2021 to be ‘exceptional year of earnings’ for miners

18th June 2021

By: Simone Liedtke

Creamer Media Social Media Editor & Senior Writer

     

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The 2021 financial year will prove to be an “exceptional year of earnings” for miners, while bringing with it a paradigm shift in terms of mining strategy, says research agency Fitch Solutions & Country Risk.

It explains that mining companies are major beneficiaries of the metal price rally that started in 2020 and that the agency expects strong margins to dominate 2021 financial results.

Earnings are likely to remain elevated in 2022, although Fitch Solutions says that most of the upside will be recorded this year.

Despite high earnings, Fitch Solutions expects miners to maintain restraint over capital expenditure (capex), instead focusing on further debt reduction, with the additional earnings to be generated this year and in 2022.

Miners are also likely to increase dividends, the agency forecasts, noting that, in terms of investment, miners are likely to focus on sustainability and decarbonisation, as well as on developing their existing assets.

“They are also likely to look to a greater extent at projects involving the extraction of materials needed for the green transition,” Fitch Solutions comments.

As noted by the agency in 2020, the metals and mining industry is in the age of disruption, where disruptors including technology, changing consumption patterns and environmental, social and governance (ESG) considerations will shape the future of market players and inevitably determine success or otherwise.

“As further gains in cost reduction and production efficiency had become harder to achieve through traditional means, large miners have been incorporating advanced technology in operations.

“Now, with increasing pressures for greater transparency in operations and environmental sustainability, we expect miners to place a strong emphasis on the decarbonisation of their operations while concomitantly investing in the mining and smelting of metals related to the green transition.”

As the world quickly shifts attention to sustainability and carbon footprints this year, in a more concerted and heightened approach than ever before, the aim for miners will be to transform the bad reputation of the mining sector, traditionally known for high levels of pollution and waste, into one that characterises the industry as environmentally responsible, socially mindful and necessary with respect to procuring materials needed to achieve a green future, Fitch Solutions notes.

Nevertheless, major mining firms have raised their capex budgets for this year in the past few months and are generally expected to produce more than in 2020. Fitch Solutions also compiles a biannual mining capex outlook, and consensus as of April was for capex by the top 30 miners to grow by about 23.7% year-on-year in 2021, after it broadly stagnated in 2020.

In recent months, miners have announced higher guidances for output and capex in 2021 and 2022 than in 2020. These updated guidances reflect stronger financials, low base effects, and a general vision to return to preplanned levels of activity on the assumption that there will be no more lockdowns that could once again hamper miners’ capabilities, Fitch Solutions says.

However, in taking a closer look at individual company capex figures, Fitch Solutions says the overall trend remains that companies are investing more in developing their existing assets than in exploration for new ones.

In general, exploration expenditure slowed down over the past decade, owing to the fact that easily commercialisable high-value mines have mostly been acquired by major firms, while remaining deposits are harder and more expensive to exploit.

Additionally, Fitch Solutions says that, after the commodities supercycle period, miners deep in debt and financial crises became more stringent in their expenditure after learning their lessons from risk-taking and extravagant expenditure.

Since then, the general strategy has been to consolidate assets and develop existing ones instead of investing in greenfield projects, the agency notes.

With greater profitability this year, as a result of soaring commodity prices, Fitch Solutions predicts that this strategy might reverse course; however, it only expects limited increases in expenditure on exploration in the coming five years, compared with the past five years.

“This is because of the increased time and expenditure needed to explore new deposits now, compared to the past, as most of the low-cost and easy-to-mine deposits have already been acquired.

“The process is even more challenging amid more stringent approval regulations and impact assessments,” the agency notes, adding that miners also have a lower tolerance for new projects in frontier markets, where there is higher fiscal and resource nationalism risk.

After spending on existing assets, diversified miners are prioritising investments in copper (or other commodities used in batteries or renewable-energy technology) and shying away from coal and other fossil fuels (which account for a substantial carbon footprint) in order to be ahead of the green race.

Going forward, Fitch Solutions expects miners to increase investments in copper, lithium and nickel projects, owing to the rising demand for these metals from the renewable- energy, battery and electric vehicle sectors.

Miners and metals companies are also likely to try to extract value out of the sustainability trends, Fitch Solutions says, as there will be pressure on them to decarbonise, reduce their environmental impact and improve transparency.

That pressure will increase dramatically in the coming years, as downstream players aim to reduce Scope 3 greenhouse-gas (GHG) emissions.

According to McKinsey & Co, mining is responsible for 4% to 7% of global GHG emissions in terms of the sector’s Scope 1 and Scope 2 emissions, while including Scope 3 emissions links the sector to about 28% of total global emissions, Fitch Solutions notes.

Therefore, the agency expects first movers in this respect to enjoy a premium for their products in the future as downstream players demand low-carbon metals.

In recent years, environmentally conscious investors have also reduced exposure to emission-intensive sectors, limiting financing options for metal producers and miners. Notably, several major banks have committed to reducing exposure to the coal mining industry.

In this regard, many major miners have announced targets to reach net-zero emissions by 2050 or earlier, and are decreasing their exposure to fossil fuels, localising supply chains, increasing technological innovation and recycling more materials.

Because of this, environmental sustainability will remain the most pressing concern.

Further, Fitch Solutions believes recent events in the metals and mining sphere, as well as the Covid-19 pandemic, will raise the prominence of social accountability in the mining sphere.

The Covid-19 pandemic has underscored the social pillar of ESG as metals and mining companies moved to protect the wellbeing and health of their employees and the communities in which they operate.

Mining capex will continue to target advanced technology that enables further efficiency gains, as industry leaders prioritise technology to remain competitive and better withstand price volatility, Fitch Solutions says.

It notes that the acceleration of technological integration in the mining industry will widen the gap between the top low-cost producers and junior miners, as well as improve the competitiveness of developed markets, compared with underdeveloped ones.

Investing in technology can help realise further profits and extend mine lifespans, including through augmented reality, which allows miners to safely explore deeper, high-grade deposits at mines facing declining ore grades.

In this regard, Fitch Solutions suggests that Rio Tinto will remain the leader, as the company boasts innovation and cutting-edge technologies in operations that can be matched by no other.

Going forward, however, cyber-risks, owing in part to the proliferation of new digital technologies, the increasing degree of connectivity and a material increase in the monetisation of cyber-crime, will become a bigger factor for mining companies to worry about.

“A cybersecurity breach has the potential to disrupt operations, put employees at risk, disclose confidential information, damage company reputation and create substantial financial and legal hurdles,” the agency states.

Meanwhile, rising resource nationalism will also be a significant risk to mining companies in the coming years, especially considering that the regulatory space in the mining industry is ever-changing, with more governments looking to demand greater returns from the natural resources sectors in their jurisdictions.

Fitch Solutions forecasts that this will accelerate, as it expects an uptick in government intervention and resource nationalism amid the race to access critical and strategic minerals for the green and digital economy and as domestic political risk rises in the post-Covid-19 era.

Growing inequalities and larger fiscal deficits following the pandemic mean that the risk of higher mining taxes or government interference in regulatory affairs and the competitive landscape will be high this year.

Meanwhile, the focus on improving supply chain resilience for strategic or critical raw materials, such as lithium, cobalt, copper and rare earths, will support mining project progression and investment in those sectors.

Mining companies often operate in developing countries subject to shifting political environments, the agency notes.

“Developed markets – mostly well-established and within stable democratic systems – also often witness political transitions with elections, despite more stable mining regulations,” the agency says.

Edited by Chanel de Bruyn
Creamer Media Senior Deputy Editor Online

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