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Miners fear for their futures

Mining company leaders are not optimistic about their futures, according to a survey released today.

Newport Consulting interviewed 60 leaders of mining companies, including CEOs, general managers, chief operating officers and chairmen, and asked them several questions about the future growth in 2013-2014.

41% of leaders said they were not optimistic about future growth, up from just 7% in 2010, citing volatile markets, falling demand and lower commodity prices as the main reasons for the downbeat view.

Confidence appears to be in free fall according to the report, with leaders facing a gloomy outlook and significant antipathy towards Australian government policy, combined with a lack of confidence in the economy and global market. 44% of leaders said they were reducing capital investment – the first time the report has ever recorded them stating definitively that they were cutting back on spending.

With capital expenditure in the mining industry at an 11-year low, it seems the downward trajectory is likely to continue. Big miners like Rio Tinto (ASX:RIO) and BHP Billiton (ASX:BHP) have been slashing costs and jobs as well as cutting back on exploration and development expenditure, in an effort to cut costs and become more efficient.

Mining services companies are in the front line wearing the brunt of the pullback, with many struggling to survive, while others have been forced to reduce their fees if they want to keep their contracts. Mining services contractor Ausenco (ASX:AAX) recently reported that it had some contracts renegotiated with clients, at lower rates and significantly reduced scopes and revenues. Similarly, drilling giant Boart Longyear (ASX:BLY) has reported several profit downgrades over the past twelve months.

Another point the report makes is that for the first time, miners are struggling to obtain funding for their projects, suggesting explorers and junior miners will be the worst hit, while the medium to major miners focus internally on maximising operational efficiencies at their existing operations.

Foolish takeaway

For investors, it’s a clear warning that the resources space is an increasingly risky place to invest in, and sticking to the larger, more diversified miners is a safer bet.

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Motley Fool writer/analyst Mike King owns shares in Ausenco and BHP.

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