The global mining and metals sector is facing one of its most challenging transitions yet as the industry is considering how it can best position itself to regain and maintain stakeholder confidence on environmental, social and governance (ESG) matters, global law firm White & Case states in its ‘Mining and Metals 2020’ survey report.

According to the report, miners spent 2019 navigating a raft of challenges, with omnipresent concerns about a global slowdown offsetting strong fundamentals.

However, in the law firm’s fourth yearly survey, it asked mining and metals industry participants to share their views for the year ahead.

Partners Rebecca Campbell, John Tivey and Oliver Wright co-authored and discussed some of the key findings from the survey report.

According to the survey report, the global mining and metals sector spent 2019 balancing two competing forces – growing concern surrounding the macro picture as a Chinese slowdown that started in 2018 was exacerbated by global trade tensions, and slowing manufacturing across Europe and the US.

However, the report authors note that this was partially offset by increasingly tight supplies of metals amid dwindling stockpiles, thereby “demonstrating that the underlying fundamentals of the industry remained strong”.

Simultaneously, the biggest miners, supported by supply shocks in iron-ore and continued revenues from asset sales, distributed record amounts of money back to shareholders, even though concerns still arose relating to the sustainability of those returns, and whether the companies were neglecting growth.

In a year characterised by climate change awareness, miners were not the only businesses forced to evaluate their future, but companies in a multitude of sectors also made efforts to showcase examples of sustainable behaviour and green credentials, with ESG issues “front and centre” in boardrooms across the corporate spectrum.

With these, and other, events leaving the industry at something of a crossroads heading into the new decade, uncertainties remain both on the macro outlook and how miners will balance stakeholder returns with sustainable long-term investment and ESG principles, the authors note.

Responses from the survey indicate that for the third year in a row, the global economic backdrop remains the biggest concern.

“Yet unlike last year, it is now trade tensions – rather than a slowdown in China – that is seen as the biggest risk. After more than a year of negotiations, the US and Chinese governments have signed a preliminary deal,” the authors say, adding that while this Phase 1 agreement should go some way to alleviating concerns, the majority of border taxes remain in place.

As a result, much work still needs to be done in a Phase 2 deal, which the US government has committed to, without providing a timeframe.

Close behind are continued worries about the Chinese economy which continues to slow.

Beyond the macro outlook, two other themes of concern are those of resource nationalism and climate change policy. Survey respondents are split on how the impact of trade tensions will be felt, with roughly 40% expecting an actual slowdown in demand, and about one-third anticipating speculative pressure on commodity prices.

THE BIG MINERS

For the big diversified miners, the year was dominated by record amounts of money being returned to shareholders through dividends and buybacks. The big two, Rio Tinto and BHP, funded these distributions through continued asset disposals and revenues from iron-ore prices that spiked above $120/t in the middle of the year.

Iron-ore advanced 27%, the most since 2016, against the backdrop of the dam collapse in Brazil and supply problems in Australia. Yet prices retreated in the second half of the year, as volumes came back on line, and concerns mounted about Chinese steel demand.

In 2020, prices are widely expected to slip further as a surplus of ore returns. That has led banks, including Morgan Stanley and Credit Suisse, to forecast declines, and the Australian government has said it expects the iron-ore price to average about $60/t.

This outlook mirrors the views of the survey respondents, with more than a quarter having said they expect a continued focus on productivity gains to be the number one priority for the sector this year, up from second place last year.

Pursuing ESG policies, dealing with tailings dams and responding to the challenges of climate change were all seen as more important than growth, which just under 9% said should be the leading goal this year.

“Perhaps that outlook explains why more than 37% said they expect generalist investors to remain wary of the sector this year, up from 30% in 2019. While shareholder returns are expected to be the biggest factor to lure generalist investors, the number of respondents predicting this is down from last year,” the authors point out.

CLIMATE CHANGE RESPONSE GAINS TRACTION

Meanwhile, the impact of climate change, and the global response from regulators and investors, is not a new theme, even though it started to gain momentum in 2019 and have a direct impact on the way the biggest miners operate.

“The year also demonstrated that, in contrast to the global macro considerations, miners are in much greater control of what they can do to adapt to this environmental challenge and improve their reputation as a result.”

Thermal coal, for example, has long been the focus of institutional investors and campaigners when it comes to the impact of mining on emissions. The pressure had been building for some time and 2019 will be looked back upon as the watershed year in which diversified miners lost appetite for increased investment into thermal coal.

Some of these include Rio Tinto selling its last coal operations during the year, while BHP started looking to exit the business and Anglo American expected to lay out a roadmap on how it will stop mining the fossil fuel at some point this year.

