SINGAPORE (Reuters Breakingviews) - The big diggers have emerged from 2017 in rude health: BHP, Rio Tinto and Glencore’s combined net debt is down to a third of where they ended 2013. The trio will soon need to do more than raise payouts to shareholders but tougher geology and high prices mean that, rather than deal-making, the next phase of growth may be unorthodox.
The mining sector was stung by many of its big-ticket investments. But after three years of aggressive cuts, the giants are back. They have shed marginal holdings and minutes wasted on shift changes. Anglo American has half the assets it had five years ago, but production and margins were higher in 2017 than 2012. That could mean - whisper it - a return to growth.
Which is where the problem emerges. Building from scratch takes longer and is costlier than ever. And once the criteria of big miners are applied – long mine life, stable region, and reasonable price - there is little out there.
The shake-out around seven years ago saw a lot of mid-sized players absorbed. Commodity prices have improved, so there are no real forced sellers. The easy-to-reach stuff has been dug up. Governments are pricklier too. Finally, China’s insatiable appetite effectively introduces a floor price in almost any deal.
First Quantum is a case in point. The $12 billion miner is an evergreen target, with the biggest new copper mine to be commissioned for years: Cobre Panama. Its co-founders, Philip Pascall and Clive Newall, are not young. But it has African assets that make investors uneasy. The company also now trades at a premium to larger peers.
The result is fewer deals. One alternative is to focus on innovation to make mines more productive. Another is buying equity stakes in companies beyond the core - in battery ingredients, for example. Outside the sphere of diversified miners, Newcrest Mining on Monday took a 27 percent stake in Lundin Gold.
A third option is working closer with needy governments. Chile’s state-owned Codelco, the world’s largest copper producer, is one attractive partner - it has long-life mines but flat production and hefty investment requirements. A joint venture there would be a worthy prize for any digger.
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