How Miners Regained Their Appetite for Transactions – Analysis

By Rhiannon Hoyle

When Jakob Stausholm became CEO of global mining company Rio Tinto almost four years ago, big mergers and acquisitions were not on his mind.

“I didn’t feel like we were ready for it,” Stausholm recalls. Today, “I think we’re in a different place and we can do it.”

In the first eight months of 2024, mining companies announced that the total value of pending and completed transactions exceeded $48 billion, about 8% more than a year earlier, according to data provider Dealogic.

This result has been beaten only once since 2012, when the transfer of a $15 billion stake in Chinese company Jiangxi Copper from one state-owned entity to another increased the value of the transaction in the same period in 2022 to $58 billion.

Mining companies are flush with cash after the Covid-19 pandemic triggered a wave of stimulus spending on infrastructure that requires raw materials like steel. Investment in the energy transition, spurred by programs like the Inflation Reduction Act in the U.S., has boosted demand for copper and other key minerals. Gold has also proven a popular bet as investors seeking a hedge against geopolitical turbulence have pushed prices of the precious metal to record highs.

This has created an opportunity for miners to get a sugar shot from buying a mine, rather than going through the ranks of getting government permits to build their own. In countries like the US, many projects are moving slowly due to environmental and community concerns.

But mergers and acquisitions come with their own challenges. Big deals often require big premiums, as was the case for BHP Group when it unsuccessfully bid for Anglo American this year.

Two months later, BHP reached an agreement with Lundin Mining to jointly acquire Canadian copper exploration company Filo for approximately $3 billion.

“Obviously, the scale of the opportunity is orders of magnitude different,” said BHP CEO Mike Henry, emphasizing that mergers and acquisitions are not a priority for the world’s largest mining company.

The list of companies making deals is a veritable guide to the global mining industry.

Last month, Arch Resources and Consol Energy, the two largest U.S. coal companies by production, agreed to merge to create a new $5.2 billion entity called Core Natural Resources. The companies said the deal would create a stronger, more diversified coal giant that could navigate changing global energy markets.

Also in August, South32 completed the sale of an Australian coal mine for $1.65 billion, while Whitehaven Coal reached agreements to sell a 30% stake in a recently acquired Australian coal mine to two Japanese steelmakers for $1.08 billion.

In the same month, South Africa’s Gold Fields signed a deal with Canadian company Osisko Mining worth about $1.6 billion, while lithium miner Pilbara Minerals agreed to buy Latin Resources in a deal that values the Australian-listed exploration company at about $378 million.

The industry appears to be spending significantly more time negotiating deals than in years past, said Owen Hegarty, executive chairman of EMR Capital, a specialist mining private equity firm. “And there’s more to come,” he said.

Still, deal activity in the sector remains below peak activity. The value of pending and completed mining deals announced this year is half of what it was in 2012, when a Chinese-led mining boom led to a rash of acquisitions.

That spending spree ended with big writedowns that angered investors and made executives reluctant to make significant acquisitions for the better part of a decade. Miners say they are taking a more measured approach to deals this time around.

After fending off an attack from BHP, Anglo American is pressing ahead with the sale of several assets, including some Australian coal mines.

“We expect further consolidation in the coal sector, with a sale of Anglo’s coal business possible in Q4 or earlier,” Jefferies analyst Christopher LaFemina said in an Aug. 24 note. “More M&A activity in the copper sector is also likely.”

Not all deal talks have been successful. In February, miner Lynas Rare Earths said it had held—and ended—talks with MP Materials, operator of the Mountain Pass rare earths mine in California.

The quality of the mining company’s reserves is a key element of its success and consolidating the assets of two rare earth mining companies was strategically attractive, said Amanda Lacaze, CEO of Lynas.

“What you should never do is just sit there and say, ‘We’re the best, forget about the rest,’ right? That’s just stupid,” she said.

Rio Tinto needed more than just a strong balance sheet to get back to the negotiating table. Stausholm took over the top job in 2021, seeking to repair the miner’s reputation among investors, lawmakers and indigenous groups after the destruction of two ancient rock shelters in Australia.

Jefferies’ LaFemina believes Rio Tinto would consider large-scale mergers and acquisitions in the copper sector, especially if metal prices remain under pressure for an extended period.

However, Stausholm said he was remaining cautious.

“There are good opportunities and bad opportunities, and unfortunately all the statistics say there are more bad opportunities than good opportunities,” he said. “So you have to be very, very careful.”

Write to Rhiannon Hoyle at [email protected]

(END) Dow Jones Newswires

September 5, 2024, 10:23 PM ET (02:23 GMT)