Risk-averse market overlooking mining opportunities in rapid growth economies
Mumbai, 27 November 2013
Risk-averse markets are over-discounting mining ventures in rapid growth markets and as a result opportunities in “the future growth engine for the mining industry” are being overlooked, says EY.
A new report from EY released today, Mining in rapid growth economies, details the mining investment trends to these markets and the key risks faced by investors.
EY Global Mining & Metals Leader Mike Elliott says emerging markets will become the future growth engine for the mining industry, with the lion’s share of mineral reserves for most commodities.
“While these are not easy places to invest in, by doing the right homework and risk management, there are enormous growth opportunities for the savvy investor,” says Elliott.
“Risk appetites will increase as growth comes back on the agenda, but these are not markets that you can jump into overnight. Longer lead times and on the ground insights are required to reliably invest in these markets.”
Elliott says investment will increasingly be directed toward rapid-growth countries as quality resources in developed countries are depleting, while those in rapid growth and frontier markets offer growth opportunities with good-quality resources.
“However the existence of mineral reserves may not translate into proportionate mineral production, with many challenges bringing a mineral deposit to production in these markets.” Elliott says mining investors in rapid growth markets typically face greater exposure to corruption, significant lack of infrastructure challenges, increasing resource nationalism, more vocal stakeholders and heightened social license to operate issues.
“The key is to understand and access the risks for each market. Those who don’t do their homework may misprice the risks and will not be in a position to seize the opportunities ahead,” he says.
“Low valuations and cash-strapped juniors have set the stage for a buyers’ market, and while global mining and metals companies remain cautious about investing, private capital interest in the sector continues to gain momentum.”
The growth of global minerals supply from rapid-growth economies has far out-weighed the supply from developed economies, effectively accounting for all of the global production growth of aluminum, copper and steel in the past 10 years.
Rapid growth economies’ share of exploration expenditure has increased from 40% at the beginning of the last decade to about 60% now.
“Despite the large potential of the rapid-growth economies, it is difficult to ignore the challenges associated with investing in these markets. Miners in the rapid-growth markets are finding it harder to secure capital as investors become more risk averse and increasingly conservative around their portfolios,” says Elliott.
“There are ways to assess and mitigate the risks, and those that do will be best positioned.”
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