MINING: NEW M&A TRENDS
LIKELY TO ADD VALUE

Mining is a cyclical industry and capital allocation has over the past few decades generally not been great. Capital decisions are typically made when commodity prices are high – the high prices are then used to justify building new mines that would otherwise not have been economical. In addition, building new mines takes time and projects tend to overrun both timing and cost estimates.

REVERSAL OF TREND

Over the past 10 years, however, we’ve seen at least some reversal of this trend of poor capital allocation in the mining sector. For example:

• We’ve seen higher dividend payouts and lower capital spend relative to past decades. For instance, the two largest diversified miners in the world, BHP and Rio Tinto, have since 2016 spent on average just one times depreciation on capital expenditure per year, compared to over two times on average over the preceding 15 years. This has enabled these miners to both buy back stock and pay out on average two thirds of profits as dividends to shareholders compared to levels consistently below 50% in the previous 15 years. The trend has been similar for the other major diversified miners.
• The interests of management are increasingly being aligned to those of shareholders through managers’ long-term incentive payment structures – in almost all cases, return on capital now has a higher weighting compared to earnings or production growth. This wasn’t the case 15 years ago.
• Companies are much more reluctant to embark on new mine developments, preferring to optimise or expand existing mines where possible (which typically delivers much better returns). Where new mines have been built, capital spend relative to market value has been kept appropriate (i.e., they haven’t built a new Minas Rio or Lake Charles Chemicals Project costing more than half the market value to build), with improved outcomes. For example, Anglo American recently brought its Quelleveco copper mine online in Peru. Barring small delays due to Covid-19, this project was on time and on budget and is now ramping up into a strong copper price environment.
• We haven’t seen any major value-destructive M&As, at least not by the South African-listed miners we cover. Exceptions include the proposal by Goldfields to buy Yamana (since withdrawn) and the recent spat between Northam and Impala to buy Royal Bafokeng Platinum (Northam has withdrawn its offer for 100% ownership).

EXTRACTING SYNERGIES

What we have seen recently are increased talks and actions by the miners in terms of deals around adjacent assets, to extract synergies.

The most tangible example of this new type of M&A has been the recent proposal by Goldfields and AngloGold of a joint venture between their adjacent Ghanaian gold mines, Tarkwa and Iduapriem. In terms of the proposal, the fence between the assets will be dropped, the mining teams combined and the processing equipment shared.

The result will be better metal recoveries and increased production, more reserves and a longer life for the mines, as well as a lower break-even cost per ounce (lower overhead costs and more ounces mined). This is a fantastic result for shareholders and a rare win-win in the world of M&As, where one party (usually the acquirer or the larger entity in the merger) often ends up worse off than the other.

COLLABORATIVE DEALS

We expect further deals of this nature to be concluded over the next few years. Ongoing examples include:

• BHP’s proposed acquisition of OZ Minerals, in terms of which the two miners will combine adjacent copper deposits in South Australia (this is, however, more of a ‘vanilla’ acquisition of a smaller company, and BHP appears to be paying full price for the assets).
• Glencore’s proposal to merge its metal and coal businesses with those of Teck Resources to create two separate entities. Within the metal portfolio there are opportunities to combine the miners’ adjacent Chilean copper assets (Collahuasi and Quebrada Blanca) to increase efficiencies. At the time of writing, it seemed unlikely that all Teck shareholders would vote for the merger to go ahead. However, even without a large deal, future collaboration (along with other Collahuasi shareholders Anglo American and Mitsui) at the asset level seems, in our view, quite likely.
• Vale’s talks with Anglo American to jointly develop an iron ore mine adjacent to Anglo’s Minas Rio in Brazil and to leverage the existing pipeline and port infrastructure.

Other notable areas of potential collaboration for Anglo American in South Africa include:

• Creating a manganese hub in the Northern Cape between Assmang and Samancor (owned by Anglo and South32)
• Combining its iron ore assets with those of Assmang, also in the Northern Cape.

ADDING VALUE OVER TIME

Overall, these newer types of M&A deals are much more likely to add value for shareholders over time compared to traditional M&As where assets are simply acquired to increase the size of the company or to diversify, either geographically or in terms of commodities. In our client portfolios, we continue to own a meaningful stake in mining companies, and we expect the much-improved capital allocation trends mentioned above to continue to have a positive impact on shareholder returns in future.