Miners search for scale in era of minerals diplomacy

The dial has been turned up in the global mining industry. New mines worth an estimated $5-trillion are required over the next 10 years to supply the critical minerals for AI data centres, renewable energy and electric mobility.But the industry’s biggest miners, companies such as the JSE’s BHP, Anglo American and Glencore, are struggling to respond adequately.As they deal with the funding and technical challenges of rapidly building production, they also face pressure from investors who want streamlined, cash-generating businesses. That has triggered an appetite for merger & acquisition (M&A) dealmaking that has, in the past, proved difficult for big mining companies to perform successfully.But there’s a newer force in minerals production. The prospect of increasing deficits in supply, along with the lack of supply response, is making governments decidedly twitchy. China’s state-owned mining company, Zijin Mining Co, phrased it perfectly in a quarterly update in August, describing the competition for critical minerals among major powers as entering “a high-intensity confrontation phase”.The unequal global distribution of resources and productive capacity contributes to the tension. A McKinsey study that analysed national critical mineral lists identified 13 metals and commodities considered most important. Of these, nine are subject to trade restrictions by countries that dominate in their production. “What is important is that all of these 13 have at least 70% concentration in the top three countries,” said Karel Eloot, McKinsey’s senior partner at the FT Metals & Mining Summit in October. “That is of course leading to a lot of disruptions.”Resource nationalism, normally the preserve of developing economies, especially in Africa, is now a feature of Western policymaking, as governments respond to China’s stranglehold over strategic industrial supply chains. China owns 20% of world mining assets, but 50% of the downstream or processing capability. Governments are responding with vertical integration of minerals, or even nationalising them.The response of the US has been among the most striking. It has threatened to extend its tariffs to metals such as refined copper. A possible 15%-30% tariff by the US in 2027 and 2028 has led to metal stockpiling. Instead of motivating investment decisions — miners aren’t sure if tariffs are here to stay — the uncertainty is inducing panic.Copper premiums on Comex, a US futures exchange, have increased. Today the US holds 70% of global copper inventories, despite accounting for 6% of world demand, says a Goldman Sachs report.As part of a whistle-stop tour of Asia last month, US President Donald Trump signed deals with Japan, Thailand, Vietnam and Cambodia to secure rare earths — minerals used in the renewables, robotics and defence industries. This follows a similar deal in Ukraine. He is talking to Australia about its minerals. Even the specious Trump claim over Greenland has the territory’s minerals potential as a subplot.US equity dealmakingIn addition to broad trade deals, the US has also embarked on specific dealmaking, especially in securing new supplies of rare earth metals. Stowed at the foot of the periodic table, elements such as terbium, yttrium and neodymium are used to make permanent magnets. They are ubiquitous in their application to modern life, from wind turbine motors to the thing that makes iPhone headphone cases satisfyingly snap shut.In July, the US’s department of war invested directly in the country’s only rare earths miner, MP Minerals. It also guaranteed the company a floor price for two of its minerals at nearly double the market price set by Chinese production. Bifurcating the market in this way is unusual, but demonstrates Trump’s determination to break China’s grip on strategic minerals production. Two months later, the department of war bought a 10% stake in Canada’s Trilogy Metals, JSE-listed South32’s partner in copper, zinc and silver projects in northwestern Alaska.South32 welcomed the investment, though its acknowledgment of a “department of war” as a partner read awkwardly. But the fact is the Trump administration has, in a combustible 10 months, added a new dynamic to minerals supply.“Resource nationalism will take precedence over optimised supply chains in a geopolitically risky world,” said PwC in its annual mining publication in June. “We do not believe that the current drive for security of supply will be reversed by 2035.”Geopolitics is also leading to a different definition of the commodity cycle, according to Rebecca Campbell, a partner at US law firm White & Case. Speaking at the FT Metals & Mining Summit, Campbell said M&A success used to depend on whether mining company management had judged prices correctly, thus doing deals when they were relatively low. That has changed completely. “We are in conversations every day with US agencies about how they are going to support growth and support M&A, take equity stakes, put debt in.”Despite the increased government resources, it’s not possible to switch on new supplies of strategic metals and minerals in the short term. George Bennett, CEO of Rainbow Rare Earths, which is developing the $326m Phalaborwa project, says the majority of recently staked-out projects and supply deals will not alleviate near-term market deficits.Resource nationalism will take precedence over optimised supply chains in a geopolitically risky world – PwC“I believe that there’s not going to be enough supply coming into the market in the next 15 years,” he says. “Even if new rare earth sources are found in Greenland or in Ukraine, these projects are 20 years away from production.”For mining companies, this new dimension has complicated an already complex task. Building new supply has become harder. New mines take longer to build. Regulatory permitting is onerous. Untapped mineral deposits are remote from infrastructure, lower in grade and harder to skill, such is the fierce competition for human resources.For an individual company seeking to keep its investor base satisfied, M&A activity is the only real alternative to project build. Relying on deals does little to change net global supply of minerals, at least in the short term (consolidation of reserves between companies does create better optionality). But it does at least give company management a strategy. Unfortunately, the industry’s track record in M&A has been dismal over the years.