cycles can have a positive influence on project economics, building and sustaining an integrated risk framework that supports sound project investment decision-making can have a more lasting impact. Ultimately, good projects thrive despite prevailing commodity head or tail winds. You are ready to dig once your project has been thoroughly tested and challenged through a rigorous front-end loading process; de-risked through a real and connected risk management process that informs corporate decisions, actions and forecasts. The desire and energy to develop resources projects must be balanced against the objective realities of building and protecting shareholder value. In our view, CEOs and project proponents should support share price growth by driving strategy and exercising professional scepticism in equal measures.
These steps are crucial in preparing a project and delivering value through disciplined investment decisions. Lastly, before sanctioning mining investment projects, to prepare for changes in commodity price and cost environments, it is critically important to ensure that an organisation preserves the flexibility to: reduce project costs adjust work intensity change directions, and delay or suspend work. The project development environment will change one way or the other, and when it does, you will need to be ready. If you are, then you are ready to dig.
Further reading
For further information please contact Robert Gray Director, Risk & Capital Management T: +61 (8) 9238 3871 E: robert.c.gray@au.pwc.com
PwC Services across the Capital Project Value Chain
Concept
Select
Define
Execute
Operate
External Assurance
Project governance and control framework design / implementation Strategy and Operational Planning Concept DSP / Business Case Select DSP / Business Case Define DSP / Business Case Performance Management Risk Management Infrastructure Planning & Improvement Capital Productivity
Project Execution Reviews / Internal Audit
Post implementation reviews
Decision analysis / Real options Approvals Management Fraud and Forensic Reviews JV and Alliance partner Assurance Data and performance tracking Project control optimisation (Cost, Schedule, quality, operability) Subcontractor assurance
47
This years mid-tier 50

Symbol Entity name Year end Market capitalisation as at 30/6/2012 A$m
1,514 294 1,927 1,231 1,158 1,827 450 497 618 373 412 600 621 823 1,043 549 581 601 4,714 803 409 330 289 734 332
10
Rank by market capitalisation
10 48 5 12 13 6 38 36 30 41 39 32 28 23 17 35 33 31 1 24 40 46 50 25 45
(ASX:ASR) (ASX:ALK) (ASX:AWC) (ASX:AQA) (ASX:ARI) (ASX:AGO) (ASX:BDR) (ASX:BRN) (ASX:CGX) (ASX:CZA) (ASX:CPL) (ASX:CDU) (ASX:DML) (ASX:ERA) (ASX:EVN) (ASX:GBG) (ASX:GDO) (ASX:GRR) (ASX:ILU) (ASX:IGO) (ASX:IRN) (ASX:IGR) (ASX:JMS) (ASX:KCN) (ASX:KRM)
Alacer Gold Corp. Alkane Resources Ltd Alumina Ltd Aquila Resources Ltd Arrium Ltd Atlas Iron Ltd Beadell Resources Ltd Brockman Resources (Wah Nam International Holdings Ltd) CGA Mining Ltd Coal of Africa Ltd Coalspur Mines Ltd CuDeco Ltd Discovery Metals Ltd Energy Resources of Australia Ltd Evolution Mining Ltd Gindalbie Metals Ltd Gold One International Ltd Grange Resources Ltd Iluka Resources Ltd Independence Group NL Indophil Resources NL Integra Mining Ltd Jupiter Mines Ltd Kingsgate Consolidated Ltd Kingsrose Mining Ltd
31-Dec 31-Dec 31-Dec 31-Dec 30-Jun 30-Jun 30-Jun 30-Jun 31-Dec 30-Jun 31-Dec 31-Dec 30-Jun 30-Jun 30-Jun 30-Jun 30-Jun 31-Dec 31-Dec 30-Jun 30-Jun 31-Dec 30-Jun 30-Jun 30-Jun
Symbol
Entity name
Year end
Market capitalisation as at 30/6/2012 A$m

1,449 912 362 1,654 933 3,330 344 314 491 2,385 1,044 1,636 1,136 1,771 857 1,083 619 636 575 1,006 292 349 730 4,205 985 51,831
Rank by market capitalisation

