Mergers and acquisitions (M&As) have been up in number and value in recent years. Australian Resources & Investment chats to PwC Australia partner Marc Upcroft to understand why.
According to PricewaterhouseCoopers (PwC), ‘critical minerals’ is the mining industry’s most pressing concern in the near-term, with imminent supply shortfalls in some of the most important materials for the renewable energy transition.
“If the mining industry does not rapidly scale up its discovery and delivery of critical minerals, the prospects of energy transition at scale will be jeopardised,” PwC global mining leader Paul A Bennell said in the firm’s ‘Mine 2022’ report.
Mine 2022 examines the performance of the world’s top 40 mining companies in 2021, while unpacking the most pressing trends facing the global mining industry.
Alongside critical minerals, Mine 2022 highlighted the record-breaking financial performance of the world’s top miners in 2021 and examined whether this will remain in the future amid heightened cost pressures.
Mergers and acquisitions (M&As) also made an appearance in the report, with gold driving increased deal activity in 2021 while critical minerals companies also jostled for position in the constant pursuit of growth and expansion.
PwC explores environmental, social and governance (ESG) as the final theme of Mine 2022, a concept growing in stature within the global mining industry and one that will increasingly influence investor sentiment into the future.
In the first of a two-part series, Australian Resources & Investment will explore financial performance and M&As in detail, pondering the sector’s continued economic success and the risks that may quell this momentum.
Top 40 miners
Every year, PwC ranks the world’s top 40 mining companies through the aggregation of public information such as annual reports and financial reports available to shareholders.
The rankings also express PwC’s point of view on topics affecting the industry, developed through interactions with its clients and other leaders in the sector.
While majors BHP, Rio Tinto and Vale maintained their 2021 grip at the top of the list – at one two and three, respectively, in 2022 – Glencore rose from eighth spot to fourth, while US-focused Freeport-McRoRan made its way into the top 10, rising from 11th to sixth on the list.
Other strong performers included Tianqi Lithium Corporation, a part owner of the Kwinana lithium hydroxide processing plant in Western Australia, which rose 22 places to 15th on the list. Canada’s Teck Resources rose 10 spots to 22nd, and US potash miner The Mosaic Company jumped 15 places to 23rd in the rankings.
On the other side of the coin, Fortescue Metals Group fell from fourth to 10th, China Molybdenum Co. dropped from 15th to 20th, while gold miners Newcrest Mining (25th), Agnico Eagle Mines (27th) and Shandong Gold Mining Co. (28th) were also casualties, falling seven, 10 and nine places, respectively.
PwC derives its Mine 2022 trends from the top 40 miners, so expect to see a few big names littered throughout this editorial.
Mining’s financial future
The last few years have been financially kind to the global mining industry, with the sector scaling the economic highs of 2020 to post an even stronger 2021.
PwC found year-on-year (YoY) revenues for the world’s top 40 mining companies to be up 32 per cent and net profits to be up 127 per cent in 2021 when compared to the previous 12 months. This was a record performance from mining’s top echelon.
Company profits closely aligned with increases in commodity price, with coal, copper and iron ore prices experiencing sizeable jumps (54, 50 and 59 per cent average increases in 2021, respectively).
PwC Australia partner Marc Upcroft called this a key takeaway from Mine 2022.
“It’s interesting when you look at the financial returns – particularly the increase in profitability. It’s really focused on pricing and across three commodities,” he told Australian Resources & Investment.
“Coal revenue was 77 per cent higher (from 2020), copper revenue was 47 per cent higher and iron ore revenue was 43 per cent higher, and those three commodities alone represented an increase of $165 billion in revenue.”
Upcroft said that in the 20 years that PwC had been compiling the report, it has only seen higher returns on equity in two years – 2006 and 2007 – when commodity prices sky-rocketed and the supply response couldn’t keep up.
According to the Australian Bureau of Agricultural and Resource Economics and Sciences’ (ABARES) Australian Mineral Statistics, the 2006–07 period was a time of strong economic growth for China.
This contributed to iron ore export earnings increasing by 21 per cent to $15.5 billion when compared to 2005–06. Australian Mineral Statistics also found increased copper prices (up 62 per cent) and zinc prices (up 73 per cent) were strong economic drivers in 2006–07.
While the top 40 mining companies have enjoyed more buoyant market conditions than ever before, the question is whether this will continue in the current world of rising inflation – a reality which is already driving rising costs for many miners.
Upcroft believes inflation naturally poses an economic threat but he expects financial performances to remain strong.
“When you look at the financial credentials of the mining industry, the sector is in a pretty strong place as a whole,” he said.
“Profitability and margins are high, balance sheets are strong and there’s low debt in the cycle of things.”
Mine 2022 found capital expenditure (capex) in the top 40 mining companies increased by 18 per cent from 2020 to 2021, with a further 14 per cent jump forecast from 2021 to 2022. This will amount to a predicted $US82 billion ($121 billion) in capex in the 2022 calendar year.
