Diversification is the new mining buzzword

According to Newmont’s CEO Tom Palmer, along with “a very volatile economic environment” including inflation, interest rate hikes and the war in Ukraine, gold miners are facing cost inflation in labor, fuel and energy, as well as materials and consumables, “continuing into the better part of 2023.”

Shaun Usmar, CEO of Triple Flag Precious Metals Corp, was quoted by Bloomberg saying that current hawkish measures being pursued by central banks, i.e., aggressive monetary tightening to bring down inflation, which has lifted bond yields and the dollar, pushing gold prices down, could make it challenging for single-asset producers and development companies that may not have the financing means to absorb costs and increase capital.

For these companies, the equity markets aren’t accessible, and if they are, it’s very expensive and dilutive. Such an environment leaves room for mergers and consolidations, especially for miners with cash and a need to grow, said Usmar, who was Barrick’s CFO from 2014-16.

Last week, the Globe and Mail reported Agnico Eagle Mines is teaming up with Teck Resources to buy a copper-zinc project in Mexico, in what would be a major departure from precious metals for Agnico.

The Toronto-based company, with stock symbol AEM, has gold and silver operations in Canada, Australia, Finland and Mexico, including Canada’s largest gold mine, Canadian Malartic, and the Meadowbank Complex, located in Canada’s far northern Nunavut territory.

Agnico Eagle said last Friday it will pay USD$580 million for a 50% share in Teck’s San Nicolas copper-zinc mine in Zacatecas, Mexico.

The Globe notes that AEM, Canada’s second-biggest gold producer, is currently heavily weighted to precious metals production (about 99%), but once San Nicolas starts up, precious metals would fall to 87% of the company’s output.

Agnico is not alone in increasing its exposure to copper and other green-economy metals, including lithium, graphite and nickel. The latter, seen by investors as ESG-friendly, fit with another decision many mining companies are making, i.e., distancing themselves from “dirty”, old-economy materials like coal and oil.

Even the so-called experts are wrong about critical metals supply

Teck, for example, has said it is open to selling its stake in the Fort Hills heavy oil project in Alberta, and is actively looking at either unloading or spinning off its metallurgical coal unit. Meanwhile, the Vancouver-based firm is moving its business towards copper by building a major new copper mine in Chile, called Quebrada Blanca, or QB2.

About 20% of Barrick Gold’s production now comes from copper, and as mentioned, in 2020 CEO Mark Bristow indicated his interest in Grasberg, then US copper mining giant Freeport McMoRan’s flagship asset (the mine is now co-owned by Freeport and Inalum; the latter, a state-owned miner, becoming a 51% majority owner in 2018 through a $3.9B payment to Freeport and Rio Tinto).

At the time, Bristow said he believes copper will be “the most strategic metal on this planet” in a decade, due to its use in electric vehicles and other clean-energy applications.

The Financial Post reported in its Tuesday edition that Bristow several years ago engaged in unsuccessful merger discussions with Freeport-McMoran. The CEO reiterated his interest in the base metal. “Copper is probably the most strategic metal, and it’s geologically related to gold,” he said. “So if you want to become a world-leading gold company in the fullness of time, you are going to end up producing [copper].”

The Financial Post notes that if gold prices continue to slide, other gold miners may also look to make copper, zinc and other metals part of their portfolio.

While not a gold company, earlier this month Rio Tinto said it is willing to pay $4.2 billion to buy the 49% of Canadian producer Turquoise Hill Resources it doesn’t already own, effectively giving the Anglo-Australian multinational control of the massive Oyu Tolgoi copper-gold mine in Mongolia (Turquoise Hill owns 66% of Oyu Tolgoi, with the Mongolian government holding the remaining 34% interest).

Diversification hasn’t always been as important to mining companies. Miners in the mid-2010s basically ate each other and by shutting down exploration there was no accretive increase in reserves. After years of selling “non-core” assets, mining firms are coming around to realizing that diversification is good.

In a 2021 article, Investors Chronicle writes that, while companies that consolidated into one or two commodities took advantage of higher prices last year, any supply increase or demand deterioration in these markets could sink profits quickly. 

