The global mining sector has recently been back in the focus of many investors due to the attempted takeover of Anglo American, which did not materialize (for the time being). The last bid valued Anglo American at GBP 31.11 (GBP 23.68 at the closing price on June 7, 2024; premium ~31%) or GBP 38.6 billion. Anglo management considered this valuation to be significantly too low. Anglo American must now implement its new strategy, which is primarily aimed at focusing on fewer business segments and assets, as quickly as possible and show that it can increase the company's value on its own. If Anglo is not successful in implementing its strategy, the company is likely to quickly become a takeover target again. The "object of desire" is primarily the copper activities.
Copper: Supply prospects for the next decade as good as fixed
Copper is a key raw material for the production of electric vehicles, batteries and other renewable energy technologies and, above all, for the associated grid expansion. Demand for copper should continue to rise in the coming years, primarily due to global decarbonization measures to reduce greenhouse gases. However, the mine supply of copper ore will most likely not be able to keep pace with demand. A temporary peak in the supply of copper ore is expected in the next 24 months due to new mines recently going into production. In general, however, there has been a lack of investment in new mining capacity since 2013, as there has been significantly too little investment over the past ten years. In addition, there are structural operational challenges (including higher capital intensity for new projects), which are leading to a phase of slower supply growth and thus market deficits. As a rule, this leads to structurally higher prices. At the most important conference in the mining sector - the Bank of America's "Global Metals, Mining & Steel Conference" in Miami - the structural problems on the supply side for copper were also the key topic recently. A number of CEOs from the world's leading mining companies believe that copper prices above the USD 12,000 per tonne Goldman & Sachs price target (USD 9,840/t at the closing price on 7 June 2024) are necessary in order to launch new projects on a significant scale. With regard to new capacities and new projects, the key issue is obtaining economically viable mining permits.
Disruptive factors weigh on global mining supply
Recently, the global mining supply has also been negatively impacted by a number of other disruptive factors. For example, there were a number of production interruptions at the end of 2023, which led to a reduction in copper supply. The ongoing suspension of production at the "Cobre Panama Mine" (USD 10 billion copper project in Panama) alone due to political headwinds and the reduced production forecasts by major producers had a negative impact of almost 3% on the global copper supply. The slump in treatment and refining charges - the fee that copper smelters receive for processing concentrate into cathodes - confirmed the tight supply situation. This supply bottleneck is being met by high structural demand, particularly from the infrastructure & energy networks and transportation sectors. Copper smelters are currently experiencing headwinds in terms of earnings development due to lower treatment and refining charges and lower sulphuric acid prices. However, the recycling business in particular remains structurally interesting in the long term. To prevent the global copper market from sliding into an excessive supply deficit in the coming years, the production of recycled copper scrap in particular must increase massively.
"Buy versus build" - focus on acquisitions
The attempted takeover of Anglo American shows a generally important trend in the sector: practically all major mining groups will be struggling with a falling production profile in the copper sector in the coming years. The main reason for this is declining ore grades in the existing reserves. Many companies are increasingly looking for external growth opportunities. As things stand today, it is sometimes "cheaper" for large companies to take over a (smaller) competitor than to invest in a new mining project themselves. It is also important to note that it currently takes around 20 years from successful exploration to the actual start of production. In view of the expected development of global copper demand, six new large mines would theoretically have to go into production every year until 2050 in order to meet global demand. The expected growth from 2024 to 2030 is 2.5 to three percent per year. Mergers and acquisitions are therefore the focus, as the "buy or build" debate, as previously mentioned, is in favor of "buy". The industry already recorded a significant increase in M&A activities in 2023. An increase in activity can currently be observed not only in the copper segment, but also among aluminum and steel producers.
China and new sources of demand
Over the past 20 years, China has been the most important market in terms of size due to the real estate boom and the very high level of investment in infrastructure projects. China still accounts for around 50% of global demand for most metals. The Middle Kingdom has probably reached the peak of its economic growth and thus its demand for raw materials, so concerns about a slowdown in demand for raw materials are justified. Within China, however, demand from the various end markets has also changed and the real estate sector is no longer as dominant as it was a few years ago. In 2023, for example, the real estate sector accounted for around 27% of Chinese steel demand, compared to 34% in 2019. Total steel production has grown during this period. In China, too, the main impetus is currently coming from infrastructure measures and the expansion of the electricity grid in conjunction with the expansion of renewable energies.
It is quite realistic to assume that we are currently entering a new commodity cycle, which will be supported by other structural drivers in addition to the expected recovery of the global economy, particularly for selected metals such as copper. In addition to ongoing urbanization trends in emerging countries, global efforts to decarbonize, i.e. the expansion of resource-intensive renewable energy production and electrification (electric vehicles and charging infrastructure), are particularly noteworthy. New and recently more prominent sources of demand such as data centers for artificial intelligence, which are expanding rapidly worldwide, are also unlikely to disappear any time soon. Data centers for AI applications are very energy-intensive and have very high power requirements. New modern AI data centers therefore often require their own energy generation unit, i.e. their own power plant. By 2030, demand for copper from the data center sector could increase by more than 60%, a development that supports the thesis of a sustained structural supply deficit in the copper sector.
Conclusion
After rising by almost 30 % to around USD 11,000 per tonne, the copper price recently fell by around 10 %. This was triggered by weak economic data from China as well as increased copper inventories on the Shanghai Stock Exchange (seasonal factor). However, the long-term positive outlook for copper has not changed. Declines are opportunities to "buy the dip". Despite the partial revaluation since the 2024 valuation lows, the sector continues to trade at a discount of over 20% compared to the MSCI World. Even if global macro indicators fluctuate from month to month, the structural demand trend for many commodities remains unbroken. Supply disruptions and simultaneously increasing M&A activity contribute positively to the risk/reward profile. The decision for M&A ultimately shows that companies are favoring "buy" over "build", which should limit new capacity for the time being and generally support prices. Smaller companies have an interesting project portfolio with attractive prospects for volume growth. Among the large diversified companies, Anglo American has initiated a strategic realignment and should be able to increase its value with the start-up of the Quellaveco mine in Peru. Other large companies have growth options in the pipeline, but will only be able to show very limited volume growth in the coming years.
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