The volume of global mining investment grew at an unexpectedly quick pace in 2010
By Magnus Ericsson, Luleå University of Technology and Viktoriya Larsson, Raw Materials Group
The slump in mining industry investment was shorter than most observers—including the Raw Materials Group (RMG)—expected only a year ago. In last year’s project review we predicted renewed growth to take place mostly toward the end of the year. Mining investments did increase over the year but the start was faster than predicted and hence overall activity was much higher than projected.
During 2010, 105 new mining investment projects with total announced costs of $60 billion were registered in our Raw Materials Data Metals Mines/Projects database. This represents sensationally healthy growth and the industry seems to be heading for a new boom in the next few years.
Our prediction from 2009 holds for another year: Investment activities are bound to continue to increase in the next 12 months.
Recovery Under Way, Not There Yet
The total amount of investment in the global mining industry’s project pipeline as recorded in RMD Metals’ Mines/Projects database is $562 billion at the end of 2010. This figure increased by more than 21% compared with the previous year, when investment growth was only 14%. The industry has recovered from the 2009 slump but has not yet reached 2008’s peak, when growth was almost 30%.
RMG’s oft-repeated conclusion that metal prices will be underpinned by a rising long-term investment cost level still holds. In 2010, the level of these long-term prices increased again after a drop in 2009. RMG does not anticipate metal prices will drop to the level of the early 2000s, however. In today’s market there is an upside developing if metal demand continues to soar.
The growth of the investment pipeline illustrates the industry’s crisis is over and the future looks bright. The inflow of projects is once again increasing and will most probably continue to grow as metal demand increases. A slowdown in new projects may, however, become evident in a couple of years due to the very sharp drop in exploration activity in 2009, although there’s no current trend in that direction. In fact, there has been strong growth in the number and volumes of early stage projects while the number of late stage projects, including feasibility and construction phases has been reduced, as few projects were brought into the final stages during the crisis in 2009–2010.
The amount of investments in brownfield projects has increased in absolute terms while the relative share has increased marginally. As would be expected, brownfield projects demand lower investments, with the average project costing only $264 million, while the average greenfield project is $542 million. Admittedly such a comparison does not take the capacities of each project into account but in our view brownfield projects are likely to be more cost effective measured on a capacity basis.
All of this year’s survey statistics are based on projects with an announced investment estimate. The RMD Metals database also includes approximately 1,800 projects—mostly in the conceptual stage—for which no investment figure has been announced. The investment total for all mining projects, including projects for which no investment estimate has been published, is therefore larger than the $562 billion recorded at the end of 2019. It is difficult to estimate how much bigger. If it is assumed that the projects without published investment estimates have a similar cost structure to those projects whose costs are known, the total figure would increase considerably.
Many of the early stage projects included in the $562-billion total will not, or at least not during a period of low metal prices, pass from the conceptual study phase to the construction stage for a number of reasons, including insufficient profitability, inadequate ore reserves, failure to secure financing, technological problems or excessive political risk. Historically RMG has observed 60%–75% of all projects announced will materialize during a three-year period.
Top Metal: Iron Trumps Copper
Iron ore, copper, gold and nickel, in that order are the most important investment targets for mining companies. These four metals account for 84% of the total project pipeline. They also dominate the mining business in terms of the total value of its output; they are cumulatively valued at $280 billion or 76% of the total value of all non-fuel mineral production during 2008. Continued high demand for iron ore and healthy increases in prices paid has gradually moved iron ore to the top of the list. Iron ore investment has surpassed that of copper with a project pipeline of $162 billion—compared with $155 million for copper—while gold and nickel are at much lower levels ($83 billion and $69 billion, respectively) distantly followed by the sector, valued at $15–$20 billion, in which uranium, lead/zinc and PGMs are to be found.
Investment in gold projects increased considerably in 2009, but then dropped in 2010 to just under 11% of total project investment despite the high level of gold prices during this period.
Iron ore outpaced the other metals in terms of new investment, registering an increase to $28 billion. New gold project investment totaled $7 billion and copper to just under $6 billion in 2010.
In 2010, 36 new gold projects were announced, along with 22 iron ore projects and 12 copper projects. The average iron ore project investment was almost $1.3 billion, up from $750 million, while the average gold project has remained steady at $204 million. Iron ore’s share of total new investment announced in 2010 increased again after a decline in 2009, reaching 47%. The continuing demand growth for steel and the concomitant high prices paid for iron ore point to a strong increase in iron ore production in the next three to five years.
High metal prices drive exploration and subsequently, investments in new mines. In 2010, the favorable price levels for silver resulted in a number of new projects being launched, particularly toward the end of the year. Six new silver projects were announced with a total investment of more than $4 billion. The political interest in rare earths also resulted in four new projects outside China with a total investment of more than $3 billion. The Chinese near-monopoly of rare earths production has caused serious concern in many countries and has been seen as a Chinese attempt to take control over vital metal resources. The low production level of rare earths outside China is, however, more a function of quick growth in demand that has not been possible to meet in the short term, given that mine startup often takes five to 10 years, rather than a problematic long-term supply situation. So far, demand has been limited and the production volumes of these metals so small—with total volume a few thousand metric tons annually, valued at the mine at a few hundred million dollars—that none of the major mining companies has bothered to get involved. The new projects outside China indicate the situation is changing.
