Construction activity in the mining sector continues to increase
By Joseph F. Govreau
As the new year begins, 2020 looks to be another good year for project activity. Mining firms, especially publicly traded ones, spent more in 2019 than in 2018 for both organic growth and mergers and acquisitions, marking the second year of increased spending after hitting the bottom of the cycle in 2017. That trend is expected to continue in 2020 as companies increase spending nominally or normalize spending near 2019 levels. An analysis of the capital guidance of six of the top mining companies (Rio Tinto, Vale, BHP Billiton, Glencore, Barrick Gold and Newmont Goldcorp) shows a combined 10% increase in planned capital expenditures for 2020.
Globally, Industrial Info Resources is tracking nearly 12,000 mining projects representing total investment value of $1.2 trillion as part of its Global Market Intelligence (GMI) Platform (See Map 1). These projects involve capital expenditures ranging from grassroot mines to in-plant capital at existing operational mines and processing. This includes expansions, additions, and retrofits of equipment at mining assets and related infrastructure. Projects included in the analysis are tracked from the exploration stage through planning, engineering and construction.
A good way to measure the health of mining project activity is to analyze projects in the construction stage. Compared with last year at this time, construction activity is up 17%, based on the total investment value (TIV) of projects. Currently, more than $209 billion worth of mining projects are under construction worldwide. Construction activity is up in all market regions with the exception of Africa, Middle East and Southeast Asia. Of note are increases in Australia, India and Russia.
Mining companies continue to develop new mines, but at a slower pace. More attention is being paid to optimizing and expanding existing assets. Grassroot projects and unit additions are being developed to replace depleting capacity from existing mines in order to keep up with demand, which is growing due to urbanization, electrification, increased usage of renewable energy sources, and a host of emerging technologies, such as electric vehicles and battery storage that require greater and more diverse metals and metal compounds. Many companies are developing pilot plants to test new process technology. Industrial Info is tracking 56 mining projects globally that are developing processes through pilot plants prior to construction of full-scale operations.
The biggest challenges to mining project development going forward include rising costs associated with social responsibility, environmental stewardship, water resources, raw materials, energy and labor. Attention is being given to Industry 4.0 and harnessing the Industrial Internet of Things (IIoT), which utilizes smart computers to analyze big data in order to identify areas of improvement in the mining process. Automation of mining equipment, comminution and material-handling systems will continue to drive cost and efficiency improvements at mines and processing plants.
The price of gold reached a six-year high in 2019 and threatened to reach $1,600 per ounce (oz) before receding to the $1,500/oz range by the end of the year. Gold prices were up nearly 50% since hitting a low at the end of 2016. The shaky economic outlook, exacerbated by Brexit and the U.S.-China trade negotiations, is prompting many investors to buy gold as a safe haven. Gold miners want to produce as much gold as possible during this high-price environment, which is putting pressure on gold mining projects. Canada, Indonesia, Papua New Guinea, Mexico and Australia are important countries for gold mine development over the next two years. Several important mergers and acquisitions occurred in 2019, the Barrick-Newmont joint venture being the most notable.
In the U.S. and Canada, gold mining projects account for about 20% of what is scheduled to begin construction in 2020. There also is a focus on critical minerals, such as rare earths and battery metals such as lithium.
In the U.S., government support for mining in the form of executive orders, such as for critical minerals development or in the form of regulatory changes, have aided the industry, but in spite of this, permitting continues to be a deterrent to mining project development in the U.S. A prime example of this is Hudbay Minerals’ $1.9 billion Rosemont copper project in Arizona. The U.S. Army Corps of Engineers granted approval early in 2019 after a 2017 approval was received from the U.S. Forestry Service. In 2019, the company was spending money and ramping up preconstruction activity with the goal of starting work during the third quarter of 2019, but on July 31, a U.S. district judge ruled against the project, overturning previous approvals and bringing the project’s construction to a halt. Hudbay Minerals is appealing to a higher court. The decision could have national implications regarding the development of mining projects on federal lands. The project has been studied and litigated for more than 23 years.
