Three mining stories on as many continents on Thursday have more in common than meets the eye. Each, in its own way, is a rational response to the commodities cycle as demand slows, input costs rise – especially on older mines – and capital is scarce. Most mining companies have entered this downturn with strong balance sheets. But they know that if they do not moderate capital expenditure and reallocate available capital to new or existing long-life, low-cost projects, investors will ask for their money back.
First up, Vancouver-based copper miner First Quantum Minerals is circling Inmet Mining. The prize is Inmet's 80-per-cent owned, $6.2-billion (and ideally located) Cobre Panama project in Central America, with its low-cost potential. Doubling up on the red metal makes sense given its price resilience and near-term supply constraints. First Quantum is keen enough to be bidding against itself. Its second proposal, also rejected by Inmet, puts a $4.9-billion value on the Toronto-based miner, still only a 24-per-cent premium to its undisturbed price.
Meanwhile, Rio Tinto's decision to cut $5-billion of costs over two years – most of them in its Australian coal and aluminum operations – should not be seen as anything other than heavier bets on its own Oyu Tolgoi copper mine in Mongolia and improvements to its prime iron ore assets in Australia's Pilbara region to boost output. It can land iron ore in China at $47 a tonne against a spot price of about $120.
Finally, in South Africa, Gold Fields is spinning off two mature mines. With rand input costs rising at twice the clip of the decline in output, it is rightly reducing its exposure. The irony of the mining industry's various attempts at cost cutting and living within its means is that its efforts have so far gone unrewarded as investors, burnt in the last cycle, sit out this one.