Natural Resources
Comment
14 November 2022
Moving in the Right Direction?
Over the last couple of years many, or perhaps most, mining market commentators (including ourselves) have written quite extensively about the paucity of the project pipeline for metals that, in some cases, are facing a step change in demand from decarbonisation and the energy transition.
The reasons behind it are well known, depleting resources, declining grade profiles, lack of exploration spending and new technologies driving a change in commodity demand.
The scars from over investment at the top of the previous cycle have led the mining industry to be weary of investing in production growth in recent years, with shareholder calls for more of a focus on returns rather than growth and capital return rather than capital investment into new projects.
However, the supply crunch that looks to be heading our way shortly has pushed governments and metal consumers into a flurry of activity as the significance of the issue has begun to register. Public pronouncements about the issue (thanks Elon), the publication of numerous Critical Minerals strategies, and in some cases, actual capital, have been deployed to encourage the mining industry to accelerate production growth in specific commodities.
Exploration budgets have tentatively increased, though still far below previous cycle highs, and mining companies, in particular the diversified producers, have given a lot of airtime to portfolio change and increasing exposure to “future facing” metals and shown an appetite to invest in new projects through M&A activity in junior miners.
In the industry’s defence commentators have also been at pains to point out to governments, regulators and investors alike, that mining is complex, accessing capital is hard and the timeline to get from discovery to production makes any significant reaction to price signals (and therefore demand) very challenging.
Accessing capital for anything earlier than a post-feasibility study project remains difficult, but as this graph from S&P Global shows, the time to production even after that milestone has been achieved takes more than 5 years.
Global Average Project Development Timeline – Source: S&P Capital IQ Pro
Nevertheless, the industry has been responding to commodity price signals and the expectation of demand increases. The number of mining projects undergoing or completing feasibility studies has increased rapidly over recent years as the extent of the supply gap has become more obvious, clearly helped by commodity price increases and improving balance sheets.
Global Mining Projects undergoing Feasibility Studies – Source: S&P Capital IQ Pro
If the market consensus on the supply-demand outlook is anywhere near right for the later part of the decade, that trend has much further to go.
That’s alright then…
As the cynics amongst us know, currently the energy transition is the probably the only mining thematic that elicits a positive response from the more generalist investor audience, almost everything is now a “battery” metal.
It is perhaps surprising to note then that if those feasibility stage projects are characterised as “Energy Transition” (copper, lithium, cobalt, nickel, etc) or “Other” (coal, iron ore, gold, etc) the picture suggests the energy transition crowd have more work to do.
Global Mining Projects undergoing Feasibility Studies – Source: S&P Capital IQ Pro, RFC Ambrian
Charlie Cryer
Head of RFC Ambrian London
+44 (0)20 3440 6834
charlie.cryer@rfcambrian.com
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