Mining optimism defies market turbulence
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Western Australia’s resources sector recorded its highest level of investment in almost a decade in 2022-23.
Government figures show the ongoing investment boom in WA delivered more than $27 billion to the mining and petroleum sectors over the 12 months to the end of June.
A multi-year record is not to be taken lightly, though the fine print in the Department of Energy, Mines, Industry Regulation and Safety’s industry activity indicators outlines a factor all-too-keenly felt by operators on the ground.
“This result was largely driven by new and expanding lithium projects such as [Covalent Lithium’s] Mount Holland and [Albemarle’s] Kemerton, iron ore projects such as [Fortescue’s] Iron Bridge, [Mineral Resources’] Onslow and [Rio Tinto’s] Western Range, as well as [Woodside’s] Scarborough project,” it said.
“It also likely reflected the impact of cost inflation.”
Inflation in the resources sector is not a new story, but against a shrinking profit margin for operators in the nickel and lithium spaces, the pressure has been growing.
The price of nickel concentrate on the London Metal Exchange took a dive over the course of 2023, and has traded at around $US18,000 per tonne in recent months.
Nickel previously climbed to unprecedented highs in March 2022, trading temporarily above $US100,000/t: the result of a short squeeze, rather than pure market factors.
It then descended to its current trading price, where it is likely to be economically borderline for even the largest players for as long as end users place price above green credentials.
First Quantum, IGO, Wyloo and Panoramic Resources have each made moves to scale back operations in the face of low prices.
BHP is in the process of reviewing its nickel operations, including the 3,000-strong workforce at Nickel West, which, if closed, would deliver a hammer blow for the state’s nickel sector.
BHP received an average price of $US16,581/t for its nickel metal product in the March quarter. A decision on Nickel West, and the West Musgrave development project, is expected by August.
Lithium’s price battles feature less in the news cycle but are equally profound to those who dabble in the volatile commodity.
However, while the long-term outlook for nickel remains clouded – BHP chief executive Mike Henry was quoted in February predicting depressed market conditions “for years ahead” – those in lithium production appear to be in for the long haul.
The price of spodumene concentrate came off around 84 per cent in the year to March, and averaged $US1,000/t in February, according to the government’s Resources and Energy Quarterly.
The price of lithium hydroxide traded at $US13,350/t the same month, having averaged $US75,393/t in November 2022.
Those with a first-mover foothold, such as Pilbara Minerals and Mineral Resources, have backed in the battery metal for the long haul and are weathering the interim turbulence.
But it’s against that backdrop that some, Liontown Resources included, are pushing forward to deliver the next generation of mining projects.
The trend in upcoming projects suggests those more traditional to the WA resources skillset – dig it up, ship it out – are less prone to cost blowouts than those with processing elements.
Liontown has battled cost escalations at its Kathleen Valley flagship over the course of its development, along with a takeover bid from Albemarle, which was scuppered by Hancock Prospecting’s intervention mid last year.
The company is progressing the development, with a view to delivering a project capable of 3 million tonnes per annum of spodumene production in the middle of 2024.
An expansion to 4mtpa has been placed on the backburner for now.
Liontown also renegotiated the project’s debt facility from $760 million in a deal that fell apart as a result of the commodity’s downturn to $550 million with a syndicate of financiers, including government entities.
Despite the headwinds, the lithium developer’s chief executive, Tony Ottaviano, told Business News the project was on track to meet its original schedule, a notable achievement in an era of development delays.
“There have been challenges, no doubt,” Mr Ottaviano said.
“Few companies could have the price for their main product fall by ninety per cent in twelve months and not be affected in some way.
“But Kathleen Valley is a worldclass, long-life asset, and the renewed support we have seen from our lending syndicate as well as our shareholders via the equity markets speaks to that quality, and the significant value it will generate over the long term.
“The one thing our team hasn’t done in the face of those challenges is lose focus on the main task at hand: bringing Kathleen Valley into production.”
A key point of difference for those trading in emerging battery metals markets, such as Liontown, is that they benefit from a relatively low exposure to spot prices.
The company’s first five years of production are largely tied up in offtake agreements with electric vehicle blue chips such as Telsa, Ford and LG Energy Solution.
Only a small portion of production over the period will be sold into the spot market.
It allows Liontown to push ahead at a time when many are scaling back.
In January, Core Lithium suspended mining at its Finnis spodumene project in the Northern Territory, while Albemarle has deferred plans to deliver a fourth lithium hydroxide processing train at Kemerton in the state’s South West.
Mr Ottaviano said Liontown would keep an eye on the responses of other players in the market and how they may affect the outlook for the baseline battery metal price.
