Why Australian miners are feeling anxious

The market and the miners were primed for good news from Beijing but they didn’t get it. Now it’s back to basics – or bids like Rio Tinto’s for Arcadium.

The shutdown of operations at BHP’s nickel smelter in Kalgoorlie this week is another example of the global twists and turns buffeting Western Australia’s mining industry.

A volatile market was clearly primed to celebrate good economic news, in part as a respite from the increasing degree of bad news in geopolitics. Mere speculation about the size of an expected new fiscal stimulus package from China had lifted sentiment and boosted an iron ore price that has spent much of this year in decline as the Chinese economy faltered.

But the upbeat mood quickly faded Tuesday – along with the big miners’ share prices – as the briefing from China’s National Development and Reform Commission failed to excite investors with any significant new measures.

How enduring optimism or pessimism about the Chinese economy will prove isn’t clear. Expert predictions about the momentum of price movements and trends in mining always seem more art than science.

The World Bank’s latest economic report also released Tuesday says China’s growth is expected to deteriorate next year with flow-on effects to Australia.

But iron ore prices and volumes – reduced or otherwise – will obviously remain the big driver of WA’s mining-heavy economy and all those valuable royalties paid to the state government.

Yet only two years ago the promise of critical minerals like lithium, nickel, cobalt and rare earths seemed to offer another lucky strike for a resources-rich state in a decarbonising world.

The expensive upgrade of BHP’s aged smelter, for example, seemed assured of a bright, new future as nickel prices soared amid enthusiasm about the crucial importance of nickel. Indonesia’s rapidly rising production levels, boosted by Chinese funding and its advanced technology, abruptly altered that financial equation for BHP. CEO Mike Henry pointedly ignored urging by federal and state governments that the company owed it to the community to stay open. Business is business.

By putting the facility into care and maintenance, BHP is keeping its options open for the end of the decade but the nickel outlook will have to substantially change to justify necessary investment. At least Kalgoorlie can console itself with strong gold prices showing no signs of weakening.

But the state’s hopes of developing a thriving lithium mining and processing industry have also been doused by the reality of plunging prices as global supply surges.

Before Rio Tinto revived Arcadium’s share price and prospects with rumours of a now confirmed, if non-binding, bid for the company, Arcadium had announced it would mothball WA’s Mount Cattlin mine to cut costs and concentrate efforts elsewhere.

This was one of several lithium mines in WA that had started production as prices began to surge along with warnings about scarcity of critical minerals like lithium required for the growth of electric vehicle batteries and other advanced technologies. Most of these mines are now shuttered or restricted as costs no longer stack up against a price plunge compounded by the consumer transition to EVs moving far more slowly than expected.

WA’s other ambitions to create more downstream processing of its resources included the establishment of three lithium hydroxide plants - also considerably curtailed since.

Unlike BHP, Rio Tinto is still willing to make a big bet on the long-term future of lithium, and Arcadium’s spread of mine assets across South America, Canada and Australia as well as lithium processing operations in Japan, North America and China.

Just how big a bet will determine the fate of the bid given Rio Tinto wants to avoid the impression it might be willing to pay too much.

Arcadium was created by a merger between ASX listed Alkem and the US company Livent under ex-Woodside chief executive Peter Coleman as chair to become a major international player in lithium.

The timing was hardly optimal for supporting the case for capital investment or market confidence. Rio Tinto’s massive balance sheet can afford to be more patient. CEO Jakob Stausholm shrugs off the outlook for lithium prices over the next year or two, focused instead on what he expects to happen in the next decade or two.

BHP is far more interested in the prospects for copper mining, short-term and long-term. After its own offer for Anglo American and its copper assets was spurned earlier this year, BHP insists it has plenty of other growth options – including in copper.

“The need for responsibly mined Australian copper is clear,” its glossy television ads insist. “It’s happening right now at BHP.”

What both bids have in common is the recognition that it is much harder and takes much longer for even the biggest resources companies to grow through developing new mines rather than acquiring existing ones in a range of countries.

The Australian mining industry is confident it has warded off the threat of more intrusive federal environmental laws along with the Greens’ demands for a “climate trigger” under Tania Plibersek’s now thwarted “nature positive” reforms.

Anthony Albanese was warned by both the state Labor government and the miners this would have been disastrous in a state where he knows he needs to consolidate Labor’s seats won at the last election.

But the combination of protracted approval processes, lack of infrastructure, new industrial relations laws and uncertainty about prices despite very high costs ensures development of any new mines will only get tougher.

Even the relentless Gina Rinehart has curbed plans for her next proposed iron ore mine project in the Pilbara. The Australian Financial Review’s Peter Ker reports the Mulga Downs mine her private companies plan to build will produce 40 per cent less iron ore than anticipated two years ago with the mine’s size adjusted to address state environmental and heritage requirements.

The supercycle keeps turning.