Rio and BHP: Is the future in battery metals?

The likes of Rio Tinto and BHP are shielding themselves from an uncertain iron ore outlook. How are they doing this?

It seems diversification is the ticket to survival in today’s mining industry, with companies no longer able to rely on traditional commodities to prop them up.

These minerals underpinned the world’s industrial revolution, and while there will continue to be demand for your iron ores and coals, especially from developing nations, miners would do well to consider new opportunities.

This can come in the form of battery raw materials (BRMs).

While BHP has been shy about venturing into BRMs, Rio Tinto has signalled its significant interest in lithium, particularly in Argentina’s lithium brine endowment.

Many BRMs – including cobalt, nickel and lithium – are currently experiencing price downturns, which opens the door for countercyclical mergers and acquisitions (M&A).

“While the majors have faced recent challenges in materials like cobalt, nickel, and lithium, new openings are emerging as valuations decline,” Wood Mackenzie said in a recent report.

“The majors’ strong balance sheets place them in a position to capitalise. Market volatility could present an opportunity to use the current downturn in BRM prices to establish a position that helps meet future demand growth.”

Rio Tinto has pounced on Arcadium Lithium for $US6.7 billion, while we’ve seen SQM grows its footprint in Australia while valuations have been low.

WoodMac said companies looking to make similar moves would need to be “selective” and “targeted”.

“But it is increasingly clear that the mix of valuations, future fundamentals, and potential for diversification should warrant many mining companies to further explore the opportunity at hand,” WoodMac said.

WoodMac predicts lithium and nickel to be $US100 billion markets by 2040 and “could grow similar in size to today’s copper market”.

In contrast, the market analyst expects the manganese market to be worth $US40 billion, cobalt below $US20 billion, and natural graphite below $US5 billion by 2040, highlighting where the opportunities lie.

Of the two core BRMs, WoodMac said lithium offers unique opportunities from nickel.

“Diversifying into lithium could reduce exposure to volatility from iron ore and copper prices,” the analyst said. “Lithium and iron ore prices have had a weak correlation over the last decade.

“Increased lithium exposure can help the majors to diversify away from bulk and base metal price volatility.

“Nickel prices, in contrast, have been strongly correlated with iron ore prices. That means nickel has limited potential to lower exposure to iron ore or copper price volatility.”

But WoodMac expects nickel prices to “de-link” from iron ore in the coming decades because of a divergence in demand.

WoodMac also considers the geographic diversification of entering BRMs, while also analysing cost curves, valuations and the need for core competencies given how specialised BRM supply chains can be.

Ultimately, the analyst said lithium and nickel offer numerous advantages for majors.

“Lithium offers numerous advantages, including market growth, low correlation with iron ore prices, a protected cost curve, and positive impact on corporate reputation,” WoodMac said.

“Nickel assets can provide exposure to demand growth, low valuations, alignment with the majors’ core competencies, and some benefits to corporate reputation.

“The majors will need to consider how to weigh different criteria as they evaluate portfolio composition.”