11 21 42 8 20 3 44 47 37 4 16 9 14 7 22 15 29 27 34 18 49 43 26 2 19
(ASX:LYC) (ASX:MML) (ASX:MDL) (ASX:MIN) (ASX:MGX) (ASX:NHC) (ASX:NFE) (ASX:NST) (ASX:OGC) (ASX:OZL) (ASX:PDN) (ASX:PNA) (ASX:PRU) (ASX:RRL) (ASX:RSG) (ASX:SFR) (ASX:SLR) (ASX:SPH) (ASX:SBM) (ASX:SDL) (ASX:SYR) (ASX:TRY) (ASX:WSA) (ASX:WHC) (ASX:ZIM)
Lynas Corporation Ltd Medusa Mining Ltd Mineral Deposits Ltd Mineral Resources Ltd Mount Gibson Iron Ltd New Hope Corp. Ltd Northern Iron Ltd Northern Star Resources Ltd OceanaGold Corporation OZ Minerals Ltd Paladin Energy Ltd PanAust Ltd Perseus Mining Ltd Regis Resources Ltd Resolute Mining Ltd Sandfire Resources NL Silver Lake Resources Sphere Minerals Ltd St Barbara Ltd Sundance Resources Ltd Syrah Resources Ltd Troy Resources Ltd Western Areas NL Whitehaven Coal Ltd Zimplats Holdings Ltd
30-Jun 30-Jun 30-Jun 30-Jun 30-Jun 31-Dec 30-Jun 30-Jun 31-Dec 31-Dec 31-Dec 30-Jun 30-Jun 30-Jun 31-Dec 30-Jun 30-Jun 31-Jul 30-Jun 30-Jun 30-Jun 30-Jun 30-Jun 30-Jun 30-Jun
49
Explanatory notes
We have analysed the largest 50 mining companies listed on the ASX with a market capitalisation of less than $5 billion at 30 June 2012. 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 2012 covers periods between and 1 January 2011 and 30 June 2012, with each companys results included for the 12-month financial reporting period that falls into this timeframe.
11
All figures in this publication are reported in Australian dollars, except where specifically stated. The results of companies that report in currencies other than the Australian dollar have been translated at the average Australian dollar exchange rate for the financial year, with balance sheet items translated at the closing Australian dollar exchange rate. Some diversified companies undertake part of their activities outside of the mining industry. Unless specifically stated, no adjustments have been made to exclude such non-mining activities from the aggregated financial information.
51
Contacting PwC
PwC provides industry-focused assurance, tax and advisory services to build public trust and enhance value for its clients and their stakeholders. More than 160,000 people in 151 countries work collaboratively using connected thinking to develop fresh perspectives and practical advice. PwC is a leading advisor to the mining industry, working with more explorers, producers and related service providers than any other professional services firm to ensure we meet the challenges of the global mining industry in the future. Our strength in serving the mining industry comes from our skills, experience and seamless network of dedicated professionals who focus their time on understanding the industry and working on solutions to mining industry issues. For more information on this publication or how PwC can assist you in managing value and reporting, please speak to your current PwC contact or telephone/e-mail the individuals below who will put you in contact with the right person.
Australian and Global Mining Leader
Western Australia
South Australia
Tim Goldsmith
Melbourne
T: +61 3 8603 2016 E: tim.goldsmith@au.pwc.com
Doug Craig
Perth
T: +61 8 9238 3262 E: douglas.craig@au.pwc.com
Andrew Forman
Adelaide
T:+61 8 8218 7401 E: andrew.forman@au.pwc.com
Australian Energy, Utilities and Mining Leader
Wayne Huf
Perth
T: +61 8 9238 3356 E: wayne.huf@au.pwc.com
New South Wales
Marc Upcroft
Sydney
T: +61 2 8266 6133 E: marc.upcroft@au.pwc.com
Jock OCallaghan
Melbourne
T: +61 3 8603 6137 E: jock.ocallaghan@au.pwc.com
Queensland
Wim Blom
Brisbane
T: +61 7 3257 5236 E: wim.blom@au.pwc.com
Stephen Loadsman
Brisbane
T: +61 7 3257 8304 E: stephen.loadsman@au.pwc.com
Global Mining Leadership Team

