Mergers and acquisitions (M&A) in mining have surged recently. This year, deal activity is poised to reach the highest levels in a decade. Majors are benefiting from elevated financial flexibility, due to exceptionally high profits from 2021 to 2022. More importantly: this M&A trend is expected to continue through 2024. Fitch Ratings, a respected credit rating agency, foresees much more corporate activity among mining firms. Our analysts are seeing 4 reasons for this: declining reserves, the energy transition, rising cash flows, and current valuations.
Diminishing ReservesThe top 10 mining companies (BHP, Rio Tinto, Glencore, e.g.) have experienced a 33% decline in their reserves in just 15 years, prompting fierce competition in the M&A market. What further drives this trend is the challenge of initiating new mining projects, as environmental, social & governance (ESG) regulation makes it difficult to obtain mining permits. Companies will continue to seek consolidation and replenish reserves through these transactions.
The Energy TransitionFurthermore, major mining companies are adapting to the evolving requirements of the green energy transition. With a growing demand for copper due to ongoing supply deficits and its environmentally friendly profile, gold majors are increasingly diversifying into copper. This shift is attributed to copper's pivotal role in the energy transition and the diminishing global supplies. Consequently, we anticipate that explorers and developers with substantial gold-copper deposits in secure regions will be attractive targets for these major companies. This trend is already underway, as indicated by S&P Global, which reported a 103% increase in the total value of copper company M&A transactions in 2022, reaching over USD 14 billion.
This development corroborates CDF's significant exposure to copper, which constitutes 20% of the portfolio. Notable projects in our portfolio include Cascabel (SolGold, Ecuador), Filo del Sol (Filo, Chile), and Los Helados (NGEX, Chile). For a detailed breakdown of our allocation, please refer to our Portfolio page and CDF's brochure.
Increasing Cash ReservesThirdly, major mining companies are experiencing a surge in cash reserves. Gold and silver miners are currently holding the highest levels of cash in decades. This strong financial position is a significant indicator that often precedes periods of increased M&A activity. These majors are expected to utilize their robust balance sheets to replenish their diminishing reserves through strategic M&A deals involving junior producers, well-funded developers, and explorers with exceptional discoveries in Tier 1 regions.
Buy-Worthy Junior ValuationsNext to these declining reserves, a demand and supply gap, and growing cash flows, we’re seeing historically low valuations of junior mining companies. And these lower valuations in the sector present strategic consolidation opportunities for the bigger players. Just have a quick look at the GDXJ/GDX chart (junior miners compared to the bigger mining companies). It's showing decade-lows:
OpportunitiesIn summary, the mining sector is entering a period of growth and transformation, driven by drought-up reserves, net zero policies, blown-up balance sheets, and junior (under)valuation. Discoveries are crucial for mining growth, with junior mining companies leading the charge in identifying and developing new mineral resources. Investors will rediscover the sector's potential, offering opportunities for those willing to participate.
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