The global mining industry has never had it so good. Soaring commodity prices — nickel hit a record of R209 a tonne recently — driven by a shortage of supply and increasing demand have led to bumper profits for big and small mining groups.
The huge amount of cash generated has led to increasingly audacious mergers and acquisitions, as illustrated by Brazil’s CVRD, one of the largest miners in the world, which recently launched a R150-billion all-cash bid for the Canadian nickel producer Inco.
Xstrata has also secured its long-awaited acquisition of the Canadian miner Falconbridge for R121-billion, after battling it out with Inco, Phelps Dodge and Teck Cominco for the best part of a year. Other big companies are now regarded as potential takeÂÂover targets. Even Anglo American, the world’s third biggest miner, is said to be a target once it demerges its non-core paper and packaging division. In the current cycle of high commodity prices, it seems anything is possible.
Analysts acknowledge that these acquisitions are value enhancing. The integration of Falconbridge, a copper and nickel producer, will catapult Xstrata into the nickel market. Anto-fagasta’s R2,8-million bid for Equatorial Mining will give it control of the El Tesoro copper mine in Chile, increasing its presence in the global copper market.
But with worldwide demand surpassing worldwide supply, one area of concern remains. Existing operations have been running at full capacity for the past three years, and there is little excess to replace production shortfalls. More importantly, there is a shortage of major new mines coming on stream.
The big groups are getting rid of their cash by returning it to shareholders — Anglo American delighted investors by announcing it would hand back R67,4-billion after bumper results in the first half of the year and BHP Billiton is expected to announce a second share buyback of at least R27-billion this week — but commodity users may well ask why they are not investing more of their excess cash in new projects to address future demand.
Admittedly, BHP Billiton, the world’s biggest miner, is developing R135-billion worth of new projects. But it has forecast it will spend only R8-billion this year on exploration, and R2-million of that will be spent on mining. In fact, it is much cheaper and easier for a company to take over another valuable operator rather than invest in the exploration and development of a mine, which takes about 10 years from the first discovery to the first tonne of metal produced.
”Growing organically is getting harder and harder,” says Simon Toyne, mining analyst at Numis Securities. ”There is a shortage of skilled workers, some of the equipment required, like trucks, can take up to three years to be delivered, and costs and lead times for everything from dynamite to tyres continue to rise.”
BHP Billiton, for example, said that costs of the development of the Ravensthorpe nickel mine in Australia had soared 30% to R13-billion and added it was further reviewing the budget and schedule of the mine.
Moreover, exploration itself is getting harder. Access to prospective land is often restricted by environmental and community concerns, and miners are talking about the necessity of digging deeper to get at scarce resources . — Â