Latin America Back at No. 1
Latin America regained its position at the top of the list in 2010, attracting more than 32% of total global investment—more than double of any other region, each of which attracted roughly 13%–15% except for Europe with 11%. Asia, which was the top region in last year’s survey, fell behind in 2010. The Latin America investment pipeline grew by US$46 billion in 2010, much stronger than the global average of 21%.
The Latin American project pipeline includes more very large projects than any other region. Currently, 58 projects have an investment figure of more than $1 billion each, which makes the Latin American average investment roughly 50% higher than in Oceania and 20% higher than in North America.
Europe is still the least favored region with only 11% of the total or $62 billion. But the downward trend is broken and, interestingly, new European projects are located mostly outside Russia, which had earlier dominated the region. Several new projects in Greenland, Sweden, Finland and Romania are indications of an investment climate slowly becoming more positive as the European Commission gradually understands the benefits of a domestic mining industry. One of the objectives of EU’s new Raw Materials Initiative is to improve the conditions for mining in Europe.
Australia Top Target for Investment
The share of total investment accounted for by the top 10 countries increased again in 2010 to 67%, almost back to the 2008 figure (68%). The discussion in the three last Project Surveys as to whether there is a trend toward spreading mining investments more evenly across the globe or not continues: At the end of 2009 we were almost convinced there is a tendency to find new target countries, but this year we are less sure.
There is a growing political interest in securing a stable mineral and metals supply among consuming countries in Europe, and in Japan and the U.S. Governments of producing countries, in particular those of emerging economies, are trying to retain more of the profits from mining within their economies. Royalties and taxes are increasing and in some countries such as Ghana and Guinea the state has the right to a certain free carried interest in each project. Such political initiatives change the competitive situation between countries, at least in the short term. Currently it appears that political instability in certain areas—for example, West Africa—is making investors think twice before they engage in the region, in spite of fantastic geological potential.
Australia is once again the leading country for mining investors, riding a continuing iron ore boom. Of the 20 largest projects in Australia, 11 are for iron ore and all require investment of more than $1 billion. In Canada, the mix of projects is much broader with several gold and base metal projects among the 20 largest—but total investments has not grown as fast on average as has the number and size of the iron ore projects in Australia, thus making Canada’s tenure at the top of the list one brief year. Both countries account for 11% of total mining investment, or some $65 billion each. Brazil remains in third place but the gap between it and the top two has shrunk as a result of strong growth in investment in the country and the region. Below third place, there has a complete reshuffle: Russia has fallen from fourth place to sixth, and Chile has risen to fourth. Peru remains in fifth. South Africa’s downward trend has been broken and it moved up again to rank seventh. It is interesting to note that high costs and antiquated mining legislation in the U.S. is finally and gradually undermining its attractiveness for miners. In 2010, the U.S. was the only top-10 country that did not increase its project pipeline, with its investment total remaining at $23 billion.
Below the top-10 cutoff are Guinea, Indonesia, Argentina, Kazakhstan New Caledonia, China and Papua New Guinea in that order, each with a portfolio of projects between $8–$11 billion. It should be noted that as some projects are much bigger than others and one new project announced in a small country or one major project completed makes a big difference in the position of this country relative to others. In Guinea, for example, one new iron ore project increased its total investment figure by 70%; thus, not too much importance should be attributed to relative country rankings below the top 10.
The figure for China is most certainly an underestimate, since many of the projects run by the state-owned companies are never reported in such a way that they reach the international mining press. With comparable reporting from China there is no doubt that the country would be high up among the top 10 countries. Chinese projects are mostly small at an average of $150 million per project, compared with Canada where the average project is priced at $545.
China’s scramble for resources in Australia, Africa and elsewhere, which has come into political focus, is still negligible in spite of rapid growth in recent years—although it represents growth from almost zero. It will take years before Chinese companies, and China, become a powerful global player in the mining industry. Further it is a mistake to view the Chinese investors as a homogenous group. There are many different types of Chinese companies active internationally: small companies earning a quick dollar in the Congolese copper industry, and major companies like Chinalco cooperating with global giants such as Rio Tinto.
About This Survey
E&MJ’s annual review of metal mining projects is compiled from Raw Materials Group’s Raw Materials Projects database. The full database is available from RMG on an annual subscription basis and includes more than 3,100 projects as of January 2011, ranging from those in the prefeasibility stage to those currently under construction. Of the total number of projects listed in the database, more than 1,200 include detailed descriptions of resources/reserves, grades, planned investment cost and completion date.
This survey includes all countries with known projects. In the process chain from ore to metal, its main focus is on the mining stage. Pure smelter projects are not listed. In some cases, however, where the process is fully integrated from mining to refining, such as acid pressure leach hydrometallurgical nickel projects, all stages are included.
Eligibility for a full listing requires each project to have an announced investment cost estimate, reserve/resource data and an estimated annual production figure. Comparability of information from different companies, countries and regions varies, as specific project information or definition may be unclear for various reasons, or the project may also involve large unreported infrastructure costs. Raw Materials Group attempts to resolve these factors, but cannot rectify all discrepancies arising from definitions and comparability.
Information contained in the survey is global in scope. However, it should be noted that completely accurate coverage of some regions is difficult to attain due to lack of information or corporate reporting standards and requirements. In total, mine projects are included from more than 70 countries and the survey’s aggregate figures are considered to reflect overall investment trends in the mining industry reasonably accurately. For more information, visit www.rmg.se or call +46-8-7440065.