I worry a great deal about mining’s future, not due to the lack of new deposits but the lack of new capital. According to Engineering & Mining Journal (E&MJ), there are at least 280 projects requiring $263 billion in capital for initial construction or expansion, and I am sure there are massive additional capital needs to maintain operations. The current electric-vehicle (EV) fad complicates this situation because now there are new metals also vying for the limited funds available.
Today’s trend started during the Great Recession (circa 2007-2009). Banks were forced to derisk their portfolios and mining was one of the first to go. This gap was partially filled by private equity and the mining royalty companies. But their collective available cash probably represents less than 10 percent of what is needed.
The problem was further exacerbated by the rise of ETFs. For example, the first gold ETF was launched in 2003 and today, there are 35 gold ETFs representing $138 billion in assets under management. There are also ETFs for other commodities, and this diversification seems to be growing. The problem with ETFs is that they cannot invest in private placements. So, these funds are not available to those seeking to explore or develop. If your company is producing, you can benefit from the ETF investor, but if you need money to build the mine, you cannot tap into this large capital pool.
Now, add the impact of environmental regulation. Since the original Earth Day on April 22, 1970, the world has developed a deep environmental consciousness. The internet plays a major role in information sharing and has become a platform benefiting special interest groups to organize and oppose new mining developments. As land becomes scarcer, governments are further increasing their environmental regulations, causing longer permitting times and giving anti-mining activists more time to fight.
This becomes important because of the time value of money. A dollar is worth more today than tomorrow, and if you have to wait 15 or more years to get your construction permit, the value of your proposed investment will get hammered in today’s terms. Inflation also degrades the project economics as goods and services cost more. Think about the impact of a 2 percent annual inflation rate on your capital and operating costs 15 years from now. It will be huge, and there is no guarantee that metal prices will keep pace. These problems could be further enhanced should the expected demand for certain mineral commodities become stretched out due to delays in the green energy transition.
Moody’s Ratings recently published a press release (but won’t release the underlying report) which calculated that the existing reclamation obligations for 24 major mining companies reached $72 billion in 2023, up from $40 billion in 2013. This represents around 42 percent of the industry’s outstanding long-term debt. Today, these select companies are spending about $3.7 billion per year, with a five-year annual average growth of 18.2 percent. This amounts to 18 to 30 percent of their annual revenues. Add inflation and these sums are going to grow significantly larger.
What is even more disturbing is that these high reclamation costs are so far into the future that the net present value (due to the time value of money) of these operations do not catch these large cash outlays. Companies do set aside funds to cover these costs but as the absolute totals increase, one has to wonder whether reclamation costs will become a deterrent to building or expanding the operation. Analysts update their cashflow models each year, so what happens to an older mine’s valuation when each year these massive reclamation costs are brought forward and are not accompanied by equivalent revenues?
The lack of capital is certain to winnow out the weaker companies, which some observers suggest should leave the remaining capital available to those operations with more rewarding prospects. However, the brunt of this decline will be felt by the exploration-stage companies, and we should remember that their discoveries are the feedstock for the larger miners. A dearth of capital means a dearth of discoveries, which could have dire consequences for the future production levels of many critical minerals.
As the population grows, so does their demand for metals. But if capital is not available, where will these metals come from? The common argument that more recycling is needed does not generate enough product to fill the void; to be a meaningful supply contributor, metal recycling must develop a “reservoir” of recyclable material, something that, save for aluminum, will not be achieved for several decades.
The growing supply-demand imbalance should result in higher metal prices. This may partially solve the capital-shortage problem because generalist investors use price surges as justification for investing. Let’s just hope they do not participate through ETFs. A Supercycle could bring them back as it did in 2002. The long time requirements to obtain permits should further lengthen this price run. All of this suggests one of two paths. Either we are on the verge of entering a new Supercycle or governments will have to step in to shorten the path to production. The current U.S. administration is throwing a lot of money at mining these days, so the second path appears to be evolving. I am waiting for signs that the Supercycle is coming.
1January 2024; E&MJ (e-mj.com)
2Gold ETF List, Performance & News; etf.com
3Top miners’ reclamation obligations could surpass industry’s total debt by 2033; Mining.com
