Diversification is good. Any aspiring actor or musician will have been told to find a back-up if the dream of filling Wembley or booking the next Marvel series doesn’t work out. Mining companies are coming back around to that approach after years of ‘non-core’ asset sales and simplification.
That trend was a natural response to a downturn, which ran until around 2016, but has left London's majors at the mercy of iron ore and copper market gyrations. That has been to their advantage this year amid high metal prices, but 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. Anglo American (AAL) was ahead of the curve by buying out Sirius Minerals last year when it was on the verge of collapse, although Anglo already had a more mixed portfolio than the two giants of the sector.
BHP greenlit the Jansen potash mine in Canada last month, while Rio committed to build the Jadar lithium and borates mine in Serbia in July. These are long-term projects that have been in development for years, to be clear, but the commitments to spend billions ($2.4bn (£1.7bn) for Jadar, $5.7bn for Jansen) on non-metals projects is new for both companies.
Smaller companies have also snapped up leftfield opportunities in the name of diversification.
Hochschild Mining (HOC), the Peru-based gold and silver miner, bought a rare earth elements project in 2019 for $56m, for which it unveiled a preliminary economic study on Wednesday. Chief executive Ignacio Bustamente told Investors’ Chronicle the company’s overall focus was not going to change but it had gone looking for “exponential growth” opportunities. “We love gold and silver and that is not going to change in the long term,” he said.
He added that the Aclara rare earths project had initially appealed because of its location in Chile, which the company knows well, and that Hochschild had built up its knowledge of the material through the due diligence and development process. The study forecast capital spending of $119m and a net present value of $152m-$177m for the project life of 11 years.
Rare earth elements, which are used to make the magnets needed in wind turbines and electric vehicle motors, require an extra level of processing than gold and silver, however. Hochschild will produce a concentrate, which is one step down the supply chain from the ore that comes out of the ground. Bustamente said the company would look to get a “minimum viable product” from the mine before looking at further processing capacity.
There are few plants outside China that can process rare earths, so this is not a surprise, although two other London-listed companies, Pensana (PRE) and Mkango Resources (MKA), have committed to build plants in Europe. They are specialists, solely focused on rare earths.
During the last mining boom, the majors tried their hand at buying or building non-iron-ore projects that would address short- and medium-term market conditions, such as coal or 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.
These look like safer bets, although the scale of these projects compared to the size of the global markets will mean Rio and BHP will be hoping for some of the "exponential growth" Hochschild is betting on.
