THE ECONOMIST: Should BHP, Rio Tinto and Vale learn from Chinese Rivals?

Many of the world’s richest deposits of iron ore and copper predate the breakup of the last supercontinent, Pangaea, around 200 million years ago.

Tectonic shifts subsequently scattered the global economy’s two favourite metals around Earth’s surface. An abundance of the iron ended up in what are now Australia and Brazil. Prodigious seams of pre-Pangaeatic copper settled in places like central Africa.

In more recent times — extremely recent, geologically speaking — the mining industry formed to dig up this ancient bounty has been undergoing its own version of continental drift. Its business model is splitting asunder, say Western bosses.

On one side are multinational giants such as BHP, Rio Tinto and Vale. They aim to maximise returns on the capital they put to work while taking a cautious approach to risks. On the other are much more gung-ho Chinese rivals. As iron ore and copper become scarcer, this could spell trouble for the Western firms.

The critical minerals which get the most attention tend to be things like lithium, used in batteries, and rare-earth metals with exotic names such as vanadium, which go into electronics. They are the reason Donald Trump covets Greenland and access to Ukraine’s subterranean bounty, which he has demanded in exchange for American help brokering peace with Russia.

Iron ore and copper, which account for perhaps half the value of all metals mined worldwide, provoke no such conniptions.

Yet rare earths and lithium are in fact commonplace, just fiddly and dirty to extract. With a few domestic plants America could “solve its rare-earth problem”, reckons one mining executive, at a cost of perhaps $US20 billion ($32b) to $US40b —a mote of dust in the pile that is the $7 trillion-a-year federal budget. The two big base metals, in contrast, have always been hard to come by, and are becoming increasingly so as known deposits are shovelled up.

For most of the past four decades giant Western miners did the bulk of the shovelling. They were spurred on by globalisation, which was emerging as the most powerful force shaping the era that some geologists have christened the anthropocene.

The rise of Japan in the 1980s and of China starting in the 2000s boosted demand for steel and copper cables. Between 2010 and 2014, as China became obsessed with building and metals prices soared, BHP, Rio Tinto and Vale ploughed a combined $US200b into capital investments.

That left the base-metals behemoths exposed when prices plunged. From 2015 to 2019, the trio’s collective annual pre-tax profits averaged $US30b, compared with nearly $60b in the preceding five years. At one point in early 2016 all three were worth less than the book value of their assets.

Returns on those assets had just turned negative, down from 15-25 per cent in mid-2011. The combined market value of the three collapsed from more than half a trillion dollars in 2011 to barely over $US100bn five years later.

Investors’ displeasure at the capital indiscipline forced the miners to think carefully about where they put their money. Each prospective project is now scrutinised for its profit-maximising potential. Capital spending has been reined in. Profits have rebounded. Market capitalisations have not returned to the lofty heights of the early 2010s but are no longer on the floor.

As the Western companies have grown less adventurous, state-controlled Chinese rivals have turned more so. Some of this has to do with greater Chinese tolerance for dodgy jurisdictions.

Listed but state-controlled firms such as Zijin Mining and CMOC piled into the conflict-torn Democratic Republic of Congo (DRC), keen to get their hands on that central African copper, as well as the world’s biggest known reserves of cobalt (which is also important in battery-making).

A Chinese-led consortium did the same with a big chunk of the gargantuan Simandou iron-ore project in Guinea once held by Vale (Rio Tinto retains an interest).

It is true that Chinese companies tend to be less constrained than Western businesses by concerns over human rights, environmental vandalism and graft. To level the playing field, and “further American economic and national security”, Mr Trump has ordered his Justice Department to stop enforcing the Foreign Corrupt Practices Act.

Yet the Chinese have two even bigger advantages. The first, shared with the rest of Chinese industry, is a carefree attitude to profits. Zijin’s operating margin of 11 per cent is less than half that of Rio Tinto and Vale, and a third of BHP’s. Jiangxi Copper ekes out 2 per cent. Despite this they enjoy a lower cost of capital, thanks to their state sponsor.

Digger, thy neighbour

Disregard for the bottom line allows the Chinese to move faster — their second advantage. It took CNMC, a fully state-owned Chinese miner, less than four years to develop the Deziwa copper-and-cobalt mine in the DRC, from the signing of a joint-venture agreement with a Congolese partner to first ore shipments.

By comparison, the paperwork for BHP’s planned Resolution copper mine in Arizona was first filed in 2013, with no end in sight.

Even in places less bureaucratic than America, Western firms can take three times as long to get mines going than their Chinese rivals, bosses admit. That is because BHP and its peers must keep their shareholders happy, which means painstaking due diligence to justify each project on its own merits.

The Chinese favour a copy-paste approach that may result in operations that are less optimal. However, they start yielding results much sooner.

Speed mattered less when rock-bottom interest rates made cash far in the future worth nearly as much as cash tomorrow. As interest rates have risen, so has the value of alacrity.

Mining bosses mustn’t sacrifice prudence. But they may need to speed up their sedimentary decision-making.