6 Trends Impacting Metals & Mining M&A in 2022

Focus on

Tim Balston
Partner
Azure Capital

The Race for Critical Minerals is Reshaping Miners M&A Strategies

As the world transitions to a clean energy economy, global demand for critical minerals such as copper, nickel, lithium, graphite, and rare earths are forecast to increase materially over the longer term. While copper and nickel have both been long sought after by global mining companies, given their uses outside of the energy storage and electric vehicle world, other critical metals such as lithium, graphite and rare earths have typically been considered by most large mining companies as relatively small, niche markets, with opaque pricing. As a result, they have not been core commodities within their existing portfolios or indeed part of their aspirational M&A growth strategies.

The rapid green transition of the global economy has forced a rethink of this strategy from many mining companies, with copper and nickel becoming key focus commodities for many (to the extent they were not already) and lithium, graphite and rare earths also now becoming either on-strategy or at least on the growth discussion table.

"The rapid green transition of the global economy has forced a rethink of this strategy from many mining companies."

When BHP spun-out South32 in 2015, it did so partly with a strategy of reducing its exposure to higher risk jurisdictions and focusing its growth ambitions on lower risk jurisdictions such as Australia and Canada. African exposure had effectively been removed from its portfolio through the spin-out, with the exception of a number of non-core assets, which have subsequently been divested. Fast forward to 2022, BHP has recently invested up to US$100m into Kabanga Nickel, a large nickel-cobalt project in Tanzania and one of the largest nickel sulphide development projects in the world. While this strategy may appear to be somewhat ‘back to the future’, it is typical of the way mining companies are now revisiting their M&A strategies to target growth in ‘future facing’ commodities.

Rio Tinto is making a clear push into the lithium sector, having recently agreed to acquire the Rincon Lithium Project in Argentina for US$825m in 2021. Rio continues to face headwinds at its US$2.4bn Jadar lithium project in Serbia, where the Serbian Government recently revoked the company’s exploration license. In spite of the Government and community opposition, Rio is likely to continue to progress the project, as it looks to become a key player in lithium as it is across its other core commodities.

These examples highlight how major global mining companies are pushing into new forward-facing commodities, some of which they are not currently major players in, and also demonstrates that they are prepared to operate in higher risk jurisdictions in order to secure assets which are of sufficient scale and quality to meet their criteria.

China to Continue Aggressively Securing Supply of Critical Minerals Globally

While Western mining companies have made a recent push to gain market share across the critical minerals sector, China has long been a dominant player, which stems from its status as the major downstream player both in terms of processing and manufacturing of final products.

Many of the key Chinese companies competing for assets across the critical minerals sector are vertically integrated manufacturing companies who are seeking to secure the supply of commodities required to produce their final products, such as electric vehicle batteries and related materials. Some of the more active Chinese players recently have included Ganfeng Lithium, Hoayou Cobalt, Zijin Mining and CATL. Some recent transactions of particular note include:

  • Zijin’s US$770m acquisition of Neo Lithium;
  • Hoayou Cobalt announced acquisition of the Arcadia Lithium Project from Prospect Resources (which Azure is advising on); for US$378m; and,
  • CATL’s US$240m investment into AVZ Minerals to acquire a 24% interest in the Manono Lithium Project

Notwithstanding earlier comments around Western mining companies now looking in higher risk jurisdictions for these types of assets, China is often willing to make large investments in jurisdictions which may still be considered too risky for Western mining companies. This ultimately provides them with a competitive advantage to secure supply of these critical metals in places where they are in abundance, such as areas across Africa like the Democratic Republic of the Congo and Zimbabwe.

"China is often willing to make large investments in jurisdictions which may still be considered too risky for Western mining companies. This ultimately provides them with a competitive advantage."

Going forward, we expect China to continue aggressively trying to lock up these critical metals to secure supply to feed their integrated supply chains. China is now facing more competition from Western mining companies who have turned their M&A focus to these sorts of assets, particularly where those minerals sit in less-risky jurisdictions. China is also coming under increased scrutiny from a regulatory perspective, with most Western Governments now actively implementing strategies to curtail China’s dominant position across the critical mineral value chain and reduce their dependence on China for the materials that will ultimately power the products of today and tomorrow.