Global Mining Leader Africa United States
Tim Goldsmith
Melbourne
T: +61 3 8603 2016 E: tim.goldsmith@au.pwc.com
Hein Boegman
T: +21 11 797 4335 E: john.gravelle@ca.pwc.com
Steve Ralbovsky
Phoenix
T: +1 (602) 364 8193 E: steve.ralbovsky@us.pwc.com
China
Russia and Central & Eastern Europe
Ken Su
Beijing
T: +86 (10) 6533 7290 E: ken.x.su@cn.pwc.com
Brazil
John Campbell
Kiev
T: + 380 44 490 6777 E: john.c.campbell@ua.pwc.com
Ronaldo Valino
Rio de Janeiro
T: +55 (21) 3232-6015 E: ronaldo.valino@br.pwc.com
United Kingdom
Canada
Jason Burkitt
London
T: +44 (20) 7213 2515 E: jason.e.burkitt@uk.pwc.com
Indonesia
John Gravelle
Toronto
T: +1 (416) 869 8727 E: john.gravelle@ca.pw.com
Sacha Winzenried
Jakarta
T: +62 21 5289 0968 E: sacha.winzenried@id.pwc.com
India
Kameswara Rao
Hyderabad
T: +91 40 6624 6688 E: kameswara.rao@in.pwc.com
Knowledge Manager
Ananth Rajaratnam
Melbourne
T: +61 3 8603 0006 E: ananth.rajaratnam@au.pwc.com
53
Other mining publications

Mine 2012: The growing disconnect This is PwCs flagship mining publication which analyses the financial performance and position of the global mining industry as represented by the top 40 mining companies by market capitalisation. From ten years of data and trends, we have seen some of the greatest ups and downs the mining industry (and the global economy for that matter) has ever seen. Contact Tim Goldsmith Partner, Melbourne T: +61 (3) 8603 2016 E: tim.goldsmith@au.pwc.com Are you ready to dig? The ongoing appetite for minerals from China and other countries is seemingly insatiable, spurring Australian companies to ramp up their investments to meet long terms demand. On the face of it, it seems like there is very little downside to commissioning new mining activity or expanding existing mines but is that really the case? Making the decision to dig involves scenario analysis and maintaining corporate agility to respond to external market place changes - this will not only prevent poor investment decisions but work to preserve and improve value for companies and their stakeholders. Contact Rob Gray Director, Perth Tel: +61 (8) 9238 3871 E: robert.c.gray@au.pwc.com Mind the gap Solving the skills shortage
pwc.com.au
Solving the skills shortages in resources June 2012
The skills shortage in the resources sector is now 10years old, and as the sector has found, resolving it is not easy. It is going to require some fundamental changes being made not just by the industry, but by the community, academia and the government.
2012 PricewaterhouseCoopers. All rights reserved. PwC refers to the Australia member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. Liability limited by a scheme approved under Professional Standards Legislation. PwC Australia helps organisations and individuals create the value theyre looking for. Were a member of the PwC network of firms in 158 countries with close to 169,000 people. Were committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com.au.
WL241335
Mind the gap
Investment appraisal of mining capital projects Operating a successful global asset portfolio requires continual effort to be expended on portfolio optimisation, which is at its most complicated when considering major capital projects situated across both developed and developing nations We explain that a singular approach, no matter how robust, has the potential to negatively impact project value across many stages of the investment review lifecycle. Instead we recommend the implementation and adherence of standard phased approach which helps ensure continuous alignment with growth plans and allows easier comparison of significantly differing projects competing for the same capital. Contact Brian Gillespie Partner, Brisbane T: +61 (7) 3257 5656 E: brian.gillespie@au.pwc.com Statement of Global Mining Capabilities | 2011
pwc.com.au
PwC have tapped into energy resources and mining services companies operating in Australia interviewing over thirty CEOs, Business Unit Leaders, Vice Presidents and General Managers, who were asked to prioritise the root causes of skills shortages in their organisations. Contact Matt Guthridge, Partner, Melbourne T: +61 (3) 8603 3160 E: matt.guthridge@au.pwc.com Our Consulting Experience Mining, Oil & Gas
pwc.com.au
Our Consulting Experience

Mining, Oil & Gas
November 2011
pwc.com
This document outlines PwCs consulting experience with such organisations as BHP Billiton, Rio Tinto, Xstrata, Vale, Santos, Anglo American and British Gas. We have also worked closely with small and mid-tier operators to provide business solutions and to help to deliver on growth aspirations. Contact Matt Guthridge, Partner, Melbourne T: +61 (3) 8603 3160 E: matt.guthridge@au.pwc.com
Mining enters a new era

