Skip to navigationSkip to contentSkip to footerHelp using this website - Accessibility statement
Advertisement

ASX mining sector at start of ‘multi-year takeover cycle’

Alex Gluyas
Alex GluyasMarkets reporter

Subscribe to gift this article

Gift 5 articles to anyone you choose each month when you subscribe.

Subscribe now

Already a subscriber?

The M&A boom in Australia’s mining sector is primed for an extended run as companies scramble to bolster their exposure to the riches arising from the energy transition after a decade of underspending on new resource projects.

While miners have spent much of the past 10 years focusing on cash flow and returns to shareholders at the expense of chasing growth, there has been a marked shift this year to splashing out on new operations that fulfil the growing demand for raw materials needed for decarbonisation.

The lithium sector has entered a phase of consolidation, Macquarie says. Bloomberg

“When I think about why M&A has picked up in the last few months, it’s the transition that’s happening and the need for these metals,” Wyloo Metals chief executive Luca Giacovazzi told The Australian Financial Review Mining Summit on Wednesday. Wyloo is the private investment vehicle controlled by Andrew Forrest.

“I look back a few years ago when you were a miner and you weren’t always everyone’s best friend, whereas today, you speak to politicians and they really recognise we need these metals and we need the industry to produce them, so there is a very different reception.”

Indeed, the value of mergers and acquisitions involving ASX-listed mining companies has already surged to a record $US30.5 billion ($46.2 billion) so far this year, according to data compiled by Refinitiv for The Australian Financial Review.

Advertisement

The wave of deals has also been propelled by inflationary pressures as miners seek to avoid the high costs associated with exploring and building new operations by purchasing those that are close to, or already in, production.

“The resources industry has been talking about buy-versus-build for some time and the fact is that in most cases it’s cheaper to buy assets than it is to develop them,” Ben Cleary, portfolio manager of Tribeca’s Global Natural Resources Fund, said.

“Almost all the major mining companies are saying the same thing, which is why I think we are at the start of a multi-year takeover cycle.”

More lithium deals to come

The local lithium sector has been home to some of the largest deals this year, including Allkem’s merger with US group Livent and battery chemicals giant Albemarle’s bid for Liontown Resources.

Advertisement

Analysts predict that the wave of M&A will continue. Macquarie said this week that the lithium market had officially entered a phase of consolidation.

The broker said the Critical Raw Materials Act in Europe and Inflation Reduction Act in the US will make lithium producers and refiners with access to those markets more favourably positioned. Additionally, lithium companies operating in countries with pro-mining policies and more stable fiscal regimes could attract a valuation premium.

The collapse in lithium prices earlier this year, which weighed on the share price of producers, has invariably contributed to the spike in deals as would-be acquirers tried to capitalise on weaker valuations across the sector. This is a trend that is expected to continue across the broader sector.

“If I look across the metals and mining space and you look at valuations, I still think metals and mining stocks are undervalued just given how important they are to where we’re heading,” Mr Giacovazzi said.

“And I think we’re still within a space where mining companies can see value and will do more deals.”

Mineral Resources’ lithium boss, Joshua Thurlow, told the Summit there was also a sense of urgency for companies to get access to critical minerals from more desirable regions which allow them to diversify the supply chain.

Advertisement

“You’ve seen all the targets have had assets in jurisdictions that are favourable from a diversity of supply chain perspective,” he said. “There is a genuine rush as people realise the need to get in and develop those assets and put more critical minerals in the market.”

Golden opportunity

The gold sector boasts the largest deal of the year with Newmont’s $26.2 billion takeover bid for Australia’s biggest gold miner, Newcrest Mining. A bidding war broke out between Genesis Minerals and Silver Lake Resources for St Barbara’s West Australian assets. St Barbara chose to stick with Genesis’ $650 million offer.

The gold sector typically enjoys more M&A activity than other commodities because the precious metal is rare geologically, meaning projects are more exploration-intensive, according to Barrenjoey.

Additionally, the life of gold assets tends to be much shorter than other commodities – it is not unusual for coal and iron ore mines to run for 20 or even 30 years, but gold mines are generally online for just five to 10 years.

“The gold industry is also very much less consolidated so if you compare what the top 10 gold mining companies contribute towards industry production, it would be a much lower proportion than iron ore for instance,” said Daniel Morgan, mining analyst at Barrenjoey.

Advertisement

“So when you’re an unconsolidated industry like gold, it’s natural that you’ll see more M&A.”

Mr Morgan said mining companies were broadly hunting for “tier-one assets” which were typically low-cost and long life projects in favourable jurisdictions with low political and legal risk.

“The thing is, these tier-one assets don’t get jagged loose very often and are generally not for sale – they tend to be in the portfolio of a wider company, or you might have to turn what is not a tier-one asset now into one, which is usually very expensive,” he said.

David Franklyn, portfolio manager of Argonaut’s Natural Resources Fund, said that while he does not invest in stocks solely for the potential for corporate activity, M&A is a bonus if he’s buying a company with quality projects in good locations.

Mr Franklyn believes gold miner De Grey Mining makes a particularly appealing takeover target given the quality of its flagship Mallina project in WA.

“We think it’s either going to develop the mine itself, at which time it will be an industry leader, but it also means that if you’re an existing major you could buy a great asset in a tier one location,” Mr Franklyn said.

Advertisement

He also likes nickel explorer Lunnon Metals for its high-grade nickel assets which are easy to bring into production.

Tribeca’s Mr Cleary is tipping ASX-listed uranium stocks to be the next sector to be swept up in the wave of M&A activity.

He pointed to Boss Energy, Paladin Energy and Deep Yellow as companies that could all be in the cross hairs of traditional energy producers and mining interests as the search for low-emission, baseload energy intensifies.

Alex Gluyas is a markets reporter based in our Melbourne newsroom. Connect with Alex on Twitter. Email Alex at alex.gluyas@afr.com

Subscribe to gift this article

Gift 5 articles to anyone you choose each month when you subscribe.

Subscribe now

Already a subscriber?

Read More

Latest In Commodities

Fetching latest articles

Most Viewed In Markets