Poor Capital Use by Australia's Miners

Australian pre-tax mining profits were 42% lower in the March quarter than a year earlier, according to data published by the Australian Bureau of Statistics. Profit over the four quarters ended March 2015 of $32.9 billion was less than half the cyclically peak profit of $78.3 billion over the year ended September 2011. Although falling, capital spending on mining remains at elevated levels. An additional $18.9 billion was spent during the March quarter compared with peak spending of $24.2 billion in the December quarter of 2012. The red line in the chart shows rolling four quarter profits within the sector. The blue line shows what the profits would have been if the industry had been achieving a lagged 14% return on capital invested. High ongoing capital spending has left returns well below target. Profits would have to again reach cyclically peak levels to validate the investment which has occurred. This is a highly unlikely outcome in the near term leaving a continuing doubt over the efficiency of the capital spending during the resources boom years.