Aussie Mine 2021: The rise of the critical minerals that will shape Australia’s low-carbon energy future

PwC’s latest report of Australia’s mid-tier miners shows record market capitalisation and highlights the growing value of battery and other critical minerals.

Battery and other critical minerals that are key to a low-carbon energy future now represent a third of the value of Australia’s top 50 mid-tier miners – and for the first time have climbed higher than gold companies as lithium and nickel demand continue to soar.

And this will continue to grow, as the demand for critical minerals increases to support the infrastructure needed to achieve net zero. In short, mining is critical to a low carbon global economy.

These were the key findings of PwC’s 16th annual Australian mining publication, Aussie Mine 2021: Critical mining, which provides industry and financial analysis on Australia’s MT50 – the 50 largest ASX mining companies outside of the ASX50.

The report reveals:

• The MT50 enjoyed market capitalisation increases of 50 per cent to a record $113 billion at the end of the financial year
• Record earnings and operating cash flows have supported a new period of growth in critical minerals, gold and energy transition metals such as copper
• The values of all mineral groups – other than gold – increased significantly from the heightened uncertainty of mid-2020
• The market value of iron ore companies increased by 178 per cent – reflecting the record price period from May. Iron ore prices have subsequently halved
• Only six companies as part of the MT50 experienced a decrease in market cap.

The MT50 movers and shakers of 2021

While gold companies continue to dominate the MT50 – making up 36 per cent of companies and 33 per cent of overall value – critical minerals are catching up, making up 34 per cent of the MT50 and accounting for 31 percent of overall value. Four coal companies remain in the MT50.

“In times of great uncertainty, we often witness a flight to gold – and that was certainly the case in 2020 – but this year, critical minerals are catching up, reflecting changes in investor intentions on climate solutions.” – PwC Australia National Mining Leader Debbie Smith

The volatility of recent years across commodities is showing no signs of slowing down, with faster than expected declines to iron ore prices and further increases to coal and critical metals prices bearing on the Australian market since the end of our review period.

Opportunity knocking in critical minerals

According to Aussie Mine, the transition to a low-carbon economy will require trillions of dollars of investment, and critical minerals will play a critical role. Projected demand for many battery and other critical minerals are expected to outstrip near and medium-term supply capacity, necessitating more investment to meet demand.

“Over the next decade, electric vehicle production will increase ten-fold, and charging infrastructure will need to grow by 30 times and installed renewable power will need to triple in capacity.” – Aussie Mine 2021 Lead Partner, Marc Upcroft.

Australia is poised to be a global leader in the new energy economy, due to its natural endowment of critical minerals such as lithium, nickel, copper, graphite, rare earths and cobalt – not to mention its track record and a credible and reliable exporter of commodities.

Improved ESG strategies are leading to higher shareholder value

To test the presumption that strong environmental, social and governance (ESG) portfolio returns may simply be a measure of strong earnings, PwC Australia tested the relative returns of a positive momentum portfolio with significantly improved ESG credentials, compared with one which has achieved declining ESG scores – testing both for returns by value weighting, and equal weighting to remove any large company biases.

In both comparisons, we saw strong outperformance from the positive momentum portfolio, even with a lower earnings base, which seemingly debunks the argument that ESG performance only comes after strong earnings.

PwC Australia’s analysis also finds that portfolios with strong ESG credentials are able to achieve a lower required return on capital from either a reduction in risk of future earning estimates, or investors finding them more attractive for portfolio purposes – or both.

“Our conclusions strongly support the benefits of sustainable value creation from improved ESG strategy and performance. Many of these companies have demonstrated a proven track record of ESG turnaround - and their shareholders have reaped the benefits.” – Debbie Smith

Transformational deals on the rise

According to PwC Australia’s Aussie Mine, the MT50 has seen a number of transformational deals in recent years – particularly across gold, critical minerals and copper.

While the number of completed deals in 2021 was at the lowest level since 2017, the $8.3 billion value of these deals was significantly higher. Gold is again the dominant theme in deal activity, both by value and number.

“We expect the higher level of deal activity to continue in FY22. In particular, we anticipate continued consolidation of gold companies and interest in increased exposure to battery minerals, other critical minerals and energy transition metals.” – Marc Upcroft

A good story to tell? Communicating tax contributions

PwC Australia’s analysis indicates the MT50 are playing their part and have a good story to tell when it comes to tax and royalty contributions. Income tax payments alone among the MT50 were up $551 million in the past financial year to $1.6 billion – an increase of more than 50 per cent.

However, fewer than 20 per cent of the MT50 report on tax in a substantial way – and within that cohort there is a large variance when it comes to the level of detail in their reporting.

The tax and royalty contributions of miners have never been more in the public spotlight. Governments around the world are not only grappling with a combined health and economic crisis, but how to fund it. Add surging ESG expectations and it’s clear miners have a very important job to show how they are making a positive fiscal contribution to society.

The expectations around tax governance and transparency will only continue to increase. The bar seems to be set even higher for miners, particularly in the more emissions-intense parts of the sector. The MT50 shouldn’t be so shy about the positive contributions they make to governments.

“The MT50 should embrace the increasing expectations, because their story is not a bad one to be told.” – Marc Upcroft

To learn more about the critical minerals opportunity and the outlook for mid-tier mining in Australia, download the report here. Or watch PwC’s mining specialists discuss Aussie Mine 2021’s key findings here.

Contact

Debbie Smith
Mining Leader
PwC Australia
debbie.smith@pwc.com

Marc Upcroft
Aussie Mine 2021 Lead Partner
PwC Australia
marc.upcroft@pwc.com