Upcroft said the mining industry had gone through a conservative capex phase in recent years, with the investment community advising mining companies to go easy on growth to maximise shareholder returns.
However, this sentiment is changing.
“We’re at a phase now where we’re expecting more growth projects, so I think capex is going to increase both in terms of increase in growth projects, but also the cost of those growth projects are increasing,” Upcroft said.
“So you’ve got both impacts at play there, and that’s going to be a huge challenge for mining companies to navigate.”
As company’s grow and expand, Upcroft said share prices are in for a rollercoaster ride amid sustained investor apprehension.
“While global supply-chain pressures are understood … and while cost pressures are understood by the market as being largely out of the control of mining companies, investors still tend to be unforgiving on negative surprises,” he said.
“So it’s going to be a bit of a bumpy ride for mining companies and share prices as they embark on this journey of trying to manage something that’s pretty hard to manage.”
Deals
The value of deals among the top 40 mining companies tripled in 2021 compared 2020, while the number of deals grew by 60 per cent.
Gold was a key player in the M&A space, making up 70 per cent of total deal value.
Valued at $US10 billion ($14.7 billion), the ‘merger of equals’ of Canadian gold miners Agnico Eagle and Kirkland Lake Gold was a noteworthy transaction.
The merger saw Agnico Eagle assume possession of the Fosterville gold mine in Victoria, which is considered one of the highest-grade and lowest-cost gold operations in the world.
Newcrest Mining’s $US2.8 billion ($4.1 billion) acquisition of Canadian-focused Pretium Resources was another notable deal, providing the major Australian gold miner with a potential Tier 1 gold mine in the Brucejack operation in British Columbia.
Upcroft said the increased proportion of deals in 2021 can be partially put down to a slowdown in recent years.
“Similar to mining companies being cautioned on capex, they’ve been cautioned on deal activity as well,” he said. “So we’ve gone through a period over the last two or three years where large transactions have probably been shut down before they’ve got out the boardroom.”
Upcroft wasn’t surprised to see the gold industry be a prominent M&A participant, and it’s something he expects will continue into the near future.
“When you look at the deals that happened last year, they were really gold-focused … which is partly a consolidation phase,” Upcroft said. “And we think that consolidation phase will continue over the next few years, both at the large end of the gold sector and also the smaller end.”
“When you look at the number of companies focused on gold (deals), it’s an ongoing cycle in terms of the sizing of those groups.
“There’s power in becoming a larger gold company – you’re in a little bit more control of what you do – but then there can also be a lot of extra value that can come from being narrowly focused on a couple of assets.
“So it is (about) getting that balance right across the gold industry.”
Genesis Minerals is a recent example of a gold miner looking to consolidate, with its acquisition of Dacian Gold expanding the company’s footprint in the Leonora region of WA.
Announced in early July, Genesis said the Dacian acquisition would combine its organic growth and high-grade resources with Dacian’s large-scale milling infrastructure at Mt Morgans.
The combined group will have approximately 4.5 million ounces of resources in the Leonora district, with a focus on growth through exploration and a pathway to production through the existing milling solution.
Dacian suspended mining at Mt Morgans in June amid rising cost pressures.
The number of critical minerals deals among the top 40 mining companies jumped fivefold in 2021 when compared to 2020, while the total value of the transactions doubled.
Rio Tinto’s $US825 million ($1.2 billion) acquisition of the Rincon lithium project in Argentina, first announced in December 2021, was a notable critical minerals M&A. Rincon is a large undeveloped lithium brine project that has the potential to be a long-life, scaleable resource capable of producing battery-grade lithium carbonate.
In October 2021, South32 announced its intention to acquire Sumitomo’s 45 per cent stake in the Sierra Gorda copper mine in Chile for an initial upfront cash consideration of $US1.55 billion ($2.28 billion). The deal was completed in February 2022.
Given the current interest in the sector, Upcroft forecasts a continued uptick in critical minerals transactions. He said M&As could also be a vehicle for mining companies not currently exposed to critical minerals and want to get involved.
Vertical integration is also becoming a prominent stimulator of M&As in the critical minerals space.
“Customers (may) want to get direct ownership to the material at mine source, and whether that’s through offtake arrangements or through equity transactions, it’s just going to be interesting to see how that unfolds,” Upcroft said.
“When you’re talking about gaps in supply, and you’re talking about an electric vehicle (EV) manufacturer that relies on that product being there to be able to produce their product and grow themselves, it becomes a pretty significant issue for them to want to directly manage.”
While the global mining industry is facing operational costs on an increased scale, well-run companies will continue to enjoy positive margins into the future.
The financial risks facing the sector remains a cause for concern but not a cause for panic, and Upcroft said as long as the sector was supported from an investor, lender and government point of view, prospects remain strong.
“Mining companies are in good shape financially and, together with investors, lenders and government help, that’s an environment for supporting the right growth projects,” he said.
“Margins are falling but they will still be pretty high, so (if you) manage costs we’ll still see margins in the right space.”
This feature appeared in the August issue of Australian Resources & Investment.