Miners have an opportunity to emerge as leaders in a critical transition

We all know that mining is experiencing unprecedented change in the race to net zero. With the demand for critical minerals surging, operating environments are even more challenging, and competition is increasing. 

PwC recently launched Mine 2022: A critical transition, its annual analysis of the world’s top 40 miners and industry trends. The report revealed that amidst an accelerating industry-wide transformation, the Top 40 posted stellar financial results for 2021. Combined with their strong performance in 2020, they face the future in excellent financial shape.

However, how long the big miners can continue their record run is less clear. Future success will depend on whether or not they can take a leading role in the world’s energy transition and continue to generate significant stakeholder value.

A new generation of miners are fast positioning themselves to deliver the critical minerals society is demanding. They are highly focused on meeting the evolving expectations of stakeholders and have reaped the rewards of acting quickly in this rapidly changing mining market.

A critical time for miners

Demand for critical minerals is expected to grow significantly over the next three decades. The International Energy Agency estimates that the annual demand for critical minerals from clean energy technologies will surpass US$400bn by 2050, which is equivalent to the annual revenues of the current coal market. This might seem like a long way off, but miners are already struggling to keep up with the demand for critical minerals.

For example, copper, lithium and cobalt are already experiencing supply constraints, and supply imbalances are likely in the near term. 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.

The Top 40 can play a leading role in the world’s clean-energy transition and generate significant stakeholder value while doing so. But they face some challenges - development timelines, price volatility, geopolitical risks, stakeholder expectations, economies of scale, and economic resource scarcity.

The miners that are responding to the demand are reaping significant rewards. In the 12 months through 31 December 2021, the market capitalisation of the Top 5 lithium, graphite and rare earth producers grew by 56, 101 and 154 per cent, respectively. By comparison, the Top 40’s market capitalisation grew by 7 per cent.

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.

Making ESG work for miners

ESG continues to be a focus and can create a competitive advantage for miners. Miners will see tangible business benefits by re-orienting operations around a value proposition that puts people and planet alongside profit.

For Australian miners, being part of an ethical supply chain, protecting the environment and dealing fairly with communities can help miners win new business and create a premium for their products. In 2021, S&P Global began publishing a ‘green aluminium’ pricing index, showing that customers are willing to pay an extra US$10–$15 per tonne for aluminium made sustainably. These kinds of green premiums will only continue to grow as consumers become more discerning about supply chains and provenance.

Deals: change is in the air

As deal activity heats up, the Top 40 are well-placed to position themselves to take advantage of the rising demand for critical minerals. But with competition coming from multiple angles, they'll need to think carefully about their next big moves.

In 2021, the value of deals among the Top 40 tripled from 2020, while the number of deals increased by 60 per cent. Gold was the key driver of deal activity, representing about 70 per cent of the total value. Gold miners continue to be well-positioned for mergers and acquisitions (M&A), given their low levels of debt and high levels of cash due to high gold prices. We expect gold deals to continue as larger companies look to expand their portfolios and the middle tier looks to consolidate.

We’re also starting to see a significant uptick in critical minerals M&A. Compared with 2020, Top 40 deal value for critical minerals doubled, and the number of deals rose more than fivefold. This trend is evident across the whole mining sector, which has seen 159 per cent growth in critical minerals deal value since 2019. We expect this trend to continue over the next five to ten years as demand for critical minerals grows and assets with high extraction costs become viable as prices rise.

Key takeaways for mining leaders

1. Take a position on critical minerals

• Review your exposure to critical minerals and materials for the energy transition.
• Evaluate opportunities to own more of the supply chain or to partner directly with original equipment manufacturers (OEMs).
• Evaluate development models around shared infrastructure solutions, potentially expediting timelines and lowering upfront capital costs.

2. Take advantage of your financial strength

• Leverage rock-solid balance sheets, strong cash flow and a positive earnings outlook to reposition towards long-term growth while balancing shareholder distributions.

3. Revisit deal strategy

• Think carefully about your M&A 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.

4. Double down on ESG

• Every miner has a role to play in building trust in brand mining; establishing strong social licences and responsible M&A is crucial.
• The Organisation for Economic Co-operation and Development’s (OECDs) Pillar 2 (global minimum tax) is fast approaching, and miners should act quickly to prepare for its potential impact.
• Green premiums and a reduced cost of capital are opportunities resulting from ESG that miners should explore further.

What it means to be a miner is changing, and the Australian mining industry must keep up with the pace of that change to build trust and thrive into the future.

To learn more, readers can download Mine 2022: A critical transition.