CLYDE RUSSELL: Investors must be persuaded to put money into mining

Mining is probably the most vital sector for the global energy transition and the success of the much-vaunted net-zero carbon emissions by 2050 targets, but it is the laggard in the process.

The industry is largely at an inflection point in that it knows its raw materials are the building blocks of the move from fossil fuels to clean energy, but it can’t seem to convince the rest of world that this is the case.

The overwhelming message from miners and investors at two major mining conferences in SA this week is that the situation is urgent, and getting worse.

The challenges do seem pressing, given the vast quantities of copper, lithium, cobalt, nickel, zinc, manganese and graphite that will be required, and the limited plans to develop new mines to produce the metals needed.

The mining industry faces several issues that it needs to address, but still seems to be grappling with how to get its message across.

These include, how to persuade investors that the real action in mitigating climate change has to be at the very start of the process, namely producing raw materials, rather than at the end, namely making electric cars and things like solar panels.

Once investors are convinced, the battle is to get them to put capital into new mines that will take several years to return a profit.

Even if you can get that far, the process of dealing with governments is fraught.

There are many development and environmental approvals to be secured, and local communities to be consulted and won over, and then transport and logistical issues to be overcome.

And even if you succeed to this point, the cost of developing new mines is rising faster than the prices of the commodities they produce.

And finally, the mining industry has to battle its largely negative image problem, and its continuing association with the climate bogeymen of coal miners.

Investing in a shiny new Tesla motor car or a household battery wall unit looks far more attractive than a copper mine in Zambia or Indonesia.

Perhaps this explains why Tesla trades on a price-earnings ratio of about 106, while the world’s biggest mining company BHP Group has a P/E ratio of 9.96 and peer Anglo American has one of just 5.95.

It seems likely that commodity prices will have to remain at historically high levels, while being less volatile, to convince those with capital that the returns are viable.

Governments will have to speed up permitting and environmental approvals, and those with an interest in meeting the net-zero by 2050 will have to overcome their distaste for mining.

The 121 Mining Conference in Cape Town this week saw speaker after speaker lament lack of government urgency, lack of interest among mining companies to build new mines, reluctance of banks to finance projects and the poor image of mining among green investors.

Lloyd Pengilly, chair of Qora Capital, said there is a “quantum leap in demand” coming for battery metals that the industry is in no position to meet.

Taking graphite as an example, Pengilly said the current global market for the battery anode component was about a million tonnes a year, of which China controlled about 650,000 tonnes.

This needs to double to 2-million tonnes within five years to meet battery demand, but there are only a few graphite projects under development, and they will not meet expected demand.

The message may be starting to get across, with President Cyril Ramaphosa delivering a mining-friendly address to the Mining Indaba on Tuesday, pledging his government will fix transport infrastructure and electricity generation while making exploration and building mines easier.

However welcome the change in rhetoric may be, the words need to be followed with action to avoid a raw-materials crunch that threatens the intended pace of the energy transition.

Reuters