The ‘concern of lacking out’ is a timeless human situation repeated for eons and ingrained in human DNA. But, it appears to carry a particular place within the mining trade.
A psychological situation that extends from the small-scale investor to the highest canine at a serious mining agency.
That’s why M&A exercise can supply a helpful barometer for gauging our place in a broad commodity-wide cycle… It’s the size judging total market hubris or lack thereof.
However the first, maybe most essential level… a single giant deal (e.g., BHP’s current bid for Anglo) shouldn’t trigger concern.
In different phrases, the formation of a serious high.
You see, nearly 20 years in the past, BHP was in pursuit of one other main mining company.
Like Anglo, BHP was after a longtime, multi-commodity producer with a deep historical past of mining… The corporate within the majors’ crosshairs was WMC, formally referred to as Western Mining Company.
Based in 1933, WMC constructed a legacy of discovering world-class deposits and bringing them into manufacturing.
This was one of many nation’s most iconic corporations, pivotal in making Australia’s mining trade world well-known.
It found one in all Australia’s largest mines, the large copper-gold Olympic Dam deposit in South Australia. Since its discovery in 1976, this venture has continued to ship wealthy rewards to its homeowners.
However in 2005, BHP paid a lofty A$9.5 billion for WMC and its basket of property. That’s equal to round A$15.4 billion in at present’s cash.
We’re nonetheless a good distance from the highest
Because the WMC acquisition confirmed, 2005 was removed from a market peak. In reality, commodities continued to rally for one more six years into 2011.
Like at present, 2005 was the start of one thing a lot bigger.
But, the sheer variety of M&A offers going down can measure the market’s boiling level… That occurred on two events over the past commodity cycle:
Supply: Mergers, Acquisitions & Alliances
Right here, blue bars symbolize the variety of offers; the brown line measures their total worth. I’ve annotated the M&A peaks, that are proven as inexperienced circles.
As you may see, 2007 marked a lofty yr for acquisitions.
That efficiently pinpointed a high in commodity markets earlier than the 2008 subprime disaster took maintain. Commodity costs fell sharply… M&A exercise cooled.
That was solely short-term. As you may see, a second inexperienced circle reveals the following peak in M&A exercise over 2010-12.
This was a very spectacular time for commodity markets.
M&A on steroids
The 2010 to 2012 interval would mark the finale of one in all historical past’s most euphoric commodity booms.
As a geologist working in Zambia for Equinox Minerals on the time, I had a singular on-the-ground perspective.
In early 2011, Equinox was beneath a takeover bid supply from the Chinese language-owned mining conglomerate MMG. A couple of weeks later, Barrick trumped MMG with a $7.3 billion takeover supply.
That was sufficient for Barrick to seize maintain of Equinox’s copper property.
Symbolically, the deal befell only a few weeks after copper reached its all-time excessive of round $4.48/lb in February 2011. Barrick had captured its prize, however the pleasure was short-lived.
Because the above graph confirmed, M&A exercise was feverish alongside traditionally excessive commodity costs.
However as some might keep in mind, the push to amass tasks and outbid rivals got here at an ideal value.
Simply two years later, Barrick, the world’s largest gold miner on the time, suffered a humiliating $4.2 billion write-down on the Equinox deal.
Barrick’s CEO admitted in shareholder communications that the mining big grossly overpaid in its race to seize this Zambian copper asset.
A couple of months later, the corporate’s CEO was given the boot.
Clearly, mining executives are simply as liable to overpaying because the on a regular basis investor.
And Barrick was removed from alone on this race to the underside…
In 2013, the CEO of mining big Rio Tinto, Tom Albanese, was fired after the corporate wrote off greater than $14 billion following a collection of poorly timed acquisitions.
BHP, Rio Tinto, Glencore, Barrick, and plenty of others participated within the M&A folly that befell on the peak of the final mining growth.
Undoubtedly, the following technology of mining executives is destined to repeat the identical errors—as are the legions of buyers.
However what does BHP’s newest transfer on Anglo sign? Is it a measured takeover try akin to BHPs 2005 acquisition of WMC?
Or does it symbolize a market stuffed with hubris, counterbids and extreme premiums?
Clearly, it’s the previous. We’re nonetheless removed from a 2011-style high.
Regardless of elevated commodity costs, junior mining shares proceed to commerce round multi-year lows.
This can be a key purpose buyers must be taking a look at this sector from a worth perspective.
James Cooper runs the commodities funding service Diggers and Drillers . You can too observe him on X (Twitter) @JCooperGeo
