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Mining 2018: Trends & Conclusions

Having been brought to its knees by the crippling slump in commodities prices and a global drop in demand, the mining industry is finally starting to regain ground. For the past five years, mining companies around the world have been striving to slash debt and increase investor confidence, gradually reviving the market in the process. Through strategic restructurings and distressed transactions, mining houses have battled for survival. At last, commodities prices have rebounded in the past year, leading to renewed vigour in the market. With mining companies finally able to move forward, practitioners we spoke to have noticed a shift in the market, with an increase in financing and M&A transactions signalling that better times lie ahead.

FINANCING AND M&A

The challenges of the past five years have made for a hostile landscape in the market, with many mining houses struggling to survive amid record-low commodities prices. The unpredictability of the international economy and the fall in prices have meant that many companies are struggling to secure financing through traditional means. Despite the depressed debt markets, sources have noted an increase in alternative financing and M&A activity, “leading the transition into a new economy”.

The rise of alternative financing structures has been a key fixture in the market for several years, with financing arrangements such as streaming, royalty payments and private equity becoming increasingly prominent. Alternative financing is by no means new; however, this year has seen a rapid expansion throughout the sector. In addition to established projects being able to effectively raise capital without diluting shareholders, juniors have used innovative solutions such as streaming to get new projects off the ground. In Indonesia, one practitioner told us that “people have been getting more creative”, citing venture capital and private equity as new and increasingly popular ways of investing in the mining industry. An increase in investments from non-traditional lenders has also been reported, signalling that from the debt perspective, the use of alternative financing is still very much a major trend.

The long-predicted spike in M&A activity finally occurred in 2017, with practitioners across the board noting a marked increase. For instance, earlier this year saw Rio Tinto sell its Australian coal assets to China-backed Yancoal for $2.69 billion. Additionally, the Los Filos gold mine in Mexico was recently acquired by Leagold for £350 million. Arguably, this uptick in gold-related M&A transactions could potentially stem from the relative price stability of the precious metal observed over the past 18 months. From a legal practice standpoint, more and more time is being spent on the corporate and financing side than on the land use side, with one partner at a US law firm commenting, “Now people are playing in the market rather than playing in the dirt.” Given the momentum that M&A transactions have gained during 2017, this trend seems unlikely to slow down any time soon.

LITHIUM SUPPLY AND DEMAND

One of the most notable trends in the market has been the upsurge in activity relating to lithium. The burgeoning global lithium market has seen exponential growth over the past decade, with an expansion rate of 8.9 per cent per year expected by 2019, according to projections by Freedonia Group. In addition to increasing demand from traditional applications such as glass and ceramics, and greases and lubricants, this growth has been largely driven by the rapid expansion of the lithium-ion battery industry. Mounting pressure to cut carbon dioxide emissions and tackle climate change has given the renewable energy market a serious boost. The past year has seen some of the world’s largest automobile consumers pledge to ban the sale of petrol and diesel cars in favour of zero-emission, electric vehicles by 2040. The increasing demand for lithium to use in the production of these mandated electric vehicles, alongside a multitude of other energy-related applications, indicates that lithium will be an increasingly profitable commodity in the mining sector. One lawyer pointed out that, by its nature, “mining is not a consolidated industry”, adding that “the mining of lithium is linked to the advancement of technology and industry”. This connection could signal a new era in financing, with lithium projects able to raise capital through collaboration with the companies looking to utilise the end product.

Demand for lithium is at its highest in the Asia-Pacific region, with China demonstrating one of the largest lithium markets due to its high output of goods manufactured using the commodity. Sources around the world have noted a marked increase of Chinese investors looking to capitalise on this rapidly expanding market. This is particularly evident in the “lithium triangle”, an area spanning parts of Chile, Argentina and Bolivia that holds more than half of the world’s identified lithium reserves. Practitioners in these jurisdictions have noticed a tentative return to exploration work, which is only expected to increase as the global demand for the metal proliferates.

Practitioners across all three jurisdictions have been involved in a plethora of expansion projects over the past year, as mining companies aim to meet global demand. In Argentina, legislative reforms have resulted in the removal of a 5 per cent tax on mining exports and the elimination of currency controls, making the market significantly more attractive to investors and bolstering the number of international transactions in the region. In Chile, however, the exploitation of the lithium industry by foreign investors has been punctuated by numerous unsuccessful public bids, and it remains to be seen whether legislative change to attract foreign investors is on the horizon.

THE RESURGENCE OF RESOURCE NATIONALISM

Resource nationalism is nothing new, and has indeed been a common feature of state policy across many resource-rich countries over the past 50 years. Over the past 12 months, however, there has been a noticeable resurgence, with practitioners across the globe highlighting it as one of the key challenges they have faced. “Host states are becoming much more assertive over mineral resources,” said one South African lawyer, pointing to the proposed export ban on unprocessed mineral sands in Tanzania. As commodities prices gradually begin to improve, many African counties are looking to implement higher mineral resource rents and becoming more aggressive in their approach. As a result of this, lawyers in South Africa told us they are noticing an uptick in litigation, while at the same time mining companies are becoming more assertive in enforcing their rights against the government.

Resource nationalism has been a distinguishing feature in the African market for some time. However, recent years have seen countries such as Indonesia introducing a range of nationalist policies in the mining sector. The recent depressed economy there has led to the introduction of an array of nationalist policies, including the ban of raw mineral ore exports and new restrictions on foreign investors in the sector. With the commodities markets now showing signs of recovery, these nationalist policies are becoming even more prevalent, as exemplified by a recent ban on the export of partially processed minerals as well as the raising of mining royalties from mines managed by contracts of work holders. The intense regulation in the sector means that the foreign investment climate in the Indonesian mining industry will continue to face challenges. One practitioner, however, has noticed a growing acceptance among investors that these regulations may be here to stay, predicting that alternative means to enter the market will be a key feature of the industry in the future.

CONCLUSIONS

Despite concern among practitioners about the challenges that have thwarted the mining industry for the past half-decade, the outlook of many we spoke to was optimistic. “Commodities are key” when it comes to interest in the market, say many, and the tentative recovery seen over the past year has certainly helped matters. Investors have readily demonstrated a renewed confidence in the sector, leading to an uptick in exploration and expansion projects. Likewise, a surge of M&A activity and the rising dominance of alternative financing lend the depressed mining market a decidedly more buoyant outlook for the future.

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W11 1QQ, UK