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A change in cash flow strategies may accelerate the mining industry standing into net zero

De Nonno Maria Giulia
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GEAM N. 167/2022

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Demand for metals for renewable energy infrastructure and electric vehicles is likely to increase in near future, driving up prices. However, mining companies have little appetite for investing in capital-intensive projects with long lead times or for the perennial challenges of permitting so their strategies aren’t yet focused on the growth. Moreover, the past decade was largely spent rebuilding balance sheets due to low commodities price. The remainder of the decade leads to more cautious choices. Consequentially, to prepare for the next super-cycle, metals and mining companies should consider adjusting their strategies, capabilities, and mindsets. The energy transition presents unique challenges and opportunities. Without a doubt this is a great momentum: cash flows are expected to increase to unprecedented levels, there is no shortage of potential projects around the world, and there is an exponential growth in demand for metals linked to the energy transition. This article explores the role of metals and minerals in the energy transition and why the net-zero economy will be material-intensive. It introduces the concept of metal super-cycle, and explains, based on a cash flow analysis of the last two decades, why mining companies are still reluctant to invest. Commodity prices remained elevated from 2009-11, after the global financial crisis. A subsequent wave of M&A activity and project investment resulted in capital expenditure blowouts, bloated cost structures, and asset write-downs. After commodity prices declined from 2012-16, cash is either going onto the balance sheet or back to shareholders. Over the last decade, adhering to capital discipline has worked well for the sector, restoring credibility with investors and share price performance alike. After 2016, however, the financial performance and health of the sector have improved. Showing three main trends: 1) Cash flows from operations have improved significantly. 2) A slight increase in capital expenditures and M&A suggests a cautious approach by leadership. 3) Capital structure has emphasized low debt, while dividends have reached peak levels. Based on the above observations, the article provides guidelines for leaders to maximize value addressing key challenges and sizing key opportunities especially for metals and mining companies that see ESG as a source of value play offensively with sustainability instead of taking a defensive approach. The article then explores and investigates a new type of (still visionary) business model that includes the exploration and production of hydrocarbons, minerals and metals. Despite, nowadays there are too few synergies between the two, stakeholders tend to be different, and many majors are diversifying into new energies, impacting on an increasing business model complexity, a combination of the two would create a giant natural resources organization with the capital needed to deliver the metals investment to feed a faster transition. Mining offers similar returns throughout the upstream cycle and would act as both a cyclical and structural hedge – as demand for oil and gas fades. It also offers new opportunities for growth. Mining and metals companies today contend with various geopolitical, supply chain, and target-market risks, but many do so from a strong financial position. And while the demand of transition minerals increases and commodity prices remain high, record cash flows could provide an ability to grow after years of cash conservation. Innovative approaches can be applied and would be beneficial for the net zero targets.

Keywords: Energy transition, Capital allocation strategy, Business model, ESG, Greenfields, Metals and mining demand.