The mining sector continues to change, and the future success of the mining companies depends on their ability to create value amid market volatility, meeting increasing demand for critical minerals, and meeting ESG goals as part of the race for net zero, according to PwC’s new Global Mine Report 2022.
The report found that despite the top 40 miners having successful financial returns in 2021, the demand for critical minerals is forcing mining companies to adapt. New operations are emerging and operating environments are getting more challenging.
“Miners need to create value amid market volatility, increasing demand and the race to net zero.”
The report states the success of the top 40 will hinge on whether or not they “can take a leading role in the world’s clean energy transition and continue to generate significant stakeholder value”.
“To do that, miners must utilise their strong current financial position to meet challenges including development timelines, price volatility, geopolitical risks, stakeholder expectations, economies of scale and economic resource scarcity.
“The rewards for those miners who emerge as leaders could be immense: the need for critical minerals is expected to grow over the next three decades, with some estimates suggesting that the annual demand from clean energy technologies will reach more than US$400 billion by 2050, which is equivalent to the annual revenues of the current coal market.”
The industry’s inability to meet demand could have major implications for the cost – and ultimately the pace – of the global uptake and installation of energy transition technologies.
Critical miners
According to the report, the critical mineral miners responding to the demand are “reaping significant rewards”.
In the 12 months through 31 December 2021 critical mineral’s market capitalism grew:
- Lithium by 56 per cent
- Graphite by 101 per cent
- Rare earth producers by 154 per cent
By comparison, the top 40’s market capitalisation grew by seven per cent.
“The surging demand for critical minerals is transforming what it means to be a miner. For example, some miners are shifting focus towards higher value ‘precursor materials’ rather than comparatively lower-value unrefined or concentrate products.
“Precursor materials are the more refined inputs into energy transition technologies, such as lithium hydroxide rather than spodumene concentrate, or cobalt sulphate rather than a cobalt concentrate. In the past three years, over US$5 billion has been invested in lithium hydroxide projects in Western Australia alone.”
The report states the transition to net zero will require more mining not less, but it will be important that the mining sector adapts to the need for critical minerals and raw materials.
These are what will “power the global economy of the future” and “these resources will need to be mined sustainably”.
“The rapid scaling of the low emission energy systems of the future – solar and wind power, electric vehicles (EVs) and grid-scale batteries – will be highly material-intensive.
“The production of a solar farm requires three times more mineral resources than a similar-sized coal plant, and constructing a wind farm needs 13 times as much as a comparable gas-fired plant.”
The challenges in the mining industry identified by the report include:
- Development timelines
- Price volatility
- Geopolitical risks
- Stakeholder expectations
- Economies of scale
- Economic resource scarcity
The report states there are four specific points of requirements that mining operations should consider if they want to ensure their success past 2022.
Take a position on critical minerals
- Review the company’s exposure to critical minerals and other materials necessary for the energy transition
- Evaluate opportunities to own more of the supply chain or to partner directly with original equipment manufacturers (OEMs)
- Incorporate low-emissions technologies into operations
- Evaluate development models around shared infrastructure solutions.
Net zero and the energy transition have been driving the demand for metals and this will continue into the future.
Over the last 12 months, market capitalisations for critical minerals miners outperformed the top 40 by 49 per cent to 147 per cent.
- Revenues are up 32 per cent
- Net profits are up 127 per cent
- Market capitalisation is up seven per cent
- Dividends are up 130 per cent
- Capital expenditures are up 18 per cent
Take advantage of your financial strength
Incumbent miners with strong balance sheets, available financing and abundant free cash flow are in the best possible shape to drive the direction of the industry for decades to come. But despite their size and financial advantages, the window to maximise growth opportunities and create value is closing; miners must make their move quickly.
- Leverage strong balance sheets and abundant cash flow
- Take advantage of expected strong short-term commodity prices to prepare for longer-term uncertainty
- Reposition towards long-term growth while balancing shareholder distributions.
Revisit deal strategy
The report recommends thinking carefully regarding the mergers and acquisitions strategy “in the context of the fundamental changes affecting mining, the market for mining products and your long-term strategic position”.
“Consider the impact of high volatility in the short to medium term, increased geopolitical risks and competition from new players.”
Despite the top 40 being “well placed” to allow themselves to make the most of the demand of critical minerals, the growing competition means “they’ll need to think carefully about their next big moves”.
The report found:
- Deal value has increased by 200 per cent
- Deal volume has increased by 60 per cent
- Gold is the largest deal driver in the top 40, but critical minerals deals are gathering steam
- 14 per cent of mining and metals company CEOs have conducted scenario planning in response to Pillar 2 (global minimum tax)
- 137 member countries have agreed to the two Pillar solutions proposed by the OECD
- 83 per cent of mining and metals CEOs see meeting customer expectations as an influential factor that supports meeting their net-zero commitment.
Double down on environmental, social, and governance (ESG)
“The mining industry is naturally competitive. But building trust in ‘brand mining’ cannot be done alone. Every miner is responsible for improving the trust that it builds with stakeholders and for strengthening mining’s social licence to operate. As leaders, the tTop 40 play a crucial role.
“ESG is no longer optional or a point of differentiation; it is the minimum operating standard. Stakeholders are increasing the pressure, and strong social licences, responsible divestitures and tax transparency will be important for success.”
Many governments around the world have established critical minerals lists to highlight what they see as essential resources for meeting their net-zero commitments and for applications in high tech, defence and other vital industries.
“It’s the subset of critical minerals with direct application to the energy transition that will experience the greatest growth and dominate the mining industry of the future,” the rReport said.
“There’s no single approach to address the complex task of transformation. But companies need to position themselves strategically, and with urgency, to benefit from the changing market dynamics and the growth in demand for critical minerals and materials necessary for the energy transition.”
- Establish strong social licences, and execute mergers and acquisitions responsibly
- Act now to prepare for the potential impact of the OECD’s Pillar 2 (global minimum tax)
- Explore green premiums and ESG opportunities for a reduced cost of capital.
According to the report, “The miners that can successfully address these challenges will be best positioned not only to navigate the changing market dynamics but also to create value and to benefit from the rapidly increasing demand for critical minerals and the energy transition”.
Click here to read the full report.