Coal presents an interesting dichotomy. Global growth is occurring, especially in Asia and Africa, while declining usage due to decarbonization and environmental regulations is happening in North America and Europe. Coal accounts for 38% of global electricity generation. New coal-fired generation capacity is coming online mainly in Asian countries, and China, Australia, India, Mongolia, Russia and South Africa lead the world in coal-mining projects.
The U.S. Energy Information Administration (EIA) forecasts that the share of U.S. generation from coal will average 22% in 2020, down from 28% in 2018. U.S. power generators retired 13 gigawatts (GW) of coal-fired generation in 2018. An additional 17 GW are scheduled to be retired by 2025. Generation capacity is mostly being replaced with natural gas and renewables. Coal exports were down about 15%-20% in 2019. U.S. coal production for both thermal and metallurgical is expected to drop by 9%-10%. Nevertheless, there is $2 billion in planned capital spending for coal mining in the U.S. in 2020. Much of the capital expenditure planned is going toward cleanup and closure projects, life extensions, expansions and replacing outdated mining equipment.
New innovations and technology for alternative uses for coal are being developed. For example, Elixsys Inc. hopes to partner with a utility company and begin construction on a plant that is able to extract value products from coal combustion waste. Arq Inc., with partner Peabody, plans to bring a waste-coal-to-powder processing plant online in 2020, with plans for more locations over the next five years. Omnis Mineral Technologies teamed up with CONSOL Energy using Hendricks Resources technology to convert waste coal into clean-carbon fuel pellets and mineral product fertilizer.
In Latin America, the mining sector is slowly improving compared with previous years. Some mining investments that were placed on hold have been reactivated in countries like Chile and Peru, especially for copper mining projects. The price of copper fell as low as $2.50 per pound (lb) during 2019. By year end, it was approaching $2.80/lb. If it would eclipse $3/lb in 2020 that marks a high not seen since 2014. Strong demand fundamentals and disruptions in supply due to resource nationalism and mine strikes in South America boosted copper prices, but ample capacity has been able to keep up with supply. A long-term supply deficit is expected, causing mining firms to invest in new copper capacity, especially in the Americas.
In Brazil, thanks to China’s growing demand for iron ore, some multimillion-dollar investments have been reactivated. The Brazilian market was heavily impacted in the aftermath of Vale’s Brumadinho dam disaster, which curtailed substantial iron ore exports. The Brazilian government banned upstream tailings dams as a result. Vale has committed billions over the next five years into new dry stacking technology and redesign/strengthening of existing dams.
Other Latin American countries are suffering due to geopolitical and economic issues. Argentina is in an economic crisis. The Argentinean peso has lost significant value and mining investments are paralyzed due to uncertainty, lack of economic stability and a lack of clear mining policies.
In Mexico, the mining sector suffered a recession due to mining policies imposed by the new government. Many investments have been halted as a result of economic uncertainties. The new USMCA trade agreement should help alleviate some of the uncertainty.
A mature market for mining, Europe’s decarbonizing efforts are resulting in a shrinking coal market. Nevertheless, coal is the second-largest market for mining project activity in Europe after copper. Poland, Russia, Ukraine, Germany, Czech Republic, Romania and U.K. are the top countries for coal mining project spending.
In Europe, Russia represents about 35% of the market, with projects reaching the construction stage doubling over the past year currently representing $10.2 billion. Russia is seeing an uptick in coal project activity as it looks to take advantage of export logistics to neighboring China.
For copper, there are 148 projects totaling $25.7 billion, but very few are reaching the construction stage due to permitting and financing delays.
Growing demand for metals and minerals in Asia is driving investment in mining projects in Africa. South Africa, Guinea, Tanzania, Mozambique, Botswanna, Zimbabwe and Congo are the main countries for investments in 2020. Leading commodities for mining project development in Africa are gold, coal and copper as well as platinum, bauxite, mineral sands, rare earths and tin.