“The March quarterlies, which are in the process of being handed down, will be instructive as far as how existing lithium producers have been impacted by – and are responding to – the recent price decline,” he said.
“We have already seen the deferral of some expansion projects and evidence of higher cost supply coming out of the market.
“Not many of those developments on the supply side have been factored into price forecasts published by the research houses and investment banks.”
Liontown estimates a cash cost of $651 per dry metric tonne of spodumene, excluding royalties, over the first 10 years of production life at Kathleen Valley.
“We anticipate that Kathleen Valley will come online into a stronger lithium market and that prices will normalise at more sustainable levels over time, as the market matures,” Mr Ottaviano said.
Kathleen Valley is in a race with Mineral Resources’ Onslow iron ore project to be the state’s next major operation to come online.
It will do so with the financial backing of loan facilities from the government-owned Clean Energy Finance Corporation and Export Finance Australia, support that has been vital to the project as it closes in on its milestone.
“There is a case to be made for government support if Australia is to have a vibrant and diverse lithium industry,” Mr Ottaviano said.
“Other nation states have flexed their muscle in unprecedented ways, which creates new opportunities but also risks Australia becoming less competitive in the global market.
“Lithium is still a fledgling industry and susceptible to extreme price volatility, as we have seen, and now is the time when government support can have maximum impact.”
Consolidation
Producers are only one part of the resources ecosystem affected when mines close or scale back, with contractors often bearing the brunt of the on-ground effects.
That impact is disruptive, but less pronounced on the balance sheet at times like the present in WA, with the workforce at historically tight levels.
Global diversified mining services operator Perenti – which became one of the world’s biggest drill fleet owners in 2023 when it purchased rival DDH1 – was impacted by closures at both Panoramic Resources’ Savannah nickel mine and IGO’s Cosmos nickel project in January.
Both projects engaged Perenti’s wholly owned subsidiary Barminco.
Perenti chief executive Mark Norwell said the company was starting to notice some easing in the WA job market for skilled mining employees, a positive in what were challenging times for project operators.
“The two closures [at Savannah and Cosmos] helped us fill roles we were already looking to fill and supported some smaller projects as they have come online,” Mr Norwell told Business News.
“The global and diverse nature of our business supports this. In fact, there were no redundancies as part of this transition and the vast majority of our Barminco employees from Cosmos and Savannah are still with the business.
“Everyone who wanted to stay with the business stayed.”
Diversification and scale are commonplace in the mining contractor sector, which has witnessed a spate of merger and acquisition activity in recent years.
Perenti is a central figure in that, having acquired the underground miner Barminco back in 2018 in a company-making deal.
“One of our key business strategies is diversification across a range of commodities and geographies, which gives us the capacity to redeploy people and assets when situations like those faced by Barminco at Savannah and Cosmos require a flexible response to changing client needs,” Mr Norwell said.
Having grown to be largely overseas focused, Perenti’s $300 million move for driller DDH1 last year recalibrated its business to more than 50 per cent domestic work.
“We had been in discussions over several months with our timing based on an optimal window that existed to ensure the transaction was beneficial for both sets of shareholders and allowed us to complete the deal,” Mr Norwell said.
It came only a year after DDH1 made a $110 million deal for Swick, the same year mining services competitor Thiess moved on MACA.
Another market leader, Macmahon, surprised the market with a $127 million deal for civil contractor Decmil announced in April, in what marked a shift away from its core mining business.
Mr Norwell said the ongoing consolidation of the mining services sector was effective when done right.
“The competitive nature of the mining services sector means consolidation can be a catalyst in driving improved business efficiencies,” he said.
“We have also seen a trend in mining services businesses building complementary ‘capital light’ service offerings, again through M&A.
“While M&A has a role to play in supporting growth aspirations, it is critical that you get the fundamentals and purchase price right, otherwise the long-term performance of the business will be significantly impacted.”
Perenti’s acquisition of DDH1 has led it to create a new drilling services division offering a range of underground and associated offerings.
The division, which combines Ausdrill and DDH1’s brands – Swick Mining Services, DDH1 Drilling, Strike Drilling and Ranger Drilling – is led by DDH1 chief executive Sy Van Dyk.
The division is one of four at Perenti along with contract mining, mining services and idoba, a tech-focused consulting firm.
Perenti anticipates growth in its underground divisions in the years ahead, despite recent setbacks in the local market for lithium players.
“Demand for metals and minerals – particularly those needed for the energy transition – is growing very rapidly and will continue to do so,” Mr Norwell said.
“At the same time, these minerals and metals are getting harder to find. They are in more remote locations, and deeper, which will see an increase in underground mining into the future.”