Raw Materials Group (RMG) says that while the industry consolidates through mergers and acquisitions, investment is needed in exploration. “Persistent high metal prices have boosted corporate profits in the industry. To secure access to metallic mineral resources, many mining companies have chosen to acquire competitors, resulting in several mega mergers. While this trend is leading to a consolidation of the industry, it does little to increase the global supply of metallic minerals. More attention needs to be paid to exploration and new technology development and research.
“Recent cross-border merger and acquisitions (M&As) have involved some of the world’s largest multinational companies (MNCs) in the metal mining industry. In 2006, the total value of such transactions reached a new record of $55 billion. Among the top deals were the takeovers by Companhia Vale do Rio Doce (Brazil) of Inco (Canada) and by Xstrata (Switzerland) of Falconbridge (Canada), each valued at about $17 billion. Preliminary data from RMG indicate that the intense M&A activity was sustained in 2007. In the first three quarters of this year another 80 billion was spent on new M&As, including the merger between Rio Tinto (UK) and Alcan (Canada) – valued at $38 billion.
“These and other M&As have increased the level of concentration. While the top 10 metal mining companies in 1995 controlled about 26% of the total value of all non-energy minerals produced globally, that share was about 33% in 2006.
“While M&As can be a quick route for a company to access mineral reserves, they do not by themselves expand the supply of metal minerals. The commodity price boom has led to more exploration investment. For example, global private exploration investment in non-ferrous metals rose from $2 billion in 2002 to over $10 billion for the whole of 2007. While this is a significant increase, it is very small compared with the more than $220 billion that were spent on M&As from 2002 to 2006.
“In the present boom it would be dangerous to be complacent that the level of expenditure has increased. With the growing demands for metals all over the world, there is a growing need for discoveries of new orebodies. However, the level of non-energy mineral exploration successes has been low in the past decade. Given that the metal deposits to be found in the future most likely are deeper, lower grade and located in more remote areas the funds necessary to locate a new deposit should realistically increase.
“This raises the issue of the need to develop new exploration techniques and methods, and thereby to invest in research and development (R&D). Even if exploration expenditures are included, the R&D intensity of the metal mining industry is very low compared with other industries. In the early 2000s, when metal prices were depressed, many mining companies slashed their R&D as well as exploration expenditure and handed over greater responsibility to the equipment suppliers and junior exploration companies.
“In order to make the discovery of deeper deposits more cost-effective, and to address various environmental and social objectives, the industry needs to invest more in R&D. The surge in metal demand and use primarily from selected developing countries will make it necessary to produce more metals and release less harmful emissions to water and air and it is not likely that this equation will be solved without more R&D and more R&D quickly.
“The location of exploration expenditure is subject to various factors including the prospectivity of the country, geopolitical stability and sovereign risk. During the past decade exploration expenditures have increased especially in Africa, Canada, the Russian Federation and Northern Asia. Meanwhile, the shares of global exploration expenditure of Australia and the Pacific have fallen. Future exploration investments are likely to be undertaken increasingly in developing countries and transition economies, including in the Asian regions of the Russian Federation, in China and Mongolia.
“A detailed assessment of the development and policy implications of the evolving role of MNCs in the extractive industries will be provided in the World Investment Report 2007. The report, which is published by the United Nations Conference on Trade and Development on October 16, draws in part on data provided by RMG.