Johannesburg Stock Exchange’s mining sector taken riskier bets in the metals rush

A more recent characteristic of the JSE’s (Johannesburg Stock Exchange)…

A more recent characteristic of the JSE’s (Johannesburg Stock Exchange) established mining sector taking risks to participating in the metals rush is that governments worldwide enact legislation geared at decarbonization, which is now widely believed to lead to significant supply shortages in base metals copper and nickel.

Some people have no option in the matter. An investment in Exxaro Resources is at risk if the company doesn’t stop producing thermal coal within ten years, as one of South Africa’s leading producers. Copper, manganese, and bauxite production will focus on the company’s new strategy, which it unveiled in September.

The lack of new initiatives is a significant factor in the resurgence of mergers and acquisitions. A lack of new projects has resulted from the mining industry spending too much in the past cycle. The emphasis has shifted from resource replacement via organic expansion, leaving the exploration pipeline primarily unexplored. As a consequence, little consideration has been made to expanding the supply.

Goldman Sachs predicts an 11-million-ton (Mt) increase in global copper consumption over the next ten years.  According to the 20-year historical average, the long-term supply shortfall is roughly 8.6 million tons.

“The combination of EV demand growth and the restricted amount of investment in new supply has led to that number increasing over time,” he added. China’s urbanization around the turn of the century is predicted to have a negligible impact on demand in the following decades. As large as a house!

There is, however, a problem with the mining industry’s capacity to meet the increased demand. First and foremost, inflation will chip away at capex despite its expansion, while ESG standards are altering how mines are developed. In a nutshell, new manufacturing is growing more and more costly. Lead times from discovery to commissioning are rising longer and longer as the market encourages additional production with greater pricing (more on this later).

Shareholder expectations for long-term economic returns in dividends are expected to keep M&A in the South African resources industry restricted for the foreseeable future, according to a PwC study. According to shareholders, M&A deals without synergy may have a detrimental influence on a company’s value. There are sure to be interesting portfolio reassessments at periods of transition like this one,” the research said. 

PGM (ruthenium, rhodium, palladium, osmium, iridium and platinum) sector concentration is the antithesis of diversity, but RBPlat’s (Royal Bafokeng Platinum) possible removal from the table may open the door to diversification.

Implications of future battery metal prices and the prospects for PGMs are critical for Implat’s choice to diversify. EV adoption rates in the future are a topic of discussion. Battery electric vehicles will be adopted gradually, according to Ninety One asset managers Unathi Loos and Daniel Sacks, who spoke in June. PGMs are also being accommodated by science in other ways, such as in hydrogen-powered fuel cells, which need PGMs to function correctly.

Alumina, used to make aluminum, would have been South32’s second-biggest contribution to EBITDA if other metals performed as expected in the 2020/21 financial year.

South32’s commodities profile might be considerably altered if copper follows the price trend suggested by Goldman Sachs, illustrating that thoughtful M&A can be profitable and sensible despite high share prices.

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