What Mining Companies Flush With Cash Are Doing: Acquisitions

May 17, 2022 10:30 AM ETSLSSF, REMX, GDX, GDXJ, GOEX, SGDM, RING, PICK, SGDJ, GOAU, JGLD, SIL, SLVP, SILJ, XME, COPX, LIT, BATT, JJN, JJNTF1 Comment
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Summary

  • Low commodity prices of the past decade have forced major mining companies to focus on cost-cutting in recent years.
  • The top five M&A deals accounted for 68.3% of the overall value during February 2022.
  • While M&A is up across the board for mining, metals, and minerals, it is battery metals in particular that have caught the attention of investors and the entire industry.

Open-pit copper mine

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Low commodity prices of the past decade have forced major mining companies to focus on cost-cutting in recent years. Many have been successful in reducing their costs, but this has not always translated into improved profits. Recently though, the story has changed.

Major mining companies are booking record profits amid a commodities supercycle that has taken prices to new highs over and over again. This has meant that these companies are now awash with cash.

So, what are the world's biggest mining companies doing with all this cash?

Competition for Acquisitions is High

Many are turning to acquisitions as a way to grow their businesses. This makes sense, as the pool of quality assets is limited. In addition, many major miners have been selling non-core assets in order to focus on their most profitable operations.

As of February 2022, metals and mining M&A transactions worth $3.71 billion were announced worldwide, a rise of 41.01% year on year, according to Global Data. The top five M&A deals accounted for 68.3% of the overall value during February 2022.

The aggregate worth of the top five metals and mining M&A transactions was $1.51 billion, versus the overall value of $2.2 billion for the month. Among many of the deals, mining companies are looking for ways to boost production numbers when geopolitical issues and global supply chain complications have thrown supply into disarray. The LME has seen copper inventories drop precariously low in recent months and this has caused prices to surge.

Battery metals and the companies exploring them are a particularly important target for some of the world's largest miners. Projects that yield a world-class, high-grade open pit inventory with scale are often the first targets for acquisition by a major considering they could quickly provide the production bump needed during a crunch.

Solaris Resources (TSX:SLS; OTCQB:SLSSF), a copper exploration company with its flagship Warintza project in southeastern Ecuador, has recently issued an updated mineral resource with a total open pit inventory of 1.5 Bt of 0.52% CuEq at 0.3% CuEq cut-off grade making it a possible prime candidate for acquisition. The resource featured a high-grade indicative starter pit comprised of 287 Mt of 0.79% CuEq at 0.6% CuEq cut-off grade. Mining analyst reports on the resource model a 20 Mtpa - 40 Mtpa operation correlating to a mine life of over 35 years (40 Mtpa). Analysts further report that the high-grade starter pit would generate a ~US$50/t margin on 20Mtpa of production correlating to $1B EBITDA for the first 15 years.

Any major mining company with extra cash on their books and a desire to boost their production in the copper space could make a play for Solaris.

Battery Metal Priorities

While M&A is up across the board for mining, metals, and minerals, it is battery metals in particular that have caught the attention of investors and the entire industry. The rise of electric vehicles (EVs) has set off a scramble for the metals used to make batteries. This has caused miners to shift their focus in order to find and develop new projects that will be able to provide the materials needed for this growing industry

Lithium-ion batteries require lithium, cobalt, nickel, and manganese, all of which have seen prices increase due to the high demand from the EV industry.

There are a few things that make battery metals projects attractive acquisitions for mining companies. First, these projects are often in the early stages of development, which means they can be had for relatively cheap. Second, they are often located in countries that are politically stable, which is not always the case for mining projects generally.

And finally, these projects have the potential to produce a lot of metal, making them a valuable addition to any miner's portfolio.

It is no surprise that cash-flush mining giants are on the hunt for their next big acquisition. The industry has continued to pull ahead in a highly favourable environment. Any challenges are being managed, and for companies with an interest in battery metals, M&A is the name of the game for 2022.

Original Post

Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.

This article was written by

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