Commodity Watch: Size Matters in Mining

<div class="grid grid--33-66-col"><div class="col"><img loading="lazy" src="/getContentAsset/061c994a-a452-418f-bfa0-f2cf3cf5c577/cb87803a-320c-480f-ab75-7b9029eaaf79/Ahmad-Al-Sati-new.png?language=en" alt="Ahmad Al Sati - insights" title="Ahmad Al Sati - insights" style="width: 180px" class="fr-fic fr-dii"></div><span style="font-size: 12px"><div class="col"><strong>AHMAD AL-SATI<br></strong>PORTFOLIO MANAGER<br><br><p>Ahmad is the President and Portfolio Manager for Gemcorp Capital Advisors LLC, based in New York.&nbsp;<br><br>Ahmad has spent most of his career in the global credit markets. Prior to Gemcorp, Ahmad was President of Pandion Mine Finance and RiverMet Resource Capital, LP - a fund focused on investing in precious metals, where he was responsible for managing the investments and the day-to-day operations of the registered investment adviser.&nbsp;</p></div></span></div><hr><p>The FOMO is real. Multiple news outlets report that BHP is re-engaging Anglo American for a merger that would create a copper behemoth. BHP’s renewed approach comes nearly two years after abandoning its initial efforts to buy Anglo. At the same time, Anglo shareholders are three weeks out from a shareholder vote (December 9) to approve its merger with Teck Resources. The Anglo-Teck merger would create the world’s largest copper miner, surpassing BHP’s production. The market has approved of the Anglo-Teck merger with Anglo up 24% since BHP abandoned its bid, while BHP is down 20%. It remains unclear if a merger ultimately makes business and financial sense. (News alert: BHP dropped their bid after this post was published). Nevertheless, the reapproach is telling.</p><p>M&amp;A activity in commodities typically bookends cycles. Late cycle is about frothiness. Early cycle is more about achieving scale, cost savings and portfolio positioning. The current M&amp;A activity (a two-decade high) seems to be about the latter, especially for metals such as copper. The IEA estimates that demand will outpace supply by 20% under the most optimistic production scenarios (35% base case) driven by electrification and, more recently, data centers.&nbsp;</p><p>Copper has thus become key for miners seeking growth. At the same time, developing mines today is expensive, time consuming, fraught with risk and facing a potentially anemic pipeline given recent neglect. As I wrote three weeks ago, miners are seeking scale to absolve them from the double-edged sins of underinvestment and under exploration. Better cash flows and more favourable lending rates don’t hurt either. Finally, miners are seeking to pivot away from the last cycle’s metals and minerals (iron ore and coal) to the next cycle’s potential stars (copper and battery metals). All this means expanded M&amp;A activity.</p><p>Gold had a similar recent renaissance. In 2019, with prices at ~$1,480/Oz, gold miners experienced a flurry of activity (350 deals valued at $30 billion), which continued for 4 more years as gold prices doubled. Copper may or may not follow the same path, as recent activity suggests that several major industry participants are increasing their focus on copper as a strategic area of interest.</p><p>Ultimately, this M&amp;A activity may cascade down toward smaller operators. Yet, investing in the “juniors” can be risky. In many cases, they lack the necessary scale and financial wherewithal necessary to operate effectively. Their public shares are thinly traded and volatile, but they require a significant amount of capital to establish viability and prove reserves. McKinsey estimates the mining industry will require $5.4 trillion by 2035. Structured transactions that mitigate risks will likely be key for investors to benefit from any upcoming consolidation.</p>