Mining has for so many years been a no-go area for M&A activity, where the focus has been on cutting debt and returning cash, with shareholders putting a virtual ban on M&A. However, there are some interesting developments driving a shift in the market.
This shift is partly down to the firming of commodity prices. Some companies, regaining confidence in making good profits, have seen a significant improvement in share prices as a result.
Iron ore prices seem comfortably settled above the USD100 a tonne level, helped in no small degree by tragic dam collapses that have forced Vale to close off some production. As the world’s biggest supplier of iron ore, predominantly to China, that has pushed up prices further.
Gold prices are not as strong and consolidation is occurring here, as we saw with the USD10bn Newmont/Goldcorp merger, the biggest mining transaction of 2019 so far. We expect to see some further M&A activity led by Australian producers, who are now trading at a healthy premium to their Canadian peers.
There is increased deal activity focused around rare earths and the specialist minerals like lithium and nickel essential to a whole range of technologies, not least batteries, chips and electric vehicles. The bid by Wesfarmers for lithium miner Kidman is a case in point. It is also bidding for Lynas Corp, the biggest producer of rare earths outside China and a significant prize should China try to lock up the market in rare earth minerals in response to mounting trade tensions, as recent reports suggest.
Technology is beginning to disrupt the industry, particularly with the potentially transformational application of blockchain in mining supply chains. But by far the biggest disruptive force for mining is climate change. Its impact will be double-edged, posing an existential threat to coal mining but a fillip for other minerals used to build solar and wind farms (aluminium and iron ore) and those rare earth elements vital to many advanced technologies.
Confidence in the industry is improving and with some investors now urging miners to deploy accumulated cash on value-creating transactions; we expect to see further developments and strong activity in H2.