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Lithium, cobalt seen as longer-term plays for mining majors

Mining majors flush with cash from the run-up in iron ore and metallurgical coal prices are unlikely to shift their near-term focus to trendier pursuits, such as lithium and cobalt exploration, according to executives speaking March 28 at an industry conference in Switzerland.

"You're seeing exploration into new materials, [but] you have to take a very long-term view on some of these materials," George Cheveley, portfolio manager at Investec Asset Management, told attendees of the Financial Times Commodities Global Summit in Lausanne, Switzerland.

"The last thing they want to do is pursue something when it's perceived as very hot."

Seemingly echoing those sentiments, when responding to a question regarding whether he was long or short on lithium, Rio Tinto CEO Jean-Sebastien Jacques' answer was quick: "long."

Lithium and cobalt, which are key elements in the production of lithium-ion batteries, have grabbed headlines and dominated chatter in commodities circles of late as the electric car segment has hit its stride and overall demand for such batteries continues to grow.

Cheveley and fellow panelists at the gathering of C-level commodities and financial executives marveled at the price increases seen for both iron ore and coking coal over the past year.

S&P Global Platts' 62% Fe Iron Ore Index, or IODEX, opened 2016 at US$42.70/tonne CFR China and ended the year at US$80.75/tonne. The IODEX price touched US$95.05/tonne in February 2017 and was assessed on March 28 at US$81.20/tonne. As Xcoal Energy and Resources CEO Ernie Thrasher pointed out, metallurgical coal pricing quadrupled from August to December 2016. Platts assessed premium low-vol met coal at US$152.25/tonne FOB Australia.

The price increases have significantly raised margins for miners such as Rio Tinto and BHP Billiton Group. They've also presented challenges.

Thrasher, whose company supplies low-, mid- and high-volatility hard coking coal, as well as semisoft coking, pulverized coal injection and anthracite coals, said the run-up influenced metallurgical coal miners to extend the production lifetimes of mines 35 to 40 years old, and they now require significant CapEx or greenfield investment.

Cheveley, whose firm manages institutional and individual investments, also said the "commodities supercycle dragged in everyone, as they tend to do," lifting expectations in the process.

Jay Hambro, CEO of energy and mining for SIMEC Group said that even with about 14 million tonnes of iron ore sitting at ports in China, producers have maintained high output levels.

"What choice do the mining companies have? They want to produce as much as possible, as soon as possible" to take advantage of elevated pricing, Hambro said.

Christopher Davis is a reporter for S&P Global Platts, which, like S&P Global Market Intelligence, is owned by S&P Global Inc.