Mining majors ramping up their diversification policies

Mining majors are ramping up their diversification policies to capitalise on or react to decarbonisation trends by targeting new growth markets, while seeking to divest from coal, oil and gas production, market research firm Fitch Solutions Country Risk and Industry Research says.

In a report titled ‘Miner diversification and adaptation strategies to accelerate amid economic uncertainty’, released on August 22, Fitch Solutions notes that multiple commodity rallies since 2020 have helped to ease the financial costs of divestment, although mining majors’ intentions to pursue merger and acquisition deals have been somewhat hampered by broadly elevated asset values across the mining sector.

Mining major BHP has, for example, been making a large bet on the potash market to break into a new market segment that will generate considerable new revenues, offsetting the loss of exposure to fossil fuels by 2026.

The company’s commitment to invest $5.7-billion into the Jansen potash mine, in Saskatchewan, Canada, announced in August last year, points to a longer-term reorientation towards new growth markets, in this case fertiliser.

BHP has been betting that demand growth for potash is strong enough to flip the current market glut to balance or deficit by the late 2020s or early 2030s to absorb the additional supply, at which point other potash mines will be higher on the cost curve to develop.

Iron-ore company Fortescue is pursuing a similar strategy of entering a new, growing market by investing in early-stage hydrogen projects in the hopes of accelerating decarbonisation for steelmakers consuming its iron-ore output and trading green hydrogen for the metallurgical sector more broadly.

The company’s energy subsidiary Fortescue Future Industries is also investing in hydropower, wind, geothermal and solar power assets globally. It also is investigating the feasibility of converting disused mines into hydrogen assets.

Although many of these projects remain prospective, industrial applications for hydrogen as an input are expected to grow, especially for firms that have moved into acquiring renewable energy assets or are investing in renewable energy supply chains.

This is in contrast with mining major Glencore’s approach. It has chosen to double-down on coal and made little effort to begin long-term diversification investments in the hopes that short- to medium-term returns on supply scarcity outweigh any advantages to be gained by selling fossil fuel assets to private equity players or other mining firms with an investment plan into a new commodity or class of commodities intended to compensate lost earnings.

Fitch Solutions believes that, whereas majors willing to commit the capital are focused on expansion into new growth markets given high costs of acquisitions, junior and mid-sized miners generally operating in unconsolidated commodities – such as lithium or critical minerals, excluding copper and nickel – are focused on ensuring demand and minimising risk, expanding into new lines of business.

“Junior miners frequently face financing difficulties in the last stages of project development and are increasingly turning to downstream consumers for financing deals that generally include offtake provisions stipulating both volumes of offtake and a bounded price range so that the buyer reduces their exposure to spot market rates,” Fitch Solutions says.

This trend applies to other minerals as well, with smaller markets such as platinum, palladium and cobalt. These are dominantly driven by commodities whose project pipelines are either perceived to be inadequate relative to expected demand growth or else are lacking owing to uncertainty and miner caution.

Meanwhile, the expected uptake of hydrogen as a replacement for other fossil fuel inputs in industrial processes, as well as power generation, is creating new avenues for diversification because of the shift among junior miners towards pairing financing with ensured end demand for production.

COPPER

Fitch Solutions says copper is a particularly troublesome commodity for miner diversification strategies because of the combined effects of historically high prices, expectations of strong demand growth and geographic concentration of production in countries that frequently pose significant risks for miners.

Copper asset values are already elevated from multiple commodity rallies and majors have left project development to junior miners, now facing an environment of rising interest rates. Companies are increasingly looking to secure marginal supplies where they can.

Despite the number of projects that exist on paper, considerable hurdles remain for supply investment to keep pace with demand. Fitch Solutions forecasts that Chile will account for 25% of global copper production and the rest of South America will account for another 17.5% of production this year.

Leftist or left-leaning governments in South America have broadly sought mining sector tax reforms, threatened or pursued nationalisation or greater control over permitting, and sought to increase environmental oversight of mining operations.

In Chile, the prospect of a mining royalty increase is already eliciting negative reactions from mining firms, saying they are likely to cut back supply investment.

Peru has the most frequent fights between local communities, labour and mining firms and has seen mining sector investment fall as a result.

The Mexican government has ceased to award new mineral concessions, nationalised lithium projects, and restricted permitting to extensions of existing projects.

The outlook does not improve considerably elsewhere, given that the composition of forecast supply growth up to 2031 skews towards riskier countries such as Chile at 14.9%, the Democratic Republic of the Congo at 13.9%, Argentina at 8.9% and Mongolia at 6.1%.

“The growing mismatch between major miners’ acquisition-focused strategies will come under greater pressure from shortfalls of supply investment. If copper assets are highly valued today, their relative valuations are likely to climb as demand-side pressures intensify,” Fitch Solutions says.

Junior miners are unlikely to be able to bridge the supply investment gap without securing financing from end-users, intensifying pressure among manufacturers and other downstream industries to move directly into mining through equity deals and joint ventures or otherwise providing prepayments and offtake arrangements to ensure project completion.

“We, therefore, expect most major miners will face significant impediments to pursuing diversification strategies focused on the acquisition of copper assets in the short- to medium-term unless they become less risk averse financially,” Fitch Solutions said.

These competing pressures are likely to increase cross-commodity deal-making, as well as accelerate diversification strategies more broadly.

The use of hydrogen as an input for industrial uses in the metallurgical sector, as well as potential to commercialise production techniques that generate by-products, such as graphite, is likely to draw greater interest in the next two years as the first pilot projects enter production next year.

Firms operating in markets with comparatively small volumes of consumption are likely to seek out deals that guarantee demand, thereby justifying potentially costly supply investments in a more expensive operating environment in the short term.

The continuing pressure on overly concentrated supply will encourage more downstream firms to secure supply by signing direct deals with mining companies.

“This is likely to disproportionately benefit junior miners capable of bringing projects to market quickly given the negotiating leverage consumers have to provide project financing and major miners’ retreat from new project development as a driver of production growth,” Fitch Solutions said.

Further, the risk that future prices of critical minerals will be too great for diversified mining and metals firms exposed to markets such as coal, iron-ore and steel to easily make acquisitions will eventually force more spending and drive some consolidation on smaller mineral markets, where rising interest rates and slowing economic growth amid elevated inflation constrain junior miners to a greater degree in the next few years.