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How miners plan to dig themselves out of a deep hole

How Western Australia-based listed firms are faring

The annual Diggers & Dealers Mining Forum kicked off in Kalgoorlie, Australia's gold capital, on Monday with talk centering on somber themes: shrinking market caps, cost cuts and consolidation.

In a report released at the opening of what is the local mining industry's premier conference, Deloitte revealed that Western Australian's top 100 listed companies shed 11.6 percent of their value during the 2015 financial year.

"Commodity prices were the real driver, almost every single commodity was down in the year to June 2015. Uranium was the only one that was actually up," Tim Richards, markets partner at Deloitte, told CNBC on the sidelines of the forum. "It was a tough year."

He added that the 11.6 percent decline came even after May's listing of South32—a new mining group spun off from BHP Billiton—that added $11.3 billion, or 8.4 percent, to the overall market capitalization.

Western Australia (WA) has been the epicenter of country's mining boom over the past decade. Rich in gold, iron ore, energy and zinc, the state's revenues helped Australia survive the global financial crisis when many of its developed peers struggled, but the recent commodity rout has triggered cost cuts across the board, resulting in a protracted industry slowdown.

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So, how are miners surviving?

For Karl Simich, managing director of mid-tier miner Sandfire Resources, reducing expenses to a bare minimum is his top priority.

"The other important thing is we must make sure to optimize the business and become as efficient as possible. You've got to be careful to not spend too much money, or save too money, cutting off your nose to spite your face," he told CNBC on Monday "You may find you need to go through a period of just breaking even or making small losses, but making sure you preserve the business' long-term value."

Iron ore’s demise

Iron ore producers with high operating costs - typically mid-tier miners in the size scale - were among the biggest losers on Deloitte's index because their break-even prices i.e. the iron ore price required for a miner to stay afloat, tend to be above those of heavyweights like Rio Tinto.

Atlas Iron, for example, lost a whopping 80.9 percent in market capitalization, Deloitte said.

"High-cost operators will soon go out of business," Kim Robinson, Managing Director of Energia Minerals, told CNBC, which will lead to the industry rebalancing itself.

When prices of the mineral fell to a decade-low of $48 in April, Atlas had a breakeven price of $55 a ton, compared to $35 for Rio. Atlas has since suspended operations at its three Pilbara mines and stated that its new operating model was based on breaking even at a price of less than $50 per ton.

Deloitte's Richards believes companies can return a reasonable margin with prices of $50-60 a ton, and he hopes prices will hover near $60 going forward.

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Iron ore is around 30 percent lower year-to-date at around $52 per ton after nearly halving in value last year. Prices recently surged to $55 on the back of lackluster Australian exports but the rally isn't expected to last.

"Supply from Australian and Brazilian producers is set to pick up strongly in the second half at a time of still struggling Chinese steel output. Even though we have factored in a 15 percent on-year drop in Chinese iron ore production this year, the market can still be expected to record a huge surplus," Capital Economics said in a recent note. The firm is forecasting prices to fall back to $45 per ton by year-end.

To be sure, the outlook isn't entirely bleak. A look at the past fifteen years reveals the overall market capitalization of the top 100 companies in Deloitte's index grew 290 percent to $131.9 billion.

"You have to remember that this industry is really resilient. It's been through periods like this before and I think they've done a reasonably job in the past 12 months of looking at costs, operational efficacy, and discovering different ways of doing things," noted Richards.

Deloitte expects the next phase for the industry could be more consolidation and deals as miners discuss how to share the cost base.

One of the early movers is WA-based Independence Group, which is buying nickel producer Sirius Resources to create a combined entity worth $2.7 billion.

"When the merger was first broached to us, it wasn't in our game plan, but creating a company that is head and shoulders above its erstwhile peers makes a big difference," Mark Bennett, managing director at Sirius Resources told CNBC.

The mining industry will definitely see some more consolidation yet, he added, pointing to the large number of junior explorers running out of cash.