Introduction
Joint ventures and asset sales are anticipated to increase in the mining industry, driven by a slowdown in manufacturing and subdued demand for industrial metals, particularly in China.Context
The current environment poses challenges for full-scale mergers and acquisitions among diversified miners, as high costs and the risks of deal rejection dampen investor enthusiasm ahead of the upcoming CESCO event in Santiago, Chile. Data from LSEG indicates that the mining sector experienced a 27% decline in merger and acquisition value in the first quarter year-on-year, totaling $15 billion. Since the beginning of 2024, shares of major players like BHP and Rio Tinto have dropped 26% and 23% respectively, while Glencore has seen a staggering 42% decline.Developments
Despite robust balance sheets and significant returns to shareholders, companies like BHP and Rio Tinto are encountering stagnation in earnings growth. With China unable to compensate for the mining demand vacuum shaped by ongoing trade tensions, mining firms are increasingly focusing on creating value through scale. Portfolio Manager George Cheveley from Investment Manager Ninety One notes a rise in discussions surrounding partnerships, joint ventures, and asset sales. Smaller deals are viewed as more manageable from a regulatory perspective, providing a pathway for enhancing asset portfolios while mitigating risk.BHP recently established a joint venture, Vicuña, with Lundin Mining, gaining ownership over the Filo copper project in Argentina and the Josemaria project in Chile. As BHP grapples with declining ore grades, it plans to invest $10.8 billion over the next 10 years in Chile, commencing with the Escondida operation. Some companies have pivoted towards boosting shareholder returns through dividends and buybacks instead of aggressive growth investments. James Whiteside from Wood Mackenzie suggests that the current trend of higher payout ratios is not translating into better valuation multiples, making the pursuit of growth more attractive.
Historically, merger discussions in the mining sector tend to emerge either at the peak or trough of the market cycle. Christel Bories, Chairman of French mining group Eramet, highlights that the M&A cycle was prompted in April 2023 when Glencore's $23 billion bid for Teck Resources was rejected, leading to Glencore's acquisition of Teck’s metallurgical coal portfolio for $7 billion. The landscape shifted significantly when BHP launched a hostile $49 billion bid for Anglo American, signaling a potential industry restructuring.
Liberum analyst Tom Price emphasizes the importance of BHP initiating the M&A cycle, facilitating other CEOs in marketing such strategies to their boards. Currently, predictions of soaring copper demand—especially for power grid enhancements and e-mobility solutions—are easing discussions around M&A among mining companies. Benchmark Mineral Intelligence forecasts that copper demand from these segments will rise to 4 million metric tons by 2030, constituting 13% of global refined demand, up from 9.5% this year. To meet rising demands, the mining sector must invest $200 billion to boost copper production by 9.6 million tons.
China remains a key player, accounting for approximately 55% of global copper consumption, alongside significant usage of aluminum in sectors like transportation and construction. However, Liberum's Price warns that while stimulus measures may be necessary, China's historical strategies have only served to stabilize activity in its commodity-heavy property and infrastructure sectors, which continue to show weakness.