“If you look at the deals that were north of $3bn over the past 10 years,” says Hassan Morsy, partner and MD at consultancy AlixPartners, “and you pick the 10 that were the most important, what we see is that 70% of those deals actually destroyed shareholder value, which is quite frightening,”The number of deals is also on the decline. In minerals ranging from copper to lithium to nickel, rare earths and even uranium, there were 245 deals last year, compared with 352 worth about $20bn in 2022, according to PwC.As for the mining majors, which arguably would be the most consequential for supply, deal completion has been difficult to achieve. In 2023, Glencore failed in its bid for Canada’s Teck Resources. A year later Anglo American successfully fended off a takeover bid by BHP. There were reports last year of a tie-up between Rio Tinto and Glencore, but that also failed to materialise, at least for now.The failure of BHP’s Anglo takeover has been put at the door of management. While BHP’s timing was good, pouncing on Anglo in the months after a negative operational update, and when Anglo’s balance sheet showed signs of serious strain, the execution was poor.The chief mistake was to insist that Anglo first restructure before completing the takeover. BHP was trying to transfer all the risks around execution onto the Anglo American shareholders, says Jim Rutherford, a former Anglo director and now a board member of Saudi Arabia’s state-owned Manara Minerals. “That made it, I think, very easy for the Anglo board to say no.”This explains why Anglo has taken extraordinary measures to win the support of shareholders and the Canadian government for its own deal — the proposed $53bn bid for Teck Resources. Critically, politics plays a key role in the deal’s structure.As well as winning the support of Teck’s class B shareholders, Anglo’s proposal has to pass scrutiny from Canada’s toughened Investment Canada Act, introduced after Glencore’s failed 2023 bid for Teck.Canadians are increasingly touchy over national assets, especially in mining, where the roots are deep. A poll conducted by Ipsos last month found most Canadians don’t want their mining companies to be owned by foreigners. Nearly two-thirds believe the federal government should ensure that offshore predators are not able to buy mining, forestry, and oil and gas firms.Anglo’s “merger of equals” with Teck is lovingly enrobed in the colours of the Maple Leaf. From naming the combined entity Anglo-Teck, to retaining its Vancouver headquarters and promising to focus on Teck’s local assets and projects, it’s clear Anglo considers resource nationalism a deal-breaker.We’re becoming a bit of an irrelevant industry in a world where you now talk about trillion-dollar companies – Gary Nagle, GlencoreAnother risk for Anglo is interloper interest. So far, no rivals for Teck have emerged but the shareholder vote isn’t until December and the sheer paucity of deal targets means rival miners will have assessed their options, so great is the need for production growth.“I believe that as an industry there is huge value to be created by looking at putting various companies or assets together, or at asset level,” Glencore CEO Gary Nagle said in July.“We’re becoming a bit of an irrelevant industry in a world where you now talk about trillion-dollar companies,” he added. “In fact, you don’t even talk about trillion-dollar companies, you talk about multitrillion-dollar companies, and in the mining industry, you’re lucky if you’re a $100bn company.”Analysts think Glencore may well seek to up the tempo of its strategy, having been frustrated by Teck. This is why a recent management change at Rio Tinto has raised eyebrows.According to unconfirmed reports, the reason Rio Tinto and Glencore didn’t make progress with their merger discussions was the reluctance of then Rio CEO Jakob Stausholm. His shock resignation in May, four years into his term, is unlikely to be coincidental, especially as Stausholm’s successor, Simon Trott, is said to be making quick-fire changes. An e-mail to staff in late October, with Trott two months into the job, outlined plans for “fundamental” change.A restructure at Rio Tinto could see it swap assets for the 15% stake China’s state-owned aluminium company Chinalco has in the group. Assets Rio could use to lure Chinalco into a deal include a stake in Simandou, an enormous iron ore mine in Guinea where Chinalco is also invested.ChinaPolitics plays a role. The optics of having a Chinese state-owned company as the largest shareholder is “increasingly fraught in a more complex and polarised geopolitical environment”, says Citi. Rio owns 55% of the Resolution copper project in Arizona, the largest undeveloped critical mineral project in the US.Chinalco has no board seat at Rio, and has been a supportive shareholder, but its removal from the register would open the door to other benefits, such as the possible dismantling of its dual-listed structure, though Rio has rejected this as an option in the past. This paves the way for share buybacks as well as larger corporate strategies, which is perhaps the point. This is bad news for London, where Rio shares are listed, but good for building projects owing to balance sheet and a broader jurisdictional reach.This last point is no small matter. Glencore opted not to shift its listing from London to New York because, among other concerns, it feared failing to break into