However great the potential of Africa’s natural resources, challenges remain a deterrent to mining activity, as geopolitical and local social unrest continue to impact African mining operations in some countries. Rio Tinto recently restarted operations and construction activity at Richards Bay Minerals in South Africa. Criminal activity is jeopardizing operations and construction of the $463 million Zulti South heavy mineral sands mine.
Chinese growth has slowed due to ongoing trade negotiations with the U.S., but remains strong at around 6% GDP growth. In 2020, China will accelerate its economic restructuring for the steel, cement, aluminum and non-ferrous metal industries to speed up capacity replacement and optimization processes, eliminating excess capacity and outdated capacity. China’s mining sector experienced rapid growth in 2019, but investments in coal mining projects are expected to slow as the growth is mainly driven by the resumption of projects that were previously put on hold.
China is developing a whopping 271 grassroot upstream and downstream aluminum projects. This includes 16 new bauxite mines, which will add almost 22 million metric tons per year (mt/y) of bauxite mining capacity; 14 alumina refineries totaling 30 million mt/y of capacity; 10 new primary aluminum smelters totaling about 2.5 million mt/y of primary capacity, six of which are currently under construction scheduled to come online in the next one to two years; and 69 secondary smelters ($2.2 billion) totaling about 3.3 million mt/y of new secondary capacity.
Southeast Asia is expected to experience continuing headwinds in 2020 due to the effects of U.S.-China trade, resource nationalism and protectionism in some countries and a growing steel production overcapacity in the region.
Resource-rich countries like Indonesia and the Philippines are expected to continue their campaigns to increase taxes and revenue from natural resources and further boost environmental measures in mining, especially in direct-shipping ore (DSO) projects. Indonesia reinstated its ban on nickel ore exports beginning next year, and the Philippines has suspended multiple nickel DSO mines indefinitely as it conducts environmental audits.
The raw mineral export ban in Indonesia five years ago, Law No. 4 of 2009 concerning mineral and coal, has promoted about 15 new smelter projects, which are operational or in commissioning, in 2020. The Indonesian government expects further mineral processing projects to support local miners as Chinese and other foreign investors, with local owners, invest in smelter projects in the provinces of Sulawesi, Kalimantan, Sumatra and Papua.
Indonesia Ministry of Energy and Mineral Resources intended to increase nickel production and maintain ore reserves by implementing its latest regulation, No. 11 of 2019, which will stop nickel ore exports beginning 2020 and strengthen nickel prices and sales in the country.
In India, coal production is expected to increase by 6%-7% during 2020. Production will improve on account of miners focusing on surface mining instead of underground mining. Coal production grew by 7.3% to 739.4 million mt during 2019, versus 2.6% growth in 2018.
Coal and iron ore, two of Australia’s most important mined commodities, were particularly hit in the recessionary years. The oversupply in steel markets and the shutting down of surplus steel-making capacity has impacted Australian exports and prices. Nevertheless, Australian mining firms are pushing ahead with iron ore mine expansions, and the recent start of construction at Adani’s Carmichael coal mining project in Queensland has driven construction activity up for the metals and minerals industry. Activity has almost doubled over the last 12 months, increasing from $6 billion to $11.9 billion currently. Uncertainties still prevail into 2020 — average thermal coal prices are expected to remain subdued as the power market continues to shift away from coal-fired generation — this has impacted new grassroot coal mines and some major expansion projects are curtailed.
Mining project activity in 2020 will continue to grow at, or moderately above, 2019 levels. Activity is driven by increasing demand for metals and minerals from existing consumers such as infrastructure construction, and new consumers such as electrical vehicle and battery applications. Challenges to reduce costs, meet ever-increasing environmental and social standards, manage resources, and navigate geopolitical issues, will continue to mold the next generation of projects.
Govreau is vice president-research for the Metals & Minerals Division of Industrial Info Resources, www.industrialinfo.com.