5 minute read 7 May 2020
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COVID-19: Why focusing on capital discipline can help miners recover

By Robert Stall

EY US Mining & Metals Leader

Transaction advisory lead in mining and metals, solving acquisition, divestiture and capital allocation challenges in a time of disruption. Avid outdoorsman, cook, wine enthusiast and father.

5 minute read 7 May 2020

Strong capital discipline is helping miners weather volatility, but bolder investment decisions may maximize returns in recovery.

This is part of a series of articles relating to the impact of COVID-19 on the mining and metals value chain, supplemented by results from the latest EY Global Capital Confidence Barometer.

Increased volatility in commodity prices and weakened supply and demand for some commodities has challenged companies across the world, although the degree of impact has varied across markets. We’ve seen a sharp drop in the prices of base metals, such as copper, and a surge in gold as investors seek a safe haven from global uncertainty. Across the sector, the impact on capital and liquidity is significant and requires companies to think carefully about navigating immediate pressures while preparing for the future.

Now: strengthen liquidity and reduce costs

Throughout this crisis, the priority of mining and metals companies has been to protect their people. But they also acted fast to maximize liquidity by preserving capital, reducing costs and prioritizing the operation of lower-cost assets. These moves reinforce several years of focused effort across the industry to strengthen balance sheets by reducing debt, extending debt profiles and instilling capital discipline. These are now paying off and will continue to yield benefits through what we expect to be a prolonged decline in commodity prices and lower demand over the next 12 to 18 months. The impact of country-specific stimulus packages and their focus on infrastructure spend vs. general economic spend will have a direct impact on many parts of the sector.

With this in mind, companies are taking a cautious approach to capital spending, delaying investment decisions, reducing capex guidance and deferring dividend payouts. We expect to see declining exploration budgets and preproduction assets put on hold, as well as a deferral of sustaining capital and nonessential maintenance.

As companies reduce costs, they still need to be mindful of managing contractual obligations to spend and take a long-term view. Disputes may arise, but these are more likely to be resolved through penalties and renegotiation than default.

Next: consider opportunistic M&A

Mining and metals M&A deal value and volume 2017-1Q 2020

ThomsonOne, EY analysis

M&A in mining and metals was down in the first quarter of 2020, with deal value and volume declining 31.6% and 3.8% year-on-year, respectively. Major deals that were already in progress continue to close. Now, however, as the pandemic continues to unfold, one-third of mining and metals executives surveyed during a recent EY webcast say they have put all M&A on hold because of the impact of COVID-19. The effect of declining commodity prices on valuations is a big reason why companies may postpone selling at this time. Distressed companies and assets are likely to receive support from banks, governments or suppliers to survive the crisis.

How mining and metals M&A outlook affected by COVID-19

Source: EY M&M webcast, 9 April 2020

While capital available for acquisitions will be limited, we are likely to see miners with strong balance sheets seize the opportunity to grow their market share. Companies may expand exploration potential by acquiring junior players or diversifying into new minerals, and we would expect to see further consolidation in the coal, gold and steel markets as well as investment in gold projects that have already started development.

Some miners will also seize the opportunities of M&A to rethink supply chains in the wake of COVID-19. Companies may pursue deals to diversify their sources of raw materials, sell off infrastructure assets or shift to share costs through a collaborative approach of multiuser open access. As well as dealmaking, we may see some strategic alliances with mining service companies.

Beyond: rethink risk and invest in innovation

In a sector where volatility is often the norm, strategies beyond COVID-19 are likely to return to a focus on maximizing returns. But in a post-pandemic world, approaches to achieve this may be radically different from those deployed in the past. It may be time for mining companies to re-evaluate their appetite for risk — as we move beyond COVID-19, it is not the time to miss out on new opportunities because of a complacent or conservative approach to capital allocation.

Miners can strengthen their recovery and ability to navigate future volatility by focusing on the following:

  1. Lower valuations and potentially more risk-averse funders will make it more difficult to access capital, particularly for mid-tier and junior companies. Alternative financing methods, such as commodity traders, royalty deals, joint ventures and customer offtake arrangements, may become more popular.
  2. Rethinking portfolios around decarbonization:  As companies reorganize portfolios to maximize returns, they are likely to be driven by the outlook for commodities. In particular, the global agenda for decarbonization is expected to drive more investment in minerals that are critical to renewable energy, electric vehicles and batteries, including cobalt and lithium. This creates a significant opportunity for mining and metals companies to play an important role in building a sustainable energy system that rewards both investors and the planet.
  3. Investing in innovation: According to the EY Global Capital Confidence Barometer, 66% of mining and metals companies were already in the midst of significant business and technology transformation. The impact of COVID-19 on workforces, supply chains and operations has underlined the case for innovative technologies such as automation and artificial intelligence. Companies more advanced in their digital transformation are faring better during the pandemic and will continue to enjoy a significant competitive edge going forward. We expect more miners to accelerate their digital programs and to keep investing in technologies, especially those that focus on worker safety and lowering operating costs. Miners may also collaborate with or invest in mining services companies to fast-track access to advanced technology.

Prepare for the new normal

Continued focus on capital discipline will help guide the sector through an extended period of disruption and ensure a stronger recovery. But miners should also prepare for changed conditions in a post-pandemic world, where accessing capital and driving growth may require new, bolder approaches, including a greater risk appetite and a need to be more carbon neutral.


The impact of COVID-19 on pricing volatility and supply and demand has created significant capital and liquidity challenges. So far, the sector has responded well, preserving capital through a range of measures and benefitting from existing capital discipline initiatives. In recovery, continued caution will see most M&A on hold, though opportunistic deals could help some companies gain market share and diversify their geographic portfolio. Going forward, the legacy of COVID-19 will require companies to employ more digital and transformational technologies and find new approaches to access and deploy capital more efficiently if miners are to maximize returns and recover strongly.

About this article

By Robert Stall

EY US Mining & Metals Leader

Transaction advisory lead in mining and metals, solving acquisition, divestiture and capital allocation challenges in a time of disruption. Avid outdoorsman, cook, wine enthusiast and father.