Many mining companies are taking a cautious approach as they try to maintain their bottom lines amidst what could be a lengthy economic downswing.
One of the strategies that many mining businesses have chosen to employ in this scenario is diversification. This strategy isn’t exactly new to some of these players. For instance, the iron ore miner BHP had turned to copper during the late 90s. They had bought Magma Copper and its San Manuel copper smelter in Arizona, USA for $3.2 billion. Similarly, Barrick Gold’s CEO Bristow had pondered buying Indonesia’s Grasberg – the world’s second-largest copper mine.
Gold mining companies facing cost inflation
With the current economic climate, the trend of diversifying seems to be on the upswing. The Chief Executive Officer (CEO) of Newmonth, Tom Palmer, said that along with “a very volatile economic environment” which includes inflation, the spiking of interest rates, and the ongoing war between Russia and Ukraine; gold mining businesses are facing cost inflation in labor, gas, and energy apart from raw materials and consumables.
The CEO of Triple Flag Precious Metals Corp, Shaun Usmar, said that the current hawkish measures being pushed by banks, i.e. aggressive monetary tightening to pull down inflation, have pushed the dollar and bond yields up. This has negatively impacted gold prices and could make it challenging for single-asset producers and development companies that do not have the financial means necessary to absorb such costs and increase capital.
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According to the former Chief Finance Officer (CFO) of Barricks, equity markets are not accessible for these mining businesses. This environment creates opportunities and gives space for mergers and consolidations – especially for mining companies with cash and wants to expand.
An example would be Agnico Eagle Mines which has reportedly tied up with Teck Resources to purchase a copper-zinc project in Mexico. This merger could be a major departure from precious metals for the Toronto-based company.
Agnico (AEM) has gold and silver operations in Canada, Australia, Finland, and Mexico. These businesses include the largest gold mine in Canada, the Canadian Malartic, and the Meadowbank Complex in the northern part of Canada in Nunavut territory.
On September 24, 2022, Agnico Eagle announced that it would pay US$580 million for a 50% share in Teck’s San Nicolas copper-zinc mine in Zacatecas, Mexico.
According to reports, Agnico is currently heavily tilted towards precious metals production (about 99% of its output). However, once the San Nicolas deal pushes through, precious metals would drop to about 87% of Agnico’s output.
The Canadian company is not alone in raising its exposure to copper, nickel, and other green-economy ores such as lithium and graphite. Seen by investors as ESG-friendly, Agnico is part of a larger trend of mining companies that are distancing themselves from coal, oil, and other old-economy materials and fossil fuels.
More mining businesses move out of their comfort zones
For example, Teck announced that it was open to selling its stake in the Fort Hills heavy project in Alberta, Canada and was actively searching either to unload or spin off its metallurgical coal business. The Vancouver-based entity is shifting its mining business towards copper and building a major new copper mine in Chile. This major copper mine is called Quebrada Blanca or QB2.
Currently, approximately 20% of Barrick Gold’s production comes from copper. As stated earlier, Bristow had expressed interest in Grasberg in 2020. At that time, Grasberg was an asset of the US copper mining giant Freeport-McMoRan. Today, the mine is co-owned by Freeport and by Inalum. The latter is a state-owned mining company which became a majority owner in 2018 with a 51% stake through a $3.9 billion payment to Freeport and Rio Tinto.
Several years ago, Bristow had engaged in unsuccessful merger talks with Freeport-McMoRan. The CEO reiterated his interest in the base metal and said, “Copper is probably the most strategic metal, and it’s geologically related to gold…So if you want to become a world-leading gold company in the fullness of time, you are going to end up producing [copper].”
A report from the Financial Post stated that if gold prices continue to fall, gold miners would eventually diversify. They may opt to include copper, zinc, and other metals in their portfolio to protect their profit margins.
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For instance, Rio Tinto had said earlier that they were willing to buy the 49% stake of Turquoise Hill Resources which they do not already own. This would give the Anglo-Australian company control over the Mongolian copper-gold mine Oyu Tolgoi.
The strategy of diversifying wasn’t always important for mining businesses. Around mid-2010, miners were basically at each other’s throats. Shutting down exploration meant that there was no accretive increase in reserves. However, after years of trading “non-core” assets, mining companies have come to the realization that diversification might just be as beneficial as it is important.
Indeed, Fitch Solutions announced that several mining businesses were ramping up their diversification policies to capitalize on decarbonization trends. As the world continues on its green-energy quest, it will be interesting to see which mining companies move out of their comfort zones and venture into new areas!