As a result, China is likely to focus its offshore growth efforts to secure critical minerals in jurisdictions where they have a positive relationship with the relevant local Government, and they feel confident they can operate in-country without putting their long-term investment at risk.

Search for Growth and Scale Driving Further Consolidation in the Gold Sector

The gold sector has experienced a wave of consolidation over the past few years, kick-started by a number of large mergers including Barrick / Randgold, Newmont / Goldcorp and more recently Agnico Eagle / Kirkland Lake. This has been followed by a long list of consolidation across the mid-cap and junior gold sector, which has been dominated by North American and Australian headquartered companies including a reasonable level of cross-border M&A.

M&A in the gold space is largely being driven by gold miners seeking to replace their depleting reserves, where ongoing exploration has for the most part failed to deliver material mine life extensions and/or new greenfield discoveries to maintain existing reserves. Sixteen of the world’s 20 largest global gold miners saw their overall remaining mine life fall over the 2010 – 2019 period, a direct result of declining discovery rates and lower overall investment in exploration.

In the face of declining reserves, we expect to see further consolidation across the gold sector, buoyed by a strong gold price which is benefiting from the ongoing geopolitical concerns with conflict in Ukraine, along with inflation headwinds, both of which are seeing rising demand for gold as a safe haven asset. The balance sheets of most mid-tier and large gold miners are generally very healthy, particularly across the ASX, which will support the growth ambitions of these companies to continue pursuing their M&A strategies.

"In the face of declining reserves, we expect to see further consolidation across the gold sector, buoyed by a strong gold price which is benefiting from the ongoing geopolitical concerns."

We expect to continue seeing acquisitions of junior gold companies by mid-cap gold miners as a means of achieving growth. Given the lack of high-quality assets available, this is likely to include mid-cap gold miners acquiring development projects and/or junior development companies where we have seen a number of recent acquisitions on the ASX, including Ramelius Resources’ acquisition of Apollo Consolidated – which Azure advised on – and St. Barbara’s acquisition of Bardoc Gold.

Investor demand has also become a key driver of M&A in the gold sector, with miners increasingly seeking to expand to increase their relevance with generalist funds and be included in exchange-traded funds. Despite some investors’ preference for M&A only where it creates genuine value, the case for M&A to create scale and attract new investors appears to be becoming stronger in the gold sector and we expect this investor feedback to continue driving appetite for consolidation through 2022.

Coal Assets Continuing to Transition into an Investor Class of their Own

Battery minerals are a key pillar of the economy if we are to successfully navigate the pathway to a cleaner future. On the other end of the commodity spectrum, coal has become much more unfashionable with investors and is experiencing a secular decline. The distinction between metallurgical and thermal coal appears to be too nuanced for many investors, as the pool of capital available for the coal sector has shrunk dramatically in the past 18 months.

The secular shift in the sector has seen Rio Tinto exit its entire coal business in 2018, Anglo American exit its thermal coal business having demerged its South African business and divested its interest in Cerrejon in 2021. BHP continues to look at exit options for its Mt Arthur thermal coal mine, having already exited its interest in BMC in 2021 for US$1.4bn. Meanwhile, Glencore remains the subject of a hedge-fund activist campaign which is seeking to have its coal assets demerged into a new listed vehicle. While Glencore has indicated its major shareholders are not supportive of this proposal, it highlights the ongoing debate around the future of coal within the portfolios of existing mining companies and how they are to be best managed going forward.

"Securing traditional bank debt has become challenging across the coal sector, with many lenders’ updated ESG requirements making it difficult to provide large amounts of capital to coal producers."

Securing traditional bank debt has become challenging across the coal sector, with many lenders’ updated ESG requirements making it difficult to provide large amounts of capital to coal producers. Stanmore Resources’ recent acquisition of BHP’s interest in BMC included a US$625m debt facility which was priced with an 11.5% fixed interest rate and was provided by a number of non-bank lenders. This reflects the type of capital now available in the coal sector; relatively expensive and without major support from traditional Australian lending banks.

We expect that M&A in the coal sector will continue to be driven by both existing diversified miners rebalancing their portfolio’s and reducing their exposure to coal (particularly thermal), along with consolidation of the sector by the remaining pure play coal companies and private equity firms with access to capital.

