ANALYSIS-Mining consolidation to speed up as Chinese demand growth slows

By Pratima Desai

LONDON, April 3 (Reuters) - Joint ventures and asset sales are expected to accelerate in the mining industry, which is ripe for consolidation due to the slowdown in manufacturing and demand growth for industrial metals, particularly in top consumer China.

However, full-scale mergers and acquisitions activity among diversified miners could be hampered for now by prohibitive high costs and significant chances of eventual rejection, investors say.

Reluctance to engage at a company level is seen in LSEG data showing M&A in mining sector fell 27% in value terms to $15 billion in the first quarter compared to the same 2024 period.

Since the start of 2024, BHP's BHP.AX shares have slumped 26% and Rio Tinto RIO.L has dropped 23% while Glencore GLEN.L's shares have collapsed 42%.

Companies such as BHP and Rio Tinto have robust balance sheets and are delivering handsome returns to shareholders, but they are approaching a period of stalled earnings growth.

With no other country able to pick up the slack left by China and trade wars triggered by U.S. President Donald Trump's import tariffs, miners are thinking more about creating value and strength through scale.

"We are seeing more discussions about partnering, joint ventures and asset sales," said George Cheveley, Portfolio Manager at Investment Manager Ninety One.

"We're more likely to see smaller deals rather than wholesale takeovers. They are easier regulation wise and an easier way of improving your asset base and derisking your portfolio."

Australia-listed BHP also recently formed a joint venture - Vicuña - with Lundin Mining. Vicuña now owns the Filo copper project in Argentina and the Josemaria project in Chile.

Struggling with declining ore grades BHP is planning to invest $10.8 billion over a period of 10 years in Chile starting with the Escondida operation

Instead of investing for growth, some have typically opted to boost shareholder returns with dividends and share buybacks.

"Our analysis suggests that valuation multiples are not responding to higher payout ratios and buybacks are no longer delivering strong returns making the pivot to growth more appealing," said James Whiteside, head of corporate for metals and mining at Wood Mackenzie.

"Diversified companies seeking relevance through big payouts aren't being rewarded, but the read across from copper miners is, investing in production growth pays."

HISTORICAL PRECEDENTS

"Historically, merger discussions often occur either at the very top of the cycle, because mining companies have a lot of money, or at the very bottom of the cycle, because there's a need to find ways to create value," said Christel Bories, Chairman of French mining group Eramet ERMT.PA.

The ball started rolling in April 2023 when London-listed Glencore GLEN.L attempt to buy Teck Resources TECKb.TO for $23 billion was rejected. Glencore instead bought Teck's metallurgical coal portfolio for $7 billion.

But it was when the world's biggest miner BHP BHP.AX went hostile with a $49 billion bid for Anglo American AAL.L, the mining world understood a restructuring of the industry was on the horizon.

"It's important in the mining world for BHP to kick off the M&A cycle because it makes it easier for other CEOs to sell the idea to their boards," said Liberum analyst Tom Price.

What has made selling the idea of M&A to company boards easier this time are forecasts of rocketing copper demand partly due to power grid replacement and upgrades and e-mobility which includes electric vehicles, scooters and bikes.

Information provider Benchmark Mineral Intelligence (BMI)expects copper demand from these two end-use segments will total 4 million metric tons in 2030 or 13% of global refined demand from 2.6 million tons or 9.5% this year respectively.

Overall, miners need to invest $200 billion to increase their copper production by 9.6 million tons, according to consultancy Wood Mackenzie.

China with its massive manufacturing sector accounts for roughly 55% and 50% of global consumption of copper and aluminium used in transport, packaging and construction.

"While stimulus is probably required, China's various strategies over recent years have only stabilised activity in its commodity-intensive property/infrastructure sectors. They remain quite weak," said Liberum's Price.