The Analysis of First-half Situation of Global Metal Mining Industry in 2021

The Analysis of First-half Situation of Global Metal Mining Industry in 2021

1. Listed companies in metal mining industry around the world made astounding advances in their market value and hit new highs continuously

According to data from S&P Global Market Intelligence, as of June, 30, total market value of 2353 mining companies worldwide fell a bit compared to that in May. Total market value being USD 2.18 trillion, it climbed by 56.4% compared to that in middle 2020 and climbed by 12.2% in first half of 2021. The dramatic rise in assets of mining companies mainly resulted from primary metal bulk commodities keeping a bull market trend in 2021. From January to June, the price of gold and silver fell. Other than them, driven by positive factors like increasing global inflation expectation, comprehensive recovery of major economies and popularization of vaccines of COVID-19, the price of primary metal products climbed on different levels. Specifically, the price of iron ore climbed by 30% within the year, doubling on a YOY basis; as for base metal, aluminum presented the biggest rise, followed by copper and lead, then zinc and nickel; gold and silver both presented a decline in price within the year but the differentiation is more significant compared to the same period last year. Silver climbing by 41.9% is also mainly due to considerable industrial demands driven by prosperous development in new energy industry, which elevates industrial property for silver and helps it to get rid of the awkward situation where silver price has to go through thick and thin together with gold.

Percentage gain of foreign leading mining companies is limited and business models result in significant differentiation in market value. The changes in market value of global leading mining companies better demonstrates the trend of bulk commodity price. As of July, 16, total market value of 15 leading mining companies had reached USD 882.239 billion, accounting for 40% of total market value contributed by 2353 mining companies worldwide, living up to the reputation of “mining giants”. This figure climbed by 8.5% compared to early this year. Specifically, Vale of Brazil, specialized in iron ore and nickel, made the biggest contribution, mainly due to 1). A big rise in price of primary products; 2). Gradual recovery of capacity impaired by dam break in 2019; 3). Increasing import demands of iron ore from Brazil under the background of strained trade relations between China and Australia. The three positive factors have made Vale of Brazil the most promising mining company for investors. In contrast, FMG of Australia, also a company specialized in iron ore, has made poor performance. On one hand, FMG’s customer resources are rather limited, mainly concentrated in Chinese market. However, China is trying to getting itself out of the dependence on Australia for iron ore, which imposes uncertainties on FMG’s development. On the other hand, FMG’s products are rather limited in types where iron ore takes up a very big proportion. Under the background of China decreasing its demands and the government confining big price movements of raw materials, FMG’s market value has fallen by 20% from mid-year high level. Glencore, a company making as good performance as Vale of Brazil, more than a mining company, it also is the biggest trading company in the world. As the heat of epidemic prevention and controlling has been reduced a bit, global trade has greatly recovered, so Glencore is now facing a promising future. In the meantime, as the Company is specialized in high-demand new energy products such as copper, cobalt and nickel, it also enjoys high premium comparatively. Companies engaged in comprehensive categories including BHP Billiton, Anglo American and Tech Resources have significantly surpassed those whose operation scope is mostly occupied by one single type. This indicates that investors tend to acknowledge the operating philosophy of moderate diversification, risk diversification and smooth cycle when they encounter market divergence.

Chinese mining companies made eye-catching advancements and raw material companies in traditional industries and those in emerging industries show significant divergence in market valuation. Additionally, the upward price of bulk commodities also resulted in the situation that leading domestic listed mining companies was brought into a rising tendency in market value since this year. Northern Rare Earth Group has made advancements by 150% within half a year, making it the most outstanding among all industry groups. One important impetus for these advancements is continuous releases of supporting policies for profound development of rare earth industry in China. On one hand, there is a transformation in price of rare earth metals from “universality of earth” to “rarity”. On the other hand, the government is making efforts to consolidate supply-side reform and eliminate informal enterprises in the industry, thus leading to a rapid concentration in the industry. Influenced by the two factors, qualitative changes have taken place in the industry, i.e. six major rare earth groups have been strongly making advancements in industrial competitiveness and operating performance, followed by new energy metal companies in lithium, cobalt and nickel, whose market evaluation levels have been continuously elevated driven by popular new energy industries. As for P/B ratio, Tianqi Lithium and Ganfeng Lithium exceeded 20 times and as for dynamic market profit, they are approaching 200 times. The two companies have made performance as good as their market evaluations in the first half of this year. Specifically, Tianqi Lithium turned losses into gains and Ganfeng Lithium increased YOY by 730.75%-922.46% in net profit. The market believes that downstream new energy auto industry enjoys pretty promising future and guaranteed growth certainties so upstream material companies will be well developing in Davis Double Play environment by 2025. Using earnings guidance as an impetus, significant growth in market value was also seen in aluminum companies. In 2017, supply side reform led to a shrinkage in industry capacity. During upswing cycle this year, capacity almost reached the limit and it is impossible to rapidly expand capacity, so aluminum price is going up continuously and relevant companies are making outstanding performance accordingly. Based on horizontal comparison of market evaluation, P/B ratio of aluminum industry is yet at a relatively low level. As a traditional industry, aluminum industry is likely to gain development more powered by earnings guidance than by evaluation. Gold companies and copper companies are a bit weaker than overall industry development level, mainly because the market holds unfavorable views on gold and copper performance for later period so earnings growth for companies is rather limited.