Statement of capabilities
What do you value?
This publication discusses the key challenges mining companies face today and how PwC is helping to identify and implement solutions. Contact Ben Gargett Director, Melbourne Tel: +61 (3) 8603 2539 Email: benjamin.gargett@au.pwc.com
2012 Gold Price Report Keeping up with the price of gold Annually, PwC surveys gold mining companies from around the world, including executives from senior and junior mines. Read our 2012 survey to learn why gold companies shares are not keeping pace with gold prices. Contact Tim Goldsmith Partner, Melbourne T: +61 (3) 8603 2016 E: tim.goldsmith@au.pwc.com Investing in Australia More than the Deal We advise the worlds largest companies that invest and operate in the Australian energy, utilities and mining sectors. This document highlights our recent work with international companies that have successfully entered the Australian market such as CNOOC, Mitsubishi, Peabody and Yanzhou. We act as lead advisor on major transactions, providing advice on tax, regulatory, commercial and financial matters. With our alliance partners, we also co-ordinate the provision of legal and technical advice to provide a one stop shop for cross border transactions. Contact Brian Gillespie Partner, Brisbane T: +61 (7) 3257 5656 E: brian.gillespie@au.pwc.com
Global mining deals 2012 mid year update When the going gets tough While global economic uncertainty and a drop in commodity prices has led to a marked slowdown in merger and acquisitions in the first half of 2012, miners with cash are viewing it as an opportunity to take advantage of lower valuations by entering M&A discussions and finding creative ways to fund projects Contact Tim Goldsmith Partner, Melbourne T: +61 (3) 8603 2016 E: tim.goldsmith@au.pwc.com Carbon pricing Implications for the Mining sector This publication focuses on the potential impacts of the introduction of a carbon price in Australia. We explore the mining industry and the new challenges the sector faces with an additional cost burden on the horizon following the release of the Federal Governments Claim Energy Future Plan and Exposure Draft of the Clean Energy Bill 2011. Contact Liza Maimone Partner, Melbourne T: +61 (3) 8603 4150 E: liza.maimone@au.pwc.com
Managing credit risk for global commodity producers
Managing credit risk for global commodity producers
Brian Gillespie John Hackwood Chris Mihos

March 2010
This paper describes the credit risk issues faced by global commodity producers and highlights examples of best practice in the areas of the assessment and management of credit risk. Contact Brian Gillespie Partner, Brisbane Tel: +61 (7) 3257 5656 Email: brian.gillespie@au.pwc.com Digging into IFRS A monthly Australian newsletter that focuses on topical accounting issues relevant to the energy and resources sector. Contact Debbie Smith Partner, Melbourne Tel: +61 (3) 8603 2249 Email: debbie.smith@au.pwc.com
55
Mining Excellence@PwC
Delivering local solutions to global challenges
The mining sector is facing a range of competing trends and a rapidly changing global business environment. Against the backdrop of commodity price fluctuations, miners need to balance shareholder dividend expectations whilst maintaining an investment pipeline in the midst of increasing operating costs. Safety, environmental and community principles also continue to shape the industry as miners look to achieve their licence to operate and deliver on corporate responsibilities. Mining Excellence@PwC has been designed to mobilise and leverage PwCs collective global knowledge and connections to deliver an exceptional and tailored client experience, helping our clients navigate the complex industry landscape and meet their growth aspirations. Our team of specialists is exclusively focused on the sector and brings an industry-based approach to deliver value for you and your organisation.
Working in the sector for over 20 years, I have seen and worked across the mining sector in both good times and bad. Its fantastic to see our clients and PwC teams working together to respond to the everchanging business dynamics miners face today.
Tim Goldsmith, PwC Global Mining Leader
Mining Excellence@PwC provides our clients: leading edge knowledge and insight
With significant investment in the research behind our mining publications and a comprehensive industry learning and development program, our professionals can share both industry and technical insight with our clients, such as:
A library of industry publications designed to help challenge conventional thinking and delve into topical industry issues. This includes: flagship publications including Aussie Mine, Mine and Mining Deals The Insight Series focuses on specific issues most important to miners
www.pwc.com
connections to our vast network of mining experts and global client portfolio
We have the widest network of industry experts who work out of strategic mining hubs across the globe to help better connect you to vital mining markets. Our connections provide:
seamless client service delivered with collaborative cross-border account management maximised deal potential through a well-connected global community of mining leaders a well-connected and mobile workforce to ensure effective service delivery in even the most remote mining locations.
the delivery of an experience that meets our clients definition of value

With mining experts working in each key Australian state, our award winning teams are helping clients deliver on specific projects and organisational growth aspirations. We offer advisory, tax and audit services to global corporations and locally listed companies. Mining Excellence@PwC complements this with:
a suite of niche mining consulting capabilities focused on optimising value across mining operations and effectively managing risk to help our clients grow their business and deliver shareholder value a comprehensive client feedback program to ensure we are always improving and delivering on individual client needs.
www.pwc.com/ca/miningdeals
Executing a successful listing Markets for miners
www.pwc.com
On the road again? Global Mining 2011 Deals Review & 2012 Outlook
pwc.com.au/industry/energy-resources
Mine The growing disconnect

March 2012
A PwC IPO Centre publication helping mining companies assess their choices February 2012
Onward and Upward!

