After the Bell: The changing design of the thoroughly modern mining company

There was a time when the largest mining companies organised themselves into a diversified mining company on the one hand, and a precious metals company on the other. This is something of a generalisation, but diversified mining companies circa the 1990s with gold in their portfolio, for example, would typically spin out that holding over the following decades. 

This trend had big implications for the two largest South African mining companies at that time — Anglo American and Gencor, both of which were essentially underpinned by gold companies. But in 1998, Gold Fields merged with Gencor’s gold assets and became a standalone company. 

AngloGold was gradually sold down by Anglo early in the first decade of the new century, while the Australian mining thumpers, BHP and Rio Tinto together still produce quite a bit of gold, but it’s essentially a byproduct of their copper operations. Rio has experimented with diamonds — without much success — and BHP always had an oil business which delivered steady returns.

This strategy of separating precious metals into their corporate structure was essentially about satisfying investors. Generally, investors prefer what are described as “pure plays” so they can take a position on an individual asset. They argue that if they want to invest in iron ore, copper and diamonds, it makes sense to have access to mining companies that mine these products alone so they can choose the best of each. 

For Anglo, this issue was a headache — arguably its largest headache — for decades, because not only did it have large gold and diamond investments, but it was also invested in industrial companies. That’s all water under the bridge now, but Anglo is still different from other miners in that it incorporates the world’s biggest diamond company, De Beers. 

In contrast to investors, mining companies have different, and sometimes competing, needs. Because mining projects are typically such long-term investments, it’s easy to find yourself mining a commodity that becomes globally oversupplied or undersupplied and then you are seriously in the poop. 

So, larger mining companies have generally tried to diversify their minerals portfolio, which may suit conservative investors who tend to like the upside — who doesn’t? — but detest big declines in earnings. A diversified portfolio also allows some cross-mineral sharing of mining production techniques and geological expertise.

But it’s hard not to notice how portfolios are continuing to concentrate — and diversify. There was a time — incredible as it may seem — when much more iron ore was being mined than the world needed. Then China happened and suddenly Rio and BHP found themselves in the pound seats because they had huge iron ore reserves, which quickly became the dominant mineral in their portfolios. Today, iron ore constitutes over half of their earnings, and it’s so profitable that investors love it. 

The predominance of iron ore has suited the two companies for decades now, but both are so huge that you do have to wonder if and when iron ore dominance might become a risk.

However, all of this is changing, and it’s changing because a whole new range of minerals is becoming more valuable and more sought after. These minerals could be roughly described as green metals, except they are no more intrinsically “green” than any other mineral. However, the energy transition is putting these metals on the global radar. They include lithium, nickel, cobalt, manganese, uranium, copper and some others, particularly if you believe in the hydrogen energy story (I don’t).

The new metals framework throws a spanner into the works of corporate design. Should Rio and BHP chase after these metals even though they would make absolutely no difference to their huge balance sheets for decades, if ever? Or do they wait to see how things play out? Big companies are typically good at creating and investing in big projects, and “green minerals” projects are typically small.

It’s a problem for politicians and regulators too; at the root, the problem is the electric car. The European Parliament has in effect outlawed the sale of internal combustion engine cars after 2035. That is going to put an enormous strain on the production of green metals. In its presentation to the Cape Town mining indaba, Sibanye-Stillwater estimates that by 2030, the total demand for lithium will be 2.5 million tonnes a year. That’s a 23% increase in demand every year until then, and almost all of it is constituted by electric cars.

Are we ready for that change? Sibanye doesn’t think so — not by a country mile. Existing operations could produce a bit less than half that by 2030. Board-approved and fully funded projects, in addition to projects where advanced feasibility studies have been completed, constitute about two-thirds of the remainder. 

But that leaves high- and medium-risk projects having to fill in the rest. Technically, they could: the projects are in the planning stages, but because of funding or execution risk, lithium supply looks doubtful for about 10% of the total demand. That doesn’t seem totally out of hand, but that’s just lithium: at least three other metals will be needed in quantity.  

All of this is dependent on the global acceptance of electric vehicles, which is not guaranteed — hybrid models remain an option for many new car buyers. And if the effort is about the climate emergency, then electricity generation itself will have to change too, which is another challenge for metals production. 

Whatever the case, the advent of a new set of desirable metals means changing the conventional wisdom about the previous metals/industrial metals corporate split. Gold companies are now quietly chasing copper projects and everybody is selling down their coal assets, just for a start. This whole process will require some new thinking from investors too. DM