The mining industry has reaped a bonanza during the past two years. Prices of base metals, precious metals and others, especially “rare earth” metals, have surged.
So, “when will the party end?” asked Tom Albanese, chief executive officer of Rio Tinto at the Credit Suisse Asian Investment Conference in Hong Kong yesterday.
Well, not soon. “It will continue for some time due to the irresistible demand-pull of China’s appetite to build infrastructure and produce secondary goods,” he replied.
But, maybe his experience in the copper industry provides a warning. Exploration companies flourished in the 1970s, which led to an over-supply right up until 2003. Some media even forecast the “death of mining” as early as the late 1980s.
By 2006, a long-term trend of demand by China, and also by India and other Asian countries, was securely identified. That trend could even last for another 20 to 30 years.
In addition, “we are at a unique point in time”, said Albanese. Individual empowerment through mobile phones and other technologies is probably irreversible – and these new and evolving goods will require metals and energy as inputs. “This is just the beginning.”
“A structural shift is underway, and that won’t be affected by speculative or hedging activities,” he added. Simply, the fundamental long-term demand over-rides any short-term market volatility.
Indeed, copper consumption (and iron and aluminium too) during the next three decades could exceed the total amount consumed since mankind evolved.
Of course, new supplies of base metals will enter the market during the next three to five years, but even slightly slower GDP growth in China won’t disturb what is a “pretty positive story”, as Albanese put it.
Factories can be built far quicker than discovering and excavating new resources in an economical manner. Mineral reserves lie deeper and in often hard-to- reach locations and it takes time to erect the necessary physical infrastructure.
One other important reason for the lag-time is a lack of investment. During the past few decades, the mining industry has lost geologists and engineers; basically, there is a skill shortage. In fact, the paucity of technological innovation in the mining industry is staggering. Albanese pointed out that, for example, it takes just as long to tunnel for copper underground today as it did 100 years ago.
“The mining industry needs a technological revolution,” he said.
Another factor is that barriers to entry are huge; it costs between $2 billion and $3 billion to develop a new mining project. It can also take up to 10 years from initial exploration before the first revenues are earned – and short-term financial market volatility acts as a disincentive for long-term investment commitment.
Albanese warned that resource nationalism, governance issues, environmental concerns and the interests of other community stakeholders could all hamper further mineral exploitation – especially in rich nations.
These supply constraints are unlikely to recede. In fact, he estimated that more than half of proposed copper mining projects recently have been held up for non-technical or non-economic reasons.
So, large, incumbent mining companies look well-placed to continue their partying. Successful ones – such as Rio Tinto – have operational capability, technical skills, logistics infrastructure and can boast consistency. According to Albanese,Rio Tinto will focus on organic growth, developing its own high-quality resources, and will eschew major acquisitions. It will look at small-scale, high-quality investments, consistent with its concentration of assets (around 85%) within safe OECD countries. And the company’s lack of acquisitive ambitions means that it will continue to give cash back to shareholders – as it did with a $5 billion buy-back last year.
“Most opportunities now being pitched were dogs 10 years ago, and they still are,” he said.