Review of global trends in the mining industry2012
John Gravelle Toronto
Ken Su Beijing John Campbell Moscow
An extensive industry development program for our people and clients. This features our annual university-style course Hard Hat: The Mining Experience.
At the coalface
Kameswara Rao Hyderabad
Jason Burkitt London Steve Ralbovsky Phoenix Colin Becker Santiago Sacha Winzenreid Jakarta Brian Gillespie Brisbane Stephen Loadsman Brisbane Darren Smith Perth Wayne Huf Perth
Hard Hat: The Mining Experience
Hein Boegman Johannesburg Global Mining Leader Tim Goldsmith Melbourne Andrew Forman Adelaide Jock OCallaghan Melbourne Derek Kidley Sydney
57
Key contributors
Tim Goldsmith
Partner
Julian McCarthy
Director
Jock OCallaghan
Partner
Simon Leung
Associate Director
Wayne Huf
Partner
Alex Mayberry
Manager
Ben Gargett
Partner
Kurt ONeil
Senior Accountant
Ananth Rajaratnam
Senior Manager
David Heatherton
Consultant
59
www.pwc.com.au/industry/energy-utilities-mining
For copies of this report,contact:

Mathew McKenzie Program Manager Tel: +61 (2) 8266 2329 Email: mathew.mckenzie@au.pwc.com Jade Hopkins Marketing Advisor Tel: +61 (3) 8613 6004 Email: jade.hopkins@au.pwc.com
2012 PricewaterhouseCoopers. All rights reserved. PwC refers to the Australian member firm, and may sometimes refer to the PwC network. Each member firm is a separate legal entity. Please see www.pwc.com/structure for further details. This content is for general information purposes only, and should not be used as a substitute for consultation with professional advisors. Liability is limited by the Accountants Scheme under the Professional Standards Legislation. PwC Australia helps organisations and individuals create the value theyre looking for. Were a member of the PwC network of firms in 158 countries with close to 169,000 people. Were committed to delivering quality in assurance, tax and advisory services. Tell us what matters to you and find out more by visiting us at www.pwc.com.au

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Aussie Mine 2012 Staying the course

ii Staying the course

Aussie Mine November 2012

iv Staying the course

Aussie Mine November 2012

2 Staying the course

Mid-tier industry in perspective

Chinese demand fears hit the mid-tier

Mid-tier 50 market capitalisation (AUD million) June 2009 to 30 September 2012

Source: Capital IQ, PwC analysis

Market Capitalisation in AUD $million

Aussie Mine November 2012

1.00 0.80 0.60

Source: World Bank, PwC analysis

Chinese construction will continue to be the demand driver

China is here for the long haul

4 Staying the course

Stimulus ready and able

Green shoots from the Western World?

Aussie Mine November 2012

Supply challenges abound

Cost management and mine optimisation

FX the break in historic negative correlation

A commodity price boom?

Source: World Bank, PwC analysis

Price index by resource USD

Source: World Bank, PwC analysis

6 Staying the course

The funding challenge

The ever changing landscape

Aussie Mine November 2012

Gold the mover

22,964 14,285 9,572

9,984 9,832 4,726 6,325 8,725

7,018 2.286 5,556 1,742 5,278

13,328 17,856 22,260 9,552

Mid-tier iron ore miners emerge

8 Staying the course

Down, but not out

Mid-tier 50 vs. other performance measures

1.10 1.00 0.90 0.80 0.70 0.60 0.50 0.40

S&P/ASX 300 Metals & Mining Index

FTSE 350 Mining Index

S&P/TSX Global Mining Index

Aussie Mine November 2012

The way I see it Ken Brinsden (Atlas Iron)

10 Staying the course

Aussie Mine November 2012

12 Staying the course

Aggregated industry financial statements

Aussie Mine November 2012

Revenue and gross margin by commodity FY12

Gross margin (%)

Revenue (A$ millions) Copper Coal Iron Ore Gold Other

Gross margin of mid-tier 50 producers

14 Staying the course

Source: Company Financial Statements, PwC analysis

Average cost per unit of production

Source: Company Financial Statements, PwC analysis

Aussie Mine November 2012

Movements in aggregated mid-tier 50 revenue by sector

3,000 2,500 2,000 1,500 1,000 500

Source: Company Financial Statements, PwC analysis