To help guard against this, BHP (BHP) and Rio Tinto (RIO) have recently approved massive new projects outside their traditional areas. This marks a turning point in the sector. 

BHP greenlit the Jansen potash mine in Saskatchewan, and Rio committed to building the Jadar lithium-borate mine in Serbia.

Smaller companies are also getting on board the diversification train. For example Hochschild Mining, a Peru-based gold and silver miner, in 2019 purchased a rare earths element project for $56 million.

Investors Chronicle said the latest round of diversification among major miners differs from the last mining boom, when the majors tried building non-iron ore projects that would address short and medium-term market conditions, such as oil and gas.

This time it’s different: BHP and Anglo are looking at population growth and more hungry mouths as drivers, while the lithium plan from Rio is largely based on forecast battery manufacturing capacity in Europe.

A report earlier this year from Fitch Solutions confirms that the mining majors are ramping up their diversification policies to capitalize on decarbonization trends.

For example, copper. It’s not an exaggeration to say that copper is essential to decarbonization; nothing happens without it. The continued movement towards electric vehicles is a huge copper driver. EVs use about 4X as much copper as regular internal combustion engine vehicles. It’s in the motor, the wiring, and the charging stations. Copper is also in the “smart grid” to get renewable energy to where it’s needed. The latest use for copper is in renewable energy, particularly in photovoltaic cells used for solar power, and wind turbines. 

When it comes to diversification, however, Fitch Solutions says copper is “a particularly troublesome commodity” because of the combined effects of historically high prices (copper reached a record $5.02 a pound on March 6, though it has since fallen back to $3.14), expectations of strong demand growth (due to the electrification & decarbonization trend) and geographic concentration of production in countries that pose a significant risk for mining companies.

The top two copper producers, Chile and Peru, are both seeing a wave of resource nationalism, where governments try to exact a greater share of resource revenues through various means, such as higher royalties and export bans of raw ores, in favor of in-country processing.    

In December, leftist candidate Gabriel Boric was elected president of Chile, on a mandate to impose higher taxes, sending a chill through the mining industry which argues the change will impede competitiveness. A vote is scheduled in Congress in the coming weeks.

Peru’s President Pedro Castillo has also proposed to raise taxes on the mining sector by at least 3%, which the country’s mining chamber says could cost USD$50 billion in future investments.

“We, therefore, expect most major miners will face significant impediments to pursuing diversification strategies focused on the acquisition of copper assets in the short- to medium-term unless they become less risk averse financially,” Fitch Solutions said.

A GlobalData analysis of the extent to which mining companies are diversifying their revenue streams, found that supply chain disruptions caused by the covid-19 pandemic have shown the importance of geographic diversification of revenues. Lockdowns targeting specific sectors similarly demonstrated the value of maintaining a diverse product offering, says the analysis, via Mining Technology.

Out of Mexico, into Colombia

One example of geographic diversification caused not by covid, but resource nationalism, is the flight from Mexico, a major mining country that ranks as the world’s top silver producer, and Latin America’s biggest gold miner.

But government policies are scaring mining companies off. The Mexican government has stopped awarding new mineral concessions, nationalized lithium projects and restricted permitting to extensions of existing mines, Mining Weekly said.

BN Americas reports that mining companies are diversifying away from Mexico in a period of heightened political risk under leftist President Obrador. Two mining and exploration firms have exited the country while a further three mid-tier players have sold off significant assets. Four Mexico-focused companies have made acquisitions overseas, with many targeting Nevada, ranked by The Fraser Institute as the world’s third most attractive mining jurisdiction.

BN Americas points to Orla Mining’s acquisition of Gold Standard Ventures as the latest example of diversification away from Mexico. Orla, whose first mine Camino Rojo in Mexico began production last year, expects to build an open-pit heap leach operation at Gold Standard’s South Railroad gold project in Nevada.

Other Mexico exits include SSR Mining with its sale of the Pitarilla project to Endeavour Silver for USD$70 million in cash and shares; and ASX-listed Azure Minerals, which announced a deal to sell its Mexican assets to Bendito Resources for AUD$20 million.

Some firms took advantage of strong prices to sell their Mexican projects while retaining a strong presence in the country. They include Equinox…