Mining Bull Market Continues, Future Mergers Anticipated
Image: The Assay
Africa Oil & Power spoke with Nivaash Singh, Co-Head: Mining & Resources, Nedbank CIB, about the current mining market supercycle, ongoing capital flight towards mining operations despite the COVID-19 pandemic and interdependence between mining and renewable energy developments.
What are the characteristics of the bull run that we have observed in mining that make it different to other supercycles?
At Nedbank, we have coined the phrase “a bull market within a bear,” which represents the current, and never before seen, bull market within a recessionary world market. World Gross Domestic Profit statistics demonstrate developing countries tracking negative numbers, and yet mining sectors worldwide are experiencing a commodity supercycle.
There are two observed drivers to this bull market. The first is the COVID-19 pandemic where we have witnessed a surge in demand for technology products that have triggered a demand for copper, nickel, graphite, manganese and lithium. This demand increase has influenced countries such as China to ramp up downstream production in an effort to make up for lost production days and to safeguard against future lockdowns through the stockpiling of raw materials. The second driver involves green initiatives being adopted worldwide.
With the growth in demand for electric vehicles and vehicles that use the hydrogen fuel cell; big motor manufactures implementing long stop dates when internal combustion engines will be discontinued; and the Paris Climate Agreement leading to the production increase of renewable energy generating equipment, demand for mining materials has increased. Therefore, in terms of spot price trading, these mining commodities are all trending upwards and have been for the last nine months.
Do you see investment dollars moving from other projects to mining projects? Can you describe the movement of money in response to the mining market supercycle?
Capital flight largely depends on what stage a company is at within the development cycle as the three cycles – pre-development, construction stage and operational stage – yield different results within the current context. A company in the pre-development stage, having not yet raised the capital to begin a construction program, will be required to draft a feasibility study that is COVID-19 compliant, otherwise no investor will be interested. This stage is difficult to attract funding within the current context and we are, therefore, not seeing capital flight within this stage.
Alternatively, within the construction stage – in which a company has raised the necessary capital, has commenced construction operations and is ready to go into the production program – capital is more easily attainable. However, it is within the operational stage, where a company is already in production, where we have witnessed the most capital flight. Despite the pandemic shelving expansion plans, these companies have continued to operate and generate cash. Therefore, we are seeing a surge in equity value of these companies due to capital pouring in.
It is evident that there have been some winners in the current market context. Who are the other winners and losers?
I would like to use Zambia as an example. The country is located on the copper belt, and as we have seen, copper has had a phenomenal run recently, doubling in price over the past 12 months. Our clients in Zambia, despite paying higher royalties and taxes due to the pandemic, have almost been printing money. However, in this situation, the Zambian Government has come out a loser in the market due to the default on its sovereign debt in October 2020.
Accordingly, the Government has tarnished its credit and shown how not managing its affairs carefully may result in a lack of benefits. The losers in this context, therefore, are those who did not put their houses in order before the onset of the pandemic and are now struggling with no direct benefit from the commodity boom cycle that is taking place. Governments can seize the opportunities of the bull market by utilizing the record revenues being generated as a result of higher taxes and royalties. These revenues can not only benefit economies, but also can assist governments throughout the pandemic.
There has been significant money going into renewable energies. Do you see any synergies regarding how capital markets move between renewable energy and mining companies?
There is a clear level of interdependence between renewable energy and mining companies. Firstly, renewable energies are available for mining operations to become more efficient and to help reduce its reliance on the grid. Many mining operations, particularly in Africa, are located in remote areas.
In countries such as South Africa, which is currently experiencing an energy crisis, renewable energies can be used to make operations more efficient. Additionally, as mining companies establish their own decarbonization strategy, they are looking at renewable options to run the mines. The second element includes the supply of raw materials into the renewable energy market for the manufacturing of solar panels, wind turbines and battery storage solutions.
Materials such as aluminum, copper, manganese, nickel and stainless steel are all the ingredients that go into solar, wind and hydroelectric developments. Therefore, there is a clear interdependence between the two.
Considering International Oil Companies, does the same environmental pressure to clean up activities manifest itself in mining companies?
It all comes back to the ultimate use of commodities and the levels of substitution. If you look at oil companies, they have finite life. If they do not transition to cleaner energies now, they will end up transitioning to bankruptcy in the long-term. One can diversify away from oil as a source of energy, however, there lacks a suitable substitute for copper. The only other options for electricity conductors are silver and gold, and therefore, investors are prepared to fund mining due to a lack of product substitution.
What is your 2021 outlook on the mining sector?
My short-term outlook, considering the next 12 months, is that 2021 is going to be a year where mining companies are going to focus on three things. The first is liquidity management and making sure that your all-in sustaining costs remain low and not allowing your cost base to meet your spot prices, for which mining companies are usually renowned. Secondly, companies will focus on disciplined capital allocation and how companies will spend money. Lastly, the focus will be on ensuring companies survive this pandemic. It is common to underestimate infection rates on mining sites and if they are out of control, mines could risk shutting down. My long-term outlook, within a post-vaccine era, includes companies adding to their portfolio of assets, effectively merging with other companies and buying marginal assets.