Sustained Higher Spot Pricing Becoming a Key Point of Negotiating Asset Sales

With many commodities in the mining sector at relatively high price points in the cycle and consensus forecast prices across many commodities declining over the medium-to-long term, finding alignment between buyers and sellers is becoming increasingly difficult. It can often be the difference between a mining asset trading or not, with the resulting bid/ask spread between vendor and seller.

Commodity price forecasting varies a great deal across different organisations. Broker consensus is a common method, albeit there is a wide range of brokers and not everybody uses the same forecasters. Some organisations, particularly very large mining companies have their own internal commodity price estimates and will cross-check these against other independent views. There are also a number of independent research companies which provide forecasts who have their own view, which can be quite well regarded in specific commodities. Finally, there are the ‘market’ prices of spot and the forward curve which can be pointed to as a real-time reference price.

With all these options to consider, it is little wonder that in-house views on price are rarely the same. Even if the buyer and seller form a similar view on the operating outlook of the asset, alternative views on pricing can result in a wide bid-ask spread, which can ultimately impede any transaction being agreed. The mining sector at the moment is clearly a seller’s market, with intense competition from a wide range of parties which ultimately benefits the vendor where they can generate sufficient competitive tension and achieve an acceptable sale price for the asset in question.  

"The mining sector at the moment is clearly a seller’s market, with intense competition from a wide range of parties which ultimately benefits the vendor. "

Where there still remains a value gap and its clear that commodity pricing is a key driver, the most common method typically used to bridge this gap is to agree a commodity price linked contingent/deferred payment, where the buyer makes an additional payment to the seller in the future if certain commodity price targets are achieved.

South32’s recent acquisition of an interest in the Sierra Gorda copper mine from Sumitomo included a similar mechanism which involved an upfront payment of US$1.6bn followed by contingent payments of up to US$500m where certain copper prices and production thresholds were reached. This type of mechanism is reasonably common in sale agreements, and in the current pricing environment where many commodity prices outlooks are in backwardation, it provides strong alignment between the buyer and seller, which also gives the seller a level of ‘anti-embarrassment’ in the event the commodity price continues to rise after they have sold. We expect to see more of these types of mechanisms being used going forward.

Large Pools of Capital Available Across Multiple Bidder Groups Providing Intense Competition for Larger Assets

In Australia, we have seen a number of transformational acquisitions by ASX listed miners for large assets which were funded through relatively large equity raisings, some of similar scale to the companies’ market capitalisations at the time. Of note for 2021 in Australia was Sandfire Resources’ US$1.9bn acquisition of MATSA, Regis Resources’ A$903m acquisition of a 30% interest in the Tropicana gold mine and IGO’s US$1.4bn acquisition of an interest in the Greenbushes lithium mine and associated downstream joint venture.

Despite equity markets softening to some degree from their recent highs, significant liquidity still remains from large institutional investors to support M&A transactions for mining companies. With this level of support from equity markets and the relatively strong position miners find themselves in financially, owing to high commodity prices and generally well managed balance sheets, miners are bidding strongly for assets in sale processes, particularly larger assets which are strategic in nature.

Chinese organizations remain highly acquisitive across the full spectrum of commodities, and in terms of M&A outside of China, are focused on jurisdictions where they have greater transaction certainty and will not face regulatory hurdles.

Mining companies continue to face strong competition from mining-focused private equity groups who remain highly acquisitive, although they have struggled to compete with mining companies on larger asset sale processes where the private equity funds typically have a higher cost of capital.

"Mining companies continue to face strong competition from mining-focused private equity groups who remain highly acquisitive."

A more recent entrant to mix of bidders competing for the same mining assets has been a number of recently formed SPACs on the NYSE, of which there are a number of within the mining sector That said, most are yet to make their first acquisition. These groups are providing a certain level of ‘x-factor’ at the moment and will be an interesting group to watch this year.

We expect competition for asset sale processes to remain very high in 2022, with multiple competing bidder groups with significant financial capacity and appetite for growth, together with a strong commodity pricing environment provides favourable market dynamics for sellers. There are some clear potential headwinds with global geopolitical uncertainty owing to the conflict occurring in Ukraine, and the legacy being left from the pandemic which looks to be heading for higher inflation and increasing interest rates across most jurisdictions. Notwithstanding these potential headwinds, we expect another very busy year of M&A across the global mining sector, following on from 2021 which where deal activity returned to pre-pandemic levels.