2. Financing of global metal mining companies hit high and eased back in first half of this year and shocked at high level

According to monthly data released by S&P Global Market Intelligence, after performance sliding down in April and May, financing market tended to stabilize in June, with 245 financing transactions totaling up to USD 1.49 billion, presenting a MOM rise by 4.7% and a YOY rise by 16.0%. This is the 13th consecutive month for this industry to exceed USD 1 billion globally, unprecedented since the first recording of this data. In the first half of this year, a total of 1314 financing transactions were completed, up by 140 ones compared to last year, achieving a total financing amount of USD 11.85 billion, three times the amount on a YOY basis. Therefore, the amount of single one transaction greatly increased this year, achieving USD 9.03 million, while the figure was USD 3.53 million this time last year, which reflects that companies are willing for financing when the industry is in prosperity.

With respect to financing methods, equity financing is still the first choice for mining companies. In the first half of this year, equity financing totaled USD 9.11 billion, accounting for 76.9%; IPO financing accounted for 3.7%; bond financing totaled USD 1.01 billion, accounting for 8.5%; convertible bond financing totaled USD 1.29 billion, accounting for 10.9%.

From the perspective of regions, mineral countries are still where mining financing transactions take place the most and the best. As for financing volume, Toronto Exchange, Australian Stock Exchange, London Stock Exchange and New York Stock Exchange respectively is USD 5.13 billion (43.4%), USD 3.1 billion (26.1%), USD 530 million (4.5%) and USD 790 million (6.7%), totally accounting for 80.5%.

From the perspective of types:

Financing in gold companies hit high and eased back and stayed high overall. After the lowest point in January, with the spreading of variant virus in India and the increase of inflation expectation globally, gold financing hit a new high since 2019 in March and then declined. From January to June, total financing volume went up to USD 4.49 billion, up by 83.3% compared to the first half of 2020. There were 678 transactions completed, just up by 5.3% compared to the first half of 2020, which indicates that more big financing transactions are taking place.

Financing of base metals hit a dramatic new high. Unlike gold industry, during April and May, base metals and other metals rapidly slid down to the low point in the past 13 months after their soaring to high point in March. Their total financing volume in the first half of this year achieved USD 4.01 billion, YOY up by 304%, and the financing scale is three times the average from 2015 to 2020. The quantity of financing transactions is 422 ones, also hitting a new high since 2015. However, the growth proportion is rather ordinary, so by calculation, averagely, the volume of single one financing transaction rose from USD 3.48 million in the past 5 years to USD 9.5 million, indicating a significant increase of large and medium financing transactions. Another truth demonstrated to us is that the skyrocketing of base metal bulk commodities not only motivates mining companies to finance and expand but also brings once-in-a-hundred-year opportunities to these companies for assets realizing. If we view the entire financing situation, supercycle has already come. From the perspective of types, copper financing accounted for a big proportion, achieving USD 2.64 billion in the first half and accounting for 65.8%. Its total volume in the whole 2020 was USD 1.2 billion, but this year, so far, the volume has been more than twice. Silver occupied the second biggest proportion, achieving USD 490 million in the first half and accounting for 12.21%.

Financing in special types rebounded drastically in the first half. Financing volume of special types was USD 369 million in June, falling a bit on a MOM basis. In the first half, financing volume in this sector totaled USD 3.35 billion, YOY up by 370%, 1.5 times the amount of the entire 2020. Financing data of the first half of each year since 2015 indicates that financing in special types follows periodic characteristics, mainly resulting from lithium occupying the biggest part in this circle, which is highly related to NEV cycle because of its application in NEV power batteries. In the first half, lithium financing was USD 1.8 billion, accounting for 53.6%, followed by rare earth financing of USD 910 million (27.1%) and graphite financing of USD 120 million (3.7%).

