Increased merger & acquisition activity is likely in the mining sector this year due to soft commodity prices, logistics bottlenecks and lower market capitalisation, analysts say.
Louis Kruger, who leads Africa energy, resources & industrials at Deloitte, said margins had shrunk for some commodities and balance sheets could be under pressure, which could lead to restructuring and the sale of assets. Lower market capitalisation of some companies could facilitate takeovers.
“With the challenge of logistics increasing costs, and lower commodity prices, we expect to see M&A activity in the coal space, particularly among small-to-medium producers as they seek synergies through mergers to reduce costs, or investors to deleverage their balance sheets,” he said.
In 2023 Glencore pursued Teck Resources and is set to separate “CoalCo” — the combination of its own coal business and Teck’s steelmaking-coal business. Northam and rival Impala Platinum both went after Royal Bafokeng Platinum, with Impala eventually clinching the deal.
Kruger said the energy transition will drive demand for commodities that are critical for green energy and low-carbon technologies.
“Investment in electric vehicles (EVs), batteries and renewable generation, chiefly solar and wind, will continue driving demand for copper, cobalt, lithium, nickel, graphite, battery-grade manganese and rare earth elements, and even natural gas — all critical resources that Africa can supply.”
Seleho Tsatsi, investment analyst at Anchor Capital, agreed, noting the “strong appetite” to acquire “green” metal operations. “Sibanye-Stillwater for example has started to build a portfolio in that space.”
Sibanye has diversified into green and battery metals, especially lithium, which is needed to make EV batteries.
Tsatsi said M&A activity was likely among companies in iron ore, given the ore’s importance to major diversified miners on the JSE; platinum group metals (PGMs), which were facing pricing pressure; and gold, which outperformed in 2023.
He said commodity prices are probably the biggest swing factor.
“Beyond that, Transnet is currently a big handbrake on the industry. We have already seen the detrimental impact that its underperformance has had on the country’s coal and iron ore exports.”
In December Kumba announced that it will cut production over the next three years due to constraints at Transnet Freight Rail. In September coal exporter Seriti Power announced layoffs partly due to TFR constraints at its Klipspruit colliery, with Glencore following suit a month later.
However, Kruger is optimistic that the logistics logjam will be eased.
“Coming off a low base in 2023, and with the national logistics crisis committee in place, there is an opportunity for Transnet to improve its performance and start to reduce the logistics constraints, while many mining companies are investing in renewable energy to reduce their reliance on Eskom.”
Transnet is currently a big handbrake on the industry. We have already seen the detrimental impact that its underperformance has had on the country’s coal and iron ore exports.
— Investment analyst at Anchor Capital, Seleho Tsatsi
He said high global inflation, which has pushed up interest rates, and lower demand for key metals, due in part to slower growth in China, have depressed commodity prices.
“The lower commodity prices will force companies to continue to look at cost and efficiency to drive profitability, while there will be continued interest in minerals required for the energy transition.”
While gold, a safe haven asset, outperformed in 2023, PGM prices — particularly rhodium — crashed. Diamond sales remained low due to faltering demand.
Low PGM prices coupled with rising input costs have resulted in South Africa’s biggest producer, Sibanye-Stillwater, announcing plans to cut more than 4,000 jobs at its local PGM operations, and 571 jobs are on the line at Wesizwe Platinum’s Bakubung operation.
Pual Miller, director at AmaranthCX, said the outlook for the industry is ominous in light of Eskom and Transnet’s woes, falling PGM prices and the upcoming elections.
“Eskom is hurting everyone. Prices can’t be helped, but the rest are own goals. And none of the mooted structural reforms will seriously kick in until after the election. And the department of mineral resources & energy is still rolling chaos.”
Kieron Hodgson, Panmure Gordon’s commodities & mining research analyst, said 2023 had been a year of shifting sentiment, starting with enthusiasm about China reopening trade and ending with the US Federal Reserve policy pivot; so base metals started the year in favour but by December precious metals were the poster child.
“In between, however, was a general underperformance in commodities and mining companies alike. For me, 2024 has the potential to deliver the peaks and troughs of sentiment once again, albeit for very different reasons, with expectations of a slowdown in the US and a long-awaited pick up in Chinese activity towards the end of the year.”
In terms of labour relations the underground sit-ins at Gold One, Impala Platinum, Blyvoor and Wesizwe’s Bakubung mine highlighted the renewed tensions between the two big unions in the mining industry.
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