- Overall, the metals and mining sector is poised to continue thriving as we enter the Year of the Dragon.
- The sector will benefit from robust commodity prices, sustained growth in China, increasing demand due to electrification trends & US stimulus programs, and tight supply dynamics.
- ESG and EVs will persist as key themes for the sector and continue to shape capital allocation strategies in 2024.
- Strong balance sheets will help buffer against potentially weaker credit fundamentals, while we expect M&A and new issuance to increase in 2024.
2024 Metals & Mining Outlook
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Despite its high beta nature, the metals & mining sector delivered excess returns in 2023 that were comparable to the broader indices in both the IG and HY categories. Throughout the year, HY M&M and HY Steel generated excess returns that were consistent to the broader HY index, with credit fundamentals remaining stable. On the other hand, IG M&M experienced greater volatility compared to its HY counterpart. Investor sentiment initially retracted in 1Q23 following the banking crisis and after a strong rally in 4Q23 spurred by China’s reopening story. Nevertheless, IG M&M still managed to produce consistent returns in the subsequent quarters. For the full year 2023, the IG M&M index yielded excess returns of 4.8%, while the HY M&M and HY Steel indices saw excess returns of 8.9% and 9.0%, respectively. By comparison, the broader IG and HY market indices delivered 4.7% and 9.2% of excess returns for the year, respectively.
Credit Quality & Ratings
While credit fundamentals in the metals & mining sector remain robust thanks to the last several years of peak cycle economics, we anticipate a slight uptick in leverage metrics in 2024 due to more assertive capital allocation initiatives, rising production costs, and a fluctuating commodity price environment. From a credit ratings standpoint, we currently see limited risk of downgrades. Rating agencies appear relatively optimistic about the sector, with positive outlooks considerably outweighing negatives for our coverage names. We would like to highlight Glencore (rated Baa1/BBB+), given the possibility of an upgrade to low single-A with both Moody’s and S&P having a positive outlook on the big cap miner. Additionally, Commercial Metals (Ba2/BB+/BB+) stands out as a potential rising star over the medium term, and we could see Fitch potentially upgrading CMC in 2H24. While the general ratings trend remains positive, there are exceptions driven by company-specific factors. First Quantum (WR/B/B+) is on watch for a downgrade by Moody’s and Fitch due to operational challenges at its principal Cobre Panama mine. For Alcoa (Baa3/BB+/BBB-), Fitch lowered its outlook on AA to negative in December 2023 to reflect the challenges in the alumina segment. Similarly, Anglo American (Baa2/BBB+/BBB+) has been placed under negative watch by S&P, a decision influenced by the management’s reduction in its production guidance.
New Issue and M&A
M&M issuance experienced a significant recovery in 2023 from the low levels seen in the prior year, with a notable increase in activity from large IG issuers. However, HY issuance continued to lag, affected by the prevailing interest rate environment and the fact that many issuers had already extended their debt maturity profiles during the previous years of strong economic performance. To provide some context, the total bond issuance for the sector surged by 55% YoY in 2023, reaching $31.6 bn. Specifically, IG issuance saw a twofold increase to $21.7 bn, while HY issuance increased a modest 3.1% to $9.9 bn. Major contributors to this trend were BHP and Glencore, which issued $7.5 bn and $3.5 bn in debt, respectively, in 2023. Looking ahead to 2024, expectations are that large-cap companies will continue to access the debt capital markets to meet their refinancing needs and support general corporate activities. Glencore, in particular, may issue a significant amount of debt to finance the $6.9 bn acquisition of TCKBCN’s met coal assets. Nonetheless, it is anticipated that proceeds from the sale of Viterra will also contribute to funding the acquisition. As for HY M&M, we expect issuance to remain modest in 2024, largely due to the limited volume of debt maturities scheduled for the year.
While M&A activity in the metals and mining sector saw a decrease in 2023 on a YoY basis, the industry witnessed the completion of several major transactions in the year. Notable deals included BHP’s acquisition of OZ Minerals, Newmont’s merger with Newcrest, and Apollo’s LBO of Arconic. Looking ahead, we anticipate a rise in M&A activity in 2024, headlined by Nippon Steel’s acquisition of US Steel and Glencore’s purchase of TCKBCN’s met coal assets. Additionally, First Quantum is rumored to have garnered interest from potential acquirers such as Barrick Gold and Jiangxi Copper. We expect gold mining industry consolidation and increasing green metals exposure to remain topical in 2024. We also foresee a number of smaller, strategic bolt-on acquisitions and individual asset sales as companies aim to optimize their portfolios. While the potential for activist investor involvement and LBO scenarios remains low in the sector, we did observe Apollo’s notable move to take Arconic private in 2023, indicating that such events are still within the realm of possibility.