After years of relentless cost-cutting and debt reduction initiatives, big mining companies are starting to spend again.
From Australia to Peru, the past month has seen a handful of new projects signed off and a flurry of dealmaking activity.
But with the scars of the last downturn, which reached its nadir in early 2016, yet to fully heal the industry is taking a more disciplined approach to growth and investment, mindful of the need to lift shareholder returns, prove they are responsible stewards of capital and improve their lowly stock market ratings.
During the China-driven commodities boom the mining sector splashed out as much as $1tn on capital expenditure yet struggled to generate positive returns, something investors and management teams have not forgotten.
As a result, miners are looking to do things differently, by recruiting deep-pocketed partners to share costs of developing new projects. They also are eschewing the mega-deals of the past, which led to billions of dollars of impairment charges, to focus on smaller more digestible targets.
“I don’t think we have seen an industry splurge. It’s very much each company following their own strategy but more importantly staying within conservative and disciplined criteria,” said Evy Hambro, BlackRock’s chief equity investment officer for natural resources
“To me that’s very encouraging. We could easily have seen a return to the bad old days of excessive spending as companies are now making lots of money, balance sheets are repaired and new shareholders are asking for growth.
“I am delighted that companies have honoured their commitment to growth in value rather than growth for growths sake.”
PwC estimates capital expenditure by the world’s top 40 miners last year totalled just $48bn and was the lowest since 2006, with most of the money used to keep operations ticking over. New projects above $500m were limited to a couple of copper developments.
In contrast, the big miners returned $43bn to shareholders through dividends and share buybacks, and reduced indebtedness by a further $25bn.
But with the industry expected to generate about $70bn of free cash flow this year thanks to higher commodity prices, big miners have renewed financial freedom to invest, said analysts.
“The big miners are making too much money and they are ex-growth. That’s the problem,” said Colin Hamilton, head of commodities research at BMO Capital Markets. “They are now trying to solve that growth problem but they are not spending aggressively.”
This month, Brazil’s Vale said it would go ahead with the $1.7bn underground expansion of Voisey’s Bay, one of the world’s largest nickel projects. Its future had looked uncertain when Fabio Schvartsman, Vale’s chief executive, ordered a review of the project shortly after he took the helm in March 2017.
The expansion has now been signed off after Vale raised almost $700m this month by selling future production of cobalt, which is produced alongside nickel. Vale said that deal transformed the economics of the project, which is now capable of generating a good return at current nickel prices.
“Is it party time in the sector again? The answer is no,” said Neil Gregson, portfolio manager at JPMorgan Asset Management. “It’s just normal business. Metals and minerals are depleting assets . . . you have to have something in the pipeline to replace them.”
UK-listed Anglo American has also taken a more conservative approach to the development of its 300,000-tonnes-a-year Quellaveco copper project in Peru.
Rather than shoulder the entire $6bn development cost, Mark Cutifani, Anglo’s chief executive, has been searching for a partner to help share the burden, with Quellaveco only then to be presented to Anglo’s board for final approval.
Anglo this month said it had secured a $850m investment from Japan’s Mitsubishi Corp, a longstanding partner that also has agreed to fund 40 per cent of the mine’s developments costs.
“Given the state of the industry’s balance sheet I don’t think it is indicative of weak discipline to see companies starting to develop some of the best new copper projects in their pipeline,” said Nick Stansbury, fund manager at Legal & General Investment Management.
He said the approach taken by Anglo to “de-risk” its new project was extremely sensible. It is also in contrast to the way Anglo developed Minas Rio, a giant iron ore mine in Brazil.
After overpaying for the project, Anglo, then run by Cynthia Carroll, took on its development alone, underestimating the project’s costs and complexity. The mine eventually came on stream in 2014, years late and billions of dollar over budget.
Mr Cutifani said: “Our syndication of 40 per cent of a multibillion-dollar project such as Quellaveco is a strategic choice, allowing us to maintain balance sheet flexibility, pursue other investment options . . . and mitigate any residual risk.
“This model has long worked well for the oil industry and we have learnt our lessons in mining from some lumpy 100 per cent investments that put undue stress on businesses.”
The spurt of mining investment has extended to Australia, where BHP Billiton and Fortescue Metals Group have both announced new iron ore projects.
BHP’s $2.9bn South Flank project will be the biggest iron ore mine ever built in Australia. But this 80m-tonnes-a-year mine will not add more of the steelmaking ingredient to an already well-supplied market because it is replacing a deposit coming to end of its life. The same is true of FMG’s $1.3bn Eliwana mine.
“Are mining companies investing for growth at the moment? Not really,” said Paul Gait, analyst at Bernstein Research. “Most of what we are seeing by way of investment is replacement or life of mine extensions.”
There are some exceptions. A bid battle involving FMG and Gina Rinehart, Australia’s richest woman, has broken out for Atlas Iron, a junior iron ore miner, while South32 has made a $1.3bn cash offer for Arizona Mining, a small Canadian exploration company that is developing what could prove to be a world class nickel deposit.
But these deals are small and will not break the bank.
Still, BMO’s Mr Hamilton projects capital expenditure to be 25 per cent higher than current levels by 2020, given growing concerns about declining production profiles across the industry. However, he expects big miners to maintain their more disciplined approach to spending. But for others some doubts remain.
“It is very easy to talk about supply-side discipline in the aftermath of a bear market,” said Mr Stansbury of Legal & General. “The real test will be what emerges over the next two to three years.”
Source: FT.com
