Miners are scouring the earth again as reserves dwindle

Think your life has been unadventurous over the past few years, as the pandemic and closed borders have kept you bottled up at home? Spare a thought for the mining sector.

An industry built on the romance and horror of finding riches on the wild frontier — from the Klondike to Kimberley, Kolyma and Katanga — has for years barely needed to get out its passport.

Take BHP Group. Under former Chief Executive Officer Andrew Mackenzie, the biggest miner developed a mantra that it would focus only on "stable, low-risk jurisdictions" — meaning, for the most part, rich countries. Over the past decade, it's been getting rid of operations in Algeria, Brazil, Colombia, Mozambique, Pakistan, South Africa, and Trinidad and Tobago, to focus almost entirely on Australia and the Americas.

That's an attitude that makes sense as long as the world seems adequately supplied with essential minerals. Why take the operational, legal and reputational risk of going to places where you may be expected to pay bribes or cope with lurching policy reversals, when there's plentiful assets available in friendlier jurisdictions?

Hot Metal
The number of LME metals trading at a cash premium to three-month forwards is at its highest since 2007

With markets looking tighter, however, things can change rapidly. The Bloomberg Industrial Metals index, a good proxy for the value of miners' key products, is running at its highest levels in a decade. Aluminum prices are at a 34-year record. Cash-to-three-month spreads — one indicator of the strength of non-speculative demand since only genuine buyers are likely to pay a premium to get hold of material quickly — have been surging. All six of the main commodities on the London Metal Exchange have been simultaneously trading at a cash premium in recent months, for the first time since the mid-2000s.

Mackenzie's successor at BHP, Mike Henry, has made no secret of his appetite for adventure. "We won't ignore if there is an attractive enough opportunity in new jurisdictions or harder jurisdictions," he told investors in 2020 at his first results briefing after taking over. Last month, the miner made its first major move into sub-Saharan Africa in years, with plans to invest as much as $100 million buying a minority stake in Tanzania's Kabanga nickel project.

Cash Machine
The share of funds that miners have dedicated to dividends has risen above 50%.

That's in line with with a general rise in animal spirits in the industry. Shareholders who've spent much of the past decade encouraging miners to slim down and return more cash as dividends are finally sated, and turning a worried eye to the problem of growth. The ore grades of key elements in major mines are in decline across the world, while demand looks set to surge as the planet engages in a resource-intensive drive to decarbonize its energy and industrial systems. Most of the key deposits being exploited were discovered decades ago, and it's not clear where their successors are coming from. Investors who worried the major miners had grown too big are now worried they're starting to look too small.

With BHP's first-half net income reported Tuesday more than doubling to $9.4 billion and margins of 64%, Henry is now in a position to invest accordingly. The question is where to go.

Looking at the way mineral resources have developed in recent decades, it's hard to avoid the notion that restricting activity to developed countries is an unnecessary limitation. About 56% of the world's copper resources are now outside the traditional tier one mining jurisdictions of Australia, Canada, Chile, Poland and the US, up from 49% two decades ago.

New Frontiers
The bulk of the world's copper reserves are now outside the most favorable tier one jurisdictions

Considering the strength of expected demand, companies simply aren't developing enough pits for the metal. "The response has been timid when you consider both the very strong prices of today and copper's future–facing halo effect," BHP wrote in its commodity outlook this week. "That underscores the idea that the option set of the industry as a whole is constrained."

A more outgoing approach to mining assets will come with its own problems. Miners' shift toward developed jurisdictions wasn't an accident, but a long pendulum swing away from places where they'd gotten themselves entangled in corruption and rights scandals, political fights with royalty-hungry governments, and other governance issues. Moving back in the other direction will expose them again to reputational risks they've worked hard to free themselves from. It will be more difficult than ever to thread that needle to the satisfaction of the current generation of ESG-conscious investors.

That seems to be where the world is headed, though. To acquire the minerals we need to manage the energy transition, we're going to need to scour every corner of the planet for the resources we'll need. Those who don't venture out will get left behind.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian. @davidfickling

Disclaimer: This article first appeared on Bloomberg, and is published by special syndication arrangement.