The world’s biggest miners are cranking up spending for the first time in half a decade as well as pursuing more takeovers — and investors are flashing hazard lights as commodities prices slide and as doubts swirl over the outlook.
Capital expenditure among the 10 largest metals and mining companies is forecast to advance to about $35bn this year, the first annual rise since 2013, according to data compiled by Bloomberg.
At the same time, the value of mergers and acquisitions in the sector has already surged to the highest in six years, spurred by deals including Barrick Gold’s $5.4bn acquisition of Randgold Resources.
“You are seeing a sort of a pivot to growth,” said Camille Simeon, a Sydney-based investment manager at Aberdeen Standard Investments, which manages about $730bn in assets including BHP Billiton and Rio Tinto shares.
However, companies need to be certain new projects can deliver improved returns, and they should be wary of major deal-making after the industry’s past failures, she said. “Given their history, that’d be a red flag for us.”
Sector leader BHP has flagged a list of growth options, raised its annual exploration budget and this month boosted its stake in SolGold, owner of a coveted copper project in Ecuador.
Anglo American gave the go-ahead in July to a $5bn mine in Peru, while last week Vale approved an approximately $1bn expansion of a Brazilian copper operation.
“The key is that growth equals value for shareholders,” Olivia Markham, co-manager of BlackRock’s World Mining Trust, said in an interview last month. The fund, which is backing companies with copper growth plans, expects miners to also continue to focus on returning cash to investors, she said.
BHP, Anglo and Vale are among companies on the 27-member International Council on Mining and Metals, an industry group with a combined market value of about $500bn, gathering in Melbourne on Tuesday for a bi-annual meeting.
Key sector executives, including from Rio, MMG and Goldcorp, will also address a separate, three-day conference taking place in the same city until Thursday.
“There’s a lot of activity under way at the moment, and a lot of us have depleting assets,” said Elizabeth Gaines, CEO of Fortescue Metals, which in May approved a $1.3bn project to build a new iron ore mine.
“Capital budgets are reflecting that, though it’s more about reinvestment — value over volume is still a key theme,” said Gaines, who will address the Melbourne conference on Wednesday.
BHP itself has pointed to a cautious short-term outlook and raw materials have declined in recent months on concern about US-China trade tension and the potential for weaker global demand for industrial commodities.
Producers’ shares have also retreated, with the Bloomberg world mining index of more than 110 companies tumbling last week to a two-year low.
Over the medium term, a lack of capital spending by miners in recent years should help tighten some commodity markets, as there are few new operations ready to add supply, according to Aberdeen’s Simeon.
“Assuming demand holds up, then the fundamentals for some commodities are going to be looking more attractive,” she said.
Other key issues that will be addressed at the meetings this week:
• Demand: The China-US trade tension is among risks to demand, yet the concern is overdone, Goldman Sachs said recently. “There is demand,” including from a boom in EVs, Fortescue’s Gaines said. “The fundamentals are looking strong and that’s why we are seeing investment in exploration and other opportunities.”
• Quest for copper: Miners are scrambling for copper deals with a potential deficit as much as 8-million tons by 2030, according to Rio. Caution is still required, according to Simeon. “Do you just throw anything at copper? I don’t think that’s the case,” she said. “It’s got to be the right opportunity that will deliver the right returns.”
• Rising costs: The sector is feeling a squeeze from higher prices for inputs, including fuel and chemicals, and now faces the prospect of rising labor costs, particularly in Australia, Newmont Mining COO Tom Palmer said last week. Inflation is “hitting all commodities and all players across the industry”, Rio CEO Jean-Sebastien Jacques said in August.