Glencore was also forced to implement a cap on its coal production after sustained pressure from shareholders, with CEO Ivan Glasenberg saying they “had little choice if they still wanted to attract investors”.

According to the survey report, this retreat from coal by the major players is also having a direct impact on the wider industry as it comes under greater scrutiny than ever before.

The report states that while coal is not “make or break” for Rio and BHP, iron-ore is, and the mining industry is also feeling the pressure here.

The end-to-end value chain emissions from making steel came into focus this year and both BHP and Rio said they are working with customers to tackle the issue. “Taking a degree of responsibility for customer emissions can be seen as a risky strategy for the miners, but it also highlights how concerned they are by the growing pressure on the industry,” the authors comment.

Fifty-eight per cent of survey respondents said it should be the combined responsibility of the raw material supplier, primary manufacturer and end consumer to deal with emissions from industries such as steelmaking and cement making.

In terms of resource nationalism, and the impact that miners can have on local communities, 41% of the survey respondents expect Africa to remain “the riskiest jurisdiction”, down from the 62% last year.

About 26% expect South-East Asia to pose the biggest risk, nearly double last year’s results.

“The year also saw investors reminded of the danger of legal probes by regulators in an industry that has always been vulnerable to such issues,” the authors say.

Additionally, on the back of the tailings storage issue and incident in Brazil last year, three-quarters of the survey respondents expect the environment to be the biggest issue for governmental enforcement this year.

Eighty-one per cent of those surveyed said they expect environmental enforcement to increase this year.

BIG DEALS

Outside of the gold space, the mining sector has seen few transformative deals in recent years, as the industry focuses on getting leaner as investors seem to have little appetite to return to the blowout mergers and acquisitions of the past.

The survey suggests that the theme is set to continue, with almost 50% of respondents saying opportunistic deals are most likely this year. Base metals and precious metals are where respondents think activity is most likely, with battery materials dropping one position from last year into third.

“When it comes to how such deals could be financed, the survey suggests there could be an increase in the use of bond and convertible debt, as well as equity and project financing. However, the use of bank debt may decline,” the authors note.

Precious metals, and the companies that mine them, were the standout performers of 2019. Driven by both macro uncertainty and geopolitical instability, gold rose to the highest level in six years and ended the year above $1 500/oz.

For the gold miners, deals were the big theme of the year, with the industry continuing to reshape following Barrick Gold and Newmont Gold’s transformational transactions.

Palladium also had a strong year, hitting record highs on fears of supply shortages, which threw a lifeline to South Africa’s previously struggling platinum miners.

OUTPERFORMERS

The positive sentiment surrounding base and precious metals is also reflected in the survey when it comes to picking the metals expected to perform best this year, with 35% of survey respondents choosing copper and 21% choosing gold.

It is a different story for battery materials after another difficult year: while 13% of survey respondents expect lithium to be a standout performer this year, none of the respondents listed cobalt.

Battery material markets remained under sustained pressure in 2019, as the full scale of new production capacities dawned on the market. Cobalt plummeted to $30 000/t after almost reaching $100 000/t at its peak in mid-2018.

It was a similar story in lithium, as too much production came on line too early and electric vehicle (EV) take-up slowed, especially in China. Between mid-2015 and mid-2018, prices for lithium almost tripled as the world’s fleet of EVs hit the five-million mark.

Prices have fallen by almost half since reaching that peak.

At the same time, Chinese sales of cars running on electric motors have been falling since July, as regulators reduced subsidies.

TECHNOLOGY

Meanwhile, the mining industry continued to pursue technological innovations in 2019, and while concepts such as blockchain grabbed the headlines, productivity gains reduced the environmental impact which has been at the forefront of most programmes.

Anglo American has continued to pursue ideas such as synthetic water, which will dramatically reduce its water needs in areas where the resource is scarce, such as Chile and South Africa, while Rio Tinto has been rolling out its automated train lines in Australia.

According to the survey report, all major miners are increasing their spend on and roll-out of data analytics to improve their mining and exploration activities.

The survey suggests that this will continue, with cost pressures being the biggest driver for innovation for a second straight year.

“Still, blockchain initiatives continue to be rolled out, especially in consumer-focused commodities such as diamonds or those with negative ESG associations such as cobalt. Our survey highlights that the experts are still split on how blockchain will be best implemented, but ultimately its use in managing supply chains and logistics had the most support, with an increased share from the previous year,” the authors comment.

Overall, however, the report said that the 2020s “are set to be a serious transition period for the mining industry”.

After two decades of supercharged Chinese growth and omnipresent concerns about a global slowdown, other issues, such as resource nationalism and trade pressures, compliance and ESG considerations are taking centre stage for investors and throughout the value chain.