Worsening economic outlook, weak metals prices marred mining in Q2, says S&P Global

Analysts at S&P Global Market Intelligence have pointed the finger at a worsening global economic outlook and softer metals prices for dragging down global mining activity in the three months through June.

In its quarterly ‘State of the Market: Mining Q2’ report released this week, senior analyst Sean DeCoff said metals and mining companies’ valuations had been significantly impacted by these market trends, despite the metals and mining indices outperforming the S&P 500 during the period.

“[There is] a lot of volatility in the markets in the macro-economic outlook, and that certainly has translated into certain indices faring much poorer during the first half of this year,” said research director for S&P Global Commodity Insights Mark Ferguson, during a webcast.

In the wider context, the S&P 500 put in its worst first half in 50 years. However, Ferguson said the softer numbers translated into depressed equity market support for the mining industry throughout the timeframe.

“The TSX Global Mining and the ASX Metals and Mining indexes fared much better through April, and that was supported by prices maintaining high levels into early April. But since then, those indices have also struggled,” said Ferguson.

The analyst noted that S&P’s monthly industry monitor series of reports tracks the exploration sector in more detail and compiles the aggregate market caps of about 2,800 publicly listed companies globally. The June quarter saw a retreat in the aggregate market cap of this group of companies despite S&P’s Exploration Price Index, which is a basket of commodities for which exploration is a crucial component. “It remained relatively strong even into the June quarter, near all-time highs benchmarked back to the June quarter of 2008,” said Ferguson.

He flagged weakening equity market support for the sector, given the recent retreat in metals prices.

“If we look at the June quarter activity levels, we certainly have seen subdued equity market support for these companies. It hasn’t fallen off a cliff completely, but it’s definitely down compared to all of 2021, and even the second half of 2020. Gold held sway through much of this period and is a dominant factor in exploration spending,” he said.

On a complete basis, more than US$10 billion was raised across the industry. A significant component was debt offerings until April, when metals prices started to retreat and before the interest rates began to rise rapidly across the various central banks.

Notably, roughly US$3 billion was raised for the Asia region, which reflects PT Freeport Indonesia’s series of three debt offerings around April that were supposed to be directed towards building refiners and smelters. “If you back those transactions out, it certainly makes the total raised in the June quarter much more subdued,” said Ferguson.

Despite the macro headwinds mounting, exploration drilling activity pulses ahead. Spending on gold outstrips budgets for finding other commodities by a significant margin over the past 4.5 years.

Although a renewed focus on copper exploration emerged from March 2021, this activity is expected to be insufficient to meet the wall of demand approaching from 2025 onwards.

“Despite gold activity starting to be suppressed in the distinct projects drilled, copper has offset some of that decline. And as a result, the June quarter was still a very robust period for drilling activity on the ground,” remarked Ferguson.

“And this is, again, a reflection of money raised in previous quarters and last year that has supported exploration companies in maintaining their programs despite the more recent weakening of metals prices.”

S&P further flagged its Pipeline Activity Index, which has fallen to 159.5 for gold in the quarter, a two-year low, as some drilling activity waned due to weakening financing streams. In contrast, at 94.8, the base and other metals category achieved the highest level since the second quarter of 2008.

In terms of mergers and acquisitions activity in the quarter, S&P noted the number of deals rebounded quarter-on-quarter, but the total deal value was skewed by Gold Fields’s (JSE: GFI; NYSE: GFI) US$6.6 billion offer for Yamana Gold (TSX: YRI; NYSE: AUY).