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Flush major miners target exploration assets over megadeal mergers

  • Author Kip Keen
  • Theme Metals

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To bolster mining project pipelines, miners are expected to target earlier-stage projects, with a focus on metals such as copper, nickel and lithium. Early-stage assets, such as Rio Tinto's Winu copper-gold project in Australia seen above, are never a sure bet but are typically far less expensive to buy than producing mines.
Source: Rio Tinto

Major miners are ready to pounce on early-stage copper, lithium and nickel projects to fill out longer-term pipelines, rather than execute large-scale mergers.

Fears of overpaying are tempering appetites for big-money deals and helping move activity to more bite-sized opportunities. Mining companies and investors covet assets that could produce metals related to the transition away from fossil fuels and into zero-carbon power generation. Competition for those projects is set to accelerate amid the race to fill supply gaps in the coming decades as demand for many base and specialty metals soars, analysts and industry veterans said.

Mining companies enjoying high metal prices have spent the last few years funneling profits back to investors, but they are putting some of that cash into assets yet to reach commercial production. For example, in 2021, Wyloo Metals Pty. Ltd. and BHP Group Ltd. engaged in a bidding war for Noront Resources Ltd., which Wyloo Metals won in a transaction valuing the nickel explorer at about C$616.9 million; BHP made a C$100 million investment in Filo Mining Corp., which owns base metal assets in South America; and Rio Tinto Group spent US$825 million in a deal for the Rincon lithium-brine project in Argentina.

"It's a demonstration to their shareholders they're going to be more capital disciplined," said David Harquail, chairman of Franco-Nevada Corp., a top streaming and royalty company that has done numerous deals with major miners. "They're going to return a lot of capital to shareholders, yet take a small amount to put into these longer-term pipeline projects."

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Avoiding big plays

Rio Tinto, among other diversified miners contacted by S&P Global Commodity Insights, did not respond to specific questions about its M&A strategy. But a spokesperson pointed to recent comments by CEO Jakob Stausholm on a Feb. 23 earnings call in which the executive took a cautious view of deal-making.

"You could say that larger-scale M&A is really not for now," Stausholm said. "But there are opportunities, and I think Rincon is a good example of it, whereas it would have been very expensive to buy a lithium [mining] company right now."

Likewise, Freeport-McMoRan Inc., a top copper miner, has downplayed large-scale acquisitions as a means of growth. Freeport Chair and CEO Richard Adkerson has repeatedly said in recent quarters that in-house projects are the company's priority.

"Our strategy is built on focusing on operating our business and growing our production internally," Adkerson said during a presentation at the BMO Global Metals & Mining conference Feb. 28. Adkerson said Freeport, which is highly bullish on copper, would consider mergers and acquisitions on an "opportunistic basis."

Smaller investments for bigger rewards

While shareholder returns remain top-of-mind, fat bank accounts will give major miners opportunities to invest in exploration-stage projects they might have ignored in years past, when many miners were grappling with heavier debt loads and metal prices were generally lower.

"A lot of these large-scale projects tied up in juniors stand to garner more attention from majors," said Cormark Securities base metal analyst Stefan Ioannou. "There's been a long period of these kind of projects being stuck in juniors without any hungry majors willing to do anything about it. And that's changed. We're going to see more activity."

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Majors increased investments into exploration companies in 2021, with gold and lithium deals picking up the most, according to a March 23 S&P Global Market Intelligence report.

"Major mining company deals involving the exploration sector reached a 10-year high in 2021 with a rise of 29% year over year, the largest in six years," the report said.

Base metal transactions fell in 2021 after hitting a nine-year high in 2020.

Higher metal prices could also help juniors with nonproducing assets raise cash to advance projects, in turn making them more attractive to larger miners. Should metal prices stabilize at higher levels, it could boost project economics and make once-marginal assets enticing to developers.

"It's a bit of a pyramid," Harquail said. "If we're going to have a commodity cycle which is sustainable, increasing real commodity prices exponentially increases the number of potential projects out there that could be developed. They just happen to be a lot lower grade."

Battery metal targets

Copper, nickel and lithium stand out among commodities getting more interest from majors, some analysts said. Larger-scale nickel-sulfide projects are especially scarce, while demand for the metal is growing as production of nickel-intensive batteries picks up amid the energy transition, Ioannou said.

"Nickel's probably the one to watch," Ioannou said. "The fundamental problem is, there's just not a lot of projects out there to begin with so the ones that are out there are worth even that much more."

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Other analysts pointed to copper, a larger market than nickel, where there may be more opportunities for miners.

"Copper for a lot of majors is number one," said Joe Mazumdar, an analyst with Exploration Insights.

More mergers eventually

Taking a similar view, Paradigm Capital base metal analyst David Davidson said a ramp-up in M&A activity is on the way.

"Cash is flowing, investors are finally embracing growth again and most of the major companies have beefed up their corporate development teams," Davidson said in an email.

An increase in acquisitions may also come with "unconventional players" dipping into the new markets for the first time, said Chris Berry, president of House Mountain Partners, an advisory firm that focuses on battery metals. Berry expects M&A in battery metals to heat up in part because companies that have not traditionally mined commodities such as lithium will want a slice of the pie as demand balloons.

"The size of the prize around the battery metals opportunity is too large for major miners to ignore," Berry said.

S&P Global Commodity Insights produces content for distribution on S&P Capital IQ Pro.