Specifically, lithium still takes up nearly 70% of all special type financing scale. Lithium financing volume totaled USD 291 million in May. From January to May, accumulated total financing achieved USD 1.5 billion, up by 50% over that of the entire 2020, i.e. USD 1.02 billion, and up by 40% over that of the entire 2019, i.e. USD 1.08 billion, even if COVID-19 not being considered. This strongly indicates a robust growth. Rare earth financing, ranking the second, totaled USD 56 million in May, and accumulated total financing achieved USD 900 million so far this year.

3. Metal mineral prospecting capabilities were greatly improved globally in the first half

From January to June, a total of 2138 metal mineral prospecting projects were held globally and filed quantity of drills was 32458 ones, both hitting new highs historically. We can easily tell from the data since 2013 that after metal mining industry went through a low tide from 2013 to 2016, prospecting projects started to climb in 2017, which led to a great deal of achievements ever since. Relying on these achievements, solid foundations have been laid for industrial capacities and virtuous circle has been realized from reserves to yield. Under the dual stimulus of upward metal price and increasing prospecting projects, prospecting index hit a new historical high, indicating that global metal mining is now in a supercycle.

Specifically from metal type, gold is still the most important prospecting goal for the whole world. We can easily tell from the data of the first half of each year since 2012 that as time goes by, prospecting teams are, more and more strongly, making it their goal to find golds. Under the big global monetary system featuring increasing inflation, gold has gained more value-preserving and value-adding properties, which draws mining prospecting teams to go and dig. Gold prospecting projects have grown to 66.9% this year from 44.5% in 2012. Silver rose from 5.8% to 8.3% and copper fell from 15.0% to 11.2%. Copper’s historical high point occurred in 2016, i.e. 18.0%, and the figure kept staying at about 10% subsequently.

Specifically from country, Australia, Canada, USA and Mexico firmly guarded their top 4 positions in June. In the first half, prospecting projects conducted by the four countries accounted for over 2/3 globally, fully indicating their importance in metal mining industry and symbolizing their key positions in this industry in the long run. Other 330 countries also conducted prospecting projects that occupied 28.4% globally, mainly concentrated in Latin America and Africa such as Brazil, Argentina, Columbia, Chili, Peru, Congo and Mali, which unsurprisingly manifests an imbalance and the fact that gift from the nature, i.e. natural mining resources, is playing a critically important role in the development in this field on the earth.

4. M&A scale in metal mining industry worldwide was at a rather low level for the past 8 years in the first half

According to S&P Index, the publicly released M&A transactions in metal mining industry in June globally was 152 ones, involving volume of USD 1.706 billion. There has been no super-large M&A transactions with the amount of over USD 3 billion for 8 consecutive months since last November. Historically speaking, total M&A transaction volume globally in the first half was merely USD 13.249 billion, ranking the last but one since 2014, exceeding just that of 2017 (USD 12.658 billion). Besides, average single one transaction volume fell to USD 14 million. This fully manifests that the rise in price of metal bulk commodities is boosting the assets value of the entire industry and is further confining the passion for large-scale M&A. All players are quite clear that purchasing assets at the most prosperous point in a cyclical industry will have to face the risks of impairment of assets in the future, unless, as predicted by investment bank like Goldman Sachs, this year is the start of supercycle instead of the end of it. Like the year of 2018 and 2019, only when the whole industry continued to gain prosperity were industrial capitals emboldened to increase investments.

From the perspective of metal types, gold is still playing a predominant role in M&A transactions by accounting for over a half of 488 transactions and forming up 40% of the scale. In the first half, NEV metals like nickel, cobalt and lithium again surpassed copper in M&A, presenting a robust upward trend and ranking the 2nd relying on 147 transactions and volume of USD 2.9 billion; copper M&A ranked the 3rd.

Few improvements in M&A were made in China in the first half. 16 global M&A transactions totaled USD 935 million and 9 overseas assets M&A transactions totaled USD 436 million, having been declined for 4 consecutive years, and the least in scale and volume since 2015. In terms of data, the year of 2018 is the watershed for our metal mining overseas M&A. Before 2018, M&A was in an upward trend, and ever since, M&A figures have been sliding down for three consecutive years. This can be explained from many aspects: 1). China-US trade wars and US diplomatic policies to China have influenced our overseas M&A to some extent; 2). Repeated outbreaks of COVID-19 have hindered our overseas M&A progress last year and this year; 3). Due to lack of overseas M&A experience, previous overseas M&As were not very successful and even some were shut down. Cash flow hardly being able to cover debt capital leads to a high leverage ratio, so China hardly has more energy for a new round of assets expansion.