Big miner capital discipline is good news for investors
HIGH IN THE mountains of southern Peru lies Quellaveco, a vast open-pit copper mine. It is one of the largest untapped deposits of red metal in the world. Anglo American, a mining giant and its majority owner, has, along with another investor, spent more than $ 5 billion to get it started. It should go live in 2022. Once operational, it will add more than 10% to the copper production of Peru, the world’s second largest producer of this product.
In the past, when commodity prices soared, as they have recently been (see Chart 1), miners around the world crammed into projects like Quellaveco. This time, what is remarkable is its uniqueness. Few diversified mining mastodons – Anglo American, BHP, Glencore, Rio Tinto, and Vale — have big new mines in the works. This is in part because of the industry’s long lead times; Anglo bought Quellaveco in 1992. But other strengths also lie behind the moderate investment. They will have consequences for the mineral-intensive energy transition towards a more climate-friendly world.
The big five miners consolidated their market power with a wave of massive mergers in the 2000s, just in time for China to emerge as a voracious consumer of metals. The result has been a 15 year high price supercycle. Miners have splurged around a billion dollars in pursuit of larger volumes and mega-projects. Many turned out to be disastrous – perhaps a fifth of that investment was returned to shareholders, according to one estimate. After a round of layoffs, a new generation of mining bosses promised to do better. In recent years, value, not volume, has become the watchword of the industry. “We will never lose our discipline capital,” promises Eduardo Bartolomeo, boss of Vale.
So far, the miners have kept their promise. Although capital spending in industry has increased since 2015, it is still 50% below its peak in 2012. Most of this spending has been devoted to sustaining current production, without adding new capacity. Even though the rise in metal prices inflated profit margins, exploration spending remained low, notes Danielle Chigumira of Bernstein, a broker (see graph 2). It is a break with the past.
The duration of sobriety will depend on a new harvest of CEOs. In the past 18 months, three of the Big Five have had new bosses. In January 2020, Mike Henry took the reins of BHP. A year later, Jakob Stausholm became boss of Rio Tinto, after his predecessor was fired following the destruction of a 46,000-year-old Aboriginal site in Australia. On July 1, Gary Nagle will take the top job at Glencore, ending Ivan Glasenberg’s 19-year reign with the Swiss-based trader-turned-miner. Anglo American boss Mark Cutifani could retire next year.
Their biggest challenge is to respond to the energy transition. Companies have taken defensive action, coming out of the most carbon intensive operations. Rio Tinto left the thermal coal business in 2018. On June 6, Anglo handed over its coal operation. BHP and Vale have promised to do the same. Mines around the world emit less carbon dioxide as operators invest in renewable energy and attempt to electrify mining vehicles.
On paper, the energy transition could be a mining boon. If the world is to meet the Paris climate agreement target of limiting global warming to 1.5 ° C above pre-industrial levels, demand for metals such as cobalt, copper, lithium and the nickel will explode. The International Energy Agency, a forecaster, calculates that an electric car needs six times more minerals than a car with an internal combustion engine. An average onshore wind farm is nine times more resource intensive than a gas-fired power plant.
Switching to green metals, however, is proving more difficult than moving away from dirty minerals. The portfolios of the five big miners are weighed down by the raw materials of the last supercycle. Iron ore and fossil fuels still account for more than half of their mining revenues and three-quarters of their gross operating profits. High metal prices make potential targets expensive.
The other option, to develop their own projects, also poses problems. One is that of investors. Since they torched shareholder value the last time, minors have been kept on a leash. The bosses “know that the way to be sacked is to have one of these mega-projects,” said a large investor. Much of the cash flow from soaring commodity prices returns to shareholders in the form of record dividends and buyouts. A mining executive fears the big yields have changed the makeup of his shareholders, attracting yield-hungry investors reluctant to plans for growth.
Second, many energy transition metals are simply too small a market for big miners to care about. Take lithium, which is used in batteries. In 2004, Rio Tinto discovered a large deposit in Jadar, Serbia. When the project goes live in a few years, it could add 2-3% to Rio’s revenue, estimates Liam Fitzpatrick of Deutsche Bank. That’s not enough to make a difference in a company with a market value of $ 140 billion. The cobalt market is even smaller.
The exception is copper. Its ubiquitous use in electrical wiring makes it one of the largest metals markets by value even today. If the world is to meet its climate targets, demand could almost triple. However, finding a new large copper project is difficult. The prospected deposits are smaller and smaller and the ore grades are deteriorating. This makes their extraction more expensive. Perhaps with the exception of Glencore, large miners are increasingly avoiding less explored copper-rich regions like the Democratic Republic of the Congo (DRC), who tend to be politically unstable. Even when miners find a lode, increasing production is a difficult task, and becomes increasingly so as public pressure intensifies on miners to mitigate risks to the local environment and residents. . It takes over 15 years for an average mine to go from discovery to production.
Then there is the nationalism of resources. The covid-19 pandemic has drained state coffers. Miners fear that they will be asked to fill the deficit. Chile, the world’s largest producer of copper, is in the process of rewriting its constitution. A new bill passed by parliament could impose an 80% tax on mining profits. Peru’s left-wing elected president Pedro Castillo wants to tax mining profits at 70%. Zambia and Panama, two other copper-rich countries, are also considering higher taxes.
One thing that could loosen the purse strings of mining supermajors is competition. Small companies, such as Lithium Americas and Global Cobalt, hope to be successful. The same goes for some non-Western giants. Norilsk Nickel, a large Russian miner, plans to invest $ 15 billion to $ 17.5 billion over five years (last year he spent $ 1.7 billion). Zijin Mining, a Chinese rival, also has big expansion plans. While prices remain high – something some mining bosses doubt given their rapid rise, as well as the drop in copper since its peak in May – some large projects in tricky places like the DRC may start to look attractive again.
Price support could come from Western governments. On June 8, the White House released an interagency review of supply chains, calling for more action to secure critical minerals, including lithium and nickel. the EU wants to do the same with its green industrial strategy. Mr. Bartolomeo de Vale expects miners to forge more strategic partnerships with national authorities in the future.
If the supply does not increase, however, shortages of certain metals such as copper may be inevitable. Perhaps part of the shortfall could be made up by substituting other metals or further recycling those previously used. But not at all. Investors applaud the new restraint of mining bosses. The planet may prefer a return to past exuberance. ■
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This article appeared in the Business section of the print edition under the headline “Rocks and Hard Places”