As Chinese demand slows, mining consolidation will accelerate.

The mining industry is expected to consolidate due to the decline in industrial metals demand, especially in China, the top consumer.

Investors said that for now, the high costs of mergers and acquisitions among diverse miners and the significant chance of rejection could hinder full-scale activity. This is ahead of the global gathering of the Copper Industry for the CESCO in Santiago, Chile, next week.

LSEG data shows that M&A activity in the mining sector dropped 27% in terms of value to $15 billion during the first quarter compared with the same period in 2024.

BHP shares are down 26% since the beginning of 2024. Rio Tinto shares are down 23%, while Glencore shares are down 42%.

BHP and Rio Tinto, for example, have strong balance sheets that deliver handsome returns to their shareholders. However they are now approaching a period where earnings growth is slowed.

Miners have to think about how they can create value and strength by using scale.

George Cheveley said, "We're seeing more conversations about joint ventures, partnering and asset sales" at Investment Manager Ninety One.

We're likely to see more smaller deals than large-scale takeovers. "They are an easier way to improve your asset base and reduce the risk in your portfolio."

BHP, a company listed in Australia, has also formed a joint-venture with Lundin Mining called Vicuna. Vicuna owns both the Filo copper mine in Argentina, and the Josemaria mine in Chile.

BHP, struggling with declining ore grades, plans to invest $10.8bn over 10 years in Chile beginning with the Escondida operations

Some investors have chosen to increase shareholder returns by boosting dividends and buying back shares instead of investing in growth.

Our analysis shows that higher payout ratios do not affect valuation multiples, and buybacks no longer deliver strong returns. This makes the pivot towards growth more attractive," said James Whiteside.

Copper miners say that diversifying companies looking for relevance by offering big payouts is not rewarded. But investing in production growth does pay off.

HISTORIC PRECEDENTS

"Historically, merger talks often happen either at the top of the cycle because mining companies are flush with cash, or at its bottom because they need to create value," explained Christel Bories of French mining company Eramet.

In April 2023, the ball began to roll when Glencore's attempt to purchase Teck Resources at a price of $23 billion from London-listed Glencore was rejected. Glencore bought Teck's portfolio of metallurgical coking coal for $7 billion instead.

The mining industry understood that a major restructuring was imminent when BHP, the world's largest miner, made a hostile bid of $49 billion for Anglo American.

Tom Price, Liberum analyst, said that it is important for BHP's M&A cycle to start because it helps other CEOs sell their ideas to their boards.

The forecasts for a soaring demand for copper, partly due to the replacement of power grids and upgrades as well as e-mobility (which includes electric vehicles and scooters) have made it easier to sell M&As to company boards this time.

Benchmark Mineral Intelligence, a provider of information, predicts that the copper demand for these two segments is expected to total 4 million metric tonnes in 2030 or 13% global refined demand. This year's demand was 2.6 million metric tons or 9.5%.

According to Wood Mackenzie, the consultancy, overall, miners will need to invest 200 billion dollars to increase copper production by 9,6 million tons.

China, with its vast manufacturing sector, accounts for approximately 55% and 50% global consumption of aluminium and copper used in packaging, transport and construction.

"While stimulus is probably required, China's various strategies over recent years have only stabilised activity in its commodity-intensive property/infrastructure sectors. Liberum's Price said that they remain weak.

(source: Reuters)