Q&A: Metals & Mining IBD Analyst

Yeah very valid question and something I definitely thought a lot about before starting full-time, would recommend anyone going into a coverage group to have a  view on the sector to gauge their level of comfort with it

I think there are two ways I personally break down the industry outlook; (1) from the advisory/financier aspect, and (2) from the mining industry more broadly

(1) Being on the financial side (investment banking / private equity / other financial roles), you're exposed to the commodity cycle as commodity prices determine, for the most part, the level of capital markets activities that take place (e.g. the economics of mining a gold deposit from the perspective of a junior exploration miner make more sense when commodity prices are strong + have a positive outlook, hence they are more likely to raise capital during these conditions)

We chat about commodity cycles and other macro events all the time at work, and everyone has a different opinion on where exactly we're going to go in the short/medium term. However, from an investment banking perspective, I'd say there is always be work to be won. Mainly because, at the end of the day, bankers are there to advise the business, and can pivot to adopt a "strategic advisory" focus. Whether that involves more bespoke advisory, consolidation / RX work, defensive capital raisings etc, work will get done because these companies do not want to face bankruptcy or other consequence (e.g. an inability to fund the development of a new site because the economics are less attractive to investors at current prices). I could be wrong as I haven't actually worked through a proper downturn, but I couldn't see myself being too far off.

Slight tangent, but I never really grasped the full gravity of a mining operation until I went on a site tour by one of our close clients. The scale of these assets, paired with the community's reliance in the form of employment / other social benefits is immense.

(2) For metals & mining more broadly, obviously there are going to be winners and losers in the future. Would say that the key factor that determines these is ESG. Before I get responses being like "tell me something I don't know" / "no one important cares about ESG", there's a bit to break down. Right now, there's a huge uptake in ESG by the broader population, but it's a bit more nuanced in mining. This ESG trend manifests itself in a lot of ways. Some that come to mind which I'll touch on (and I'm sure I'm forgetting some) are renewables, EVs and environmental/land appreciation.

The prevailing take on renewables is that it will completely decimate coal once we are able to fix the energy storage issue. Again, a few things to unpack with that. I agree that thermal coal mining will become/is already ridiculously uneconomical and unpopular, and will likely only be needed as part peakers until we fix the storage problem. In saying that, we don't have a good substitute for metallurgical/coking coal yet. Met coal is used in the steel making process, with c.70% of steel being produced in blast furnaces that rely on met coal. There's some commentary on how green hydrogen could replace met coal in the steel making process, but I think we're still quite far from being able to adopt that at a large scale. So you could say that met coal won't be as negatively impacted - but the issue is that all types of coal have been sledged. Investors we talk to have explicitly told us they will not invest in met coal simply because it's too hard to explain the difference to their capital providers. Take what you will from that, but the crux of it is that coal isn't going to be too popular as more and more renewables get on the grid. On the other hand, a number of metals are used in the actual production of storage/generation assets (graphite/nickel/cobalt etc), which are undoubtedly gaining a lot of popularity. 

EV's are a subset of the points on renewables. Copper, graphite, nickel, cobalt, lithium, manganese, and silver are all able to take part in the upside from EVs, as they are all involved in some aspect. I won't dig too deep into these, as my views aren't too developed on all battery metals as opposed to the sector more broadly. There are still some nuances to dig into from each type. With copper, there's a distinguishment that needs to be made between miners that sell copper concentrate and copper cathode. Cathode is generally "pure" / ~99% copper metal in the cathode, while concentrate tends to be around ~30% copper metal in concentrate (impacting things like Capex requirements, Opex for differing mining methods, TC/RC's etc). Similarly with Nickel, there are laterites and sulphates. Laterite deposits are in abundance globally and have easier / cheaper mining processes, but tend to have higher Capex needed for processing and are generally only economical at higher Nickel prices. Compare that to sulphates of higher quality but lower abundance. So even within the "winners" from EVs, there are specific types of metals that will get ahead compared to others.

Finally, on the environment/land, this is more focused on the individual mining operation type as opposed to individual commodities. There's been a lot of money flowing into mining technology-focused automation, disaster prevention, and generally more responsible mining. I think (maybe optimistically) mining companies recognise that the environment needs to be given significant consideration. It's not as simple as earmarking money towards a remediation fund that gets put into use after the life of mine, but more about incorporating more sustainable mining practices into day-to-day operations. I don't think mining is "fully sustainable" or can get there without significant R&D/investment, so at the moment I think the guys who really consider their impact on the environment are those that will come ahead relative to the rest of the pack.

The point on land is a huge one - BHP and Rio have been lambasted (and rightfully so) for their environmental impact; BHP with Samarco in 2015 and Rio with the Juukan Gorge in 2020. The issue is that these are only the headline disasters, there are a lot more that go under the radar due to lack of media coverage or public interest, but I think that this has been changing over time. Perhaps the winners here could be those that really put a focus on considering the widespread effects of how they operate.

Sorry, I feel like I went way too in-depth with some really niche topics! You could make the argument that I'm a bit pessimistic about mining or question why I work in this group. I think personally, I'm grateful because the companies I work alongside are more on the base metals / rare earths side, along with some of those mining technology companies. There's a lot of really cool developments out there at the moment that tick all the right boxes across economics and ESG, and I think those are the horses to back in the long term