What drives shareholder returns in mining companies?

Abstract

The mining industry has a long history of generating low shareholder returns. Over the past two decades, the average Canadian mining company has returned −8% per year, while the TSX composite index returned +7% per year. Prior studies indicate these low returns are driven primarily by volatile commodity prices and thus largely out of managers’ control. However, this research relies on small samples over short periods of time. To assess more robustly the distribution of shareholder returns across mining firms and to identify the relative impact of price versus other firm-specific factors on firm-level returns, we analyzed the performance of over 100 Canadian mining companies from 2003 to 2016. We find that commodity prices explained the majority of firm performance annually, but that over the long-run, mineral asset impairments had a much more significant influence on performance. Firms that significantly overperformed the industry experienced minimal impairments while firms that significantly underperformed experienced very large impairments. To deliver superior returns, it seems that mining firm managers and investors need to understand how to minimize impairments.