the S&P 500 index, which would automatically introduce it to new institutional investors. “Some of them [S&P admission rules] are clear and some of them are not,” said Nagle at the time. One criterion was whether the company was “sufficiently American”.Another option for Glencore is a restructuring of its own. The group has been progressively streamlining its diverse portfolio, selling its agribusiness and less profitable or unprofitable assets. But since it went public in 2010, Glencore has seen rivals perform radical changes of their own. BHP sold petroleum, while Anglo American demerged its platinum business, and is finalising the sale of coal and its stake in De Beers.In both cases, the goal has been to tighten focus on copper production, essentially becoming a pure play which investors prefer. “The relative multiple of copper/base metals stocks has continued to widen versus diversified/energy stocks,” said UBS in a report last month. Glencore “continues to underperform”, the bank added. It does not offer enough copper leverage or organic growth, while its returns are lower than energy stocks.All eyes will be on the group’s capital markets day presentation, scheduled for December 3, though whether this results in major portfolio changes, as analysts claim is possible, is questionable. If there are changes, one option would be to finally spin out its coal assets, a strategy that was halted at the request of shareholders who saw increased cash flow in peaking thermal coal prices. Nagle has said previously he’s open to the idea but won’t be regularly canvassing shareholders on the issue. The sale of the group’s marketing business is another possible change, though that would require a change to Glencore’s DNA it might not be prepared to make.Developing scale and streamlining look like opposing ends of a spectrum. The ideal would be for a company to have the technical capability to develop multiple projects concurrently, as well as capital discipline.“Scale is important, but to a certain limit,” says Morsy. “For a company with 28 capital projects in seven countries, it’s just very difficult to push them with the right capital efficiency across the value chain.”While M&A has proved elusive for major mining companies, there appears to have been greater success at the asset level. Anglo CEO Duncan Wanblad said this year his firm’s proposed deal with Teck was born out of co-operation between their adjacent copper projects in Chile: Anglo’s Collahuasi and — 10km away — Teck’s Quebrada Blanca.We’ve been seeing for many years Zijin doing one or two transactions at the asset level every year – Richard Horrocks-TaylorChina has scored huge successes in this way. Zijin Mining, founded by geologist and current chair Chen Jinghe in the 1980s, grew from a small gold mine in southeastern China into the world’s third-largest miner. The company now controls or holds majority stakes in hundreds of operations worldwide, said Bloomberg News in a report in September. In the past few years, it added to its portfolio Serbia’s largest copper mine, Kazakhstan’s Raygorodok gold mine (pending) and Ghana’s Akyem gold mine.“There’s a little bit more of an untold story around the types of transactions that are actually being done in the sector at the moment, and in particular, those that are being done to foster growth in actual production,” says White & Case’s Campbell. These are single-asset deals over pre-production or near-production assets, as well as strategic joint ventures. They tend not to show up in official deal statistics because there’s no change of control. “These are transactions that are delivering new supplies to the market,” says Campbell.Zijin recently spun its gold business, Zijin Gold International, which holds all its gold mines outside China, into a Hong Kong listing that raised $3.2bn — the world’s largest IPO this year.“We’ve been seeing for many years Zijin doing one or two transactions at the asset level every year,” says Richard Horrocks-Taylor, global head of metals and mining at Standard Chartered bank. “I think the asset-level piece is definitely there and I think Zijin’s an example of a company that’s harnessed that. They’ve been doing that for the past 10 years, where many of the majors didn’t do deals for five or six years.”Saudi ArabiaSaudi Arabia, backed by enormous wealth, has also entered the hunt for minerals. Ma’aden, the state’s mining vehicle formed by royal decree in 1997, has targeted $75bn from mining by 2035. Where it really gets interesting is the recent creation of Manara Minerals, a joint venture between Ma’aden and its 65.4% shareholder, the Public Investment Fund. Manara is seeking a global footprint by investing up to 20% in mining assets.In 2024, it replaced Russia’s Alrosa as a 41% shareholder in Angola’s Catoca, the world’s fourth-largest diamond mine. It also bought a 24% stake in Polymetal. But other rumoured deals, such as joining Barrick Mining in the development of the Reko Diq mine in Pakistan, and buying a stake in First Quantum Minerals, a Canadian firm operating in Zambia, have failed to materialise.Against a backdrop of political tension, its caution is worth taking seriously. “I think the people making decisions in Saudi are being very smart, very shrewd,” says Morsy. “Mining is a long-term game, and they’re picking the right allies.”Rutherford, who as a director of Manara would know most about this, thinks the West and China can get along. He said at the FT Metals & Mining Summit that Western mining companies could import processing skills from China without signing offtake deals with it. But as a battleground for an increasingly polarised world, a sharply divided mining sector looks here to stay.A version of this article first appeared in the Financial Mail.The post Miners search for scale in era of minerals diplomacy appeared first on Miningmx.Weiter zum vollständigen Artikel bei Mining.com Weiter zum vollständigen Artikel bei Mining.com