Pandemic era feasibility studies that have fast become outdated are driving a forecast 11% reduction in capital expenditure on mining projects during 2023. It is estimated that capex peaked in 2012 at US$164.1 billion, largely driven by iron and gold project development which accounted for 58% of this expenditure. It reached a recent low of $65.8 billion in 2016, with gold and iron ore making up almost two thirds of the annual decrease.

Iron ore has typically been a large capex, low margin business that often requires the construction of railway lines and ports – making it an industry with high barriers to entry and consisting of dominant operators. It’s a commodity especially vulnerable to the economy, particularly China’s, where a robust construction sector has resulted in unprecedented demand for the steel-making material. This has topped around 70% of global seaborne iron ore demand.

Inflationary pressures, including rising costs of raw materials and a tight labour market, have blown out costs and lead times on projects. Rising interest rates have broken the financial models that initially deemed many projects viable, as well as restricting access to credit for  small and mid cap miners.

China’s fragile residential housing market continues to dampen outlook, with their new home prices falling not only again in December for the fifth month in a row, but 2022 was also the eighth straight declining year in a row. 

With US$87.5 billion capital expenditure expected for 2023, the market will remain nimble and react quickly to changes in macroeconomic conditions. A continued reduction in inflation combined with rate cuts could easily tip these forecasts from a decline in capex to growth. China, the world’s second largest economy, reported 2.9% GDP growth in the fourth quarter of last year. 

With resources contributing around 68% of Australian export revenue in 2021, and iron ore accounting for almost half of that, a turn of the tide would be a welcomed boost for the economy in the midst of a desperate attempt to avoid a recession.

As shown in the graph above, ASX-listed mining companies have been steadily increasing their exploration budgets over the past few years. With the invention and implementation of new mining technologies that will hopefully drive efficiency across the sector, it is hoped that these rising exploration costs will result in the discovery of deposits that are actually able to be financed.

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Past performance is not a reliable indicator of future performance.

Sources

• • S&P Global, Planned mining capital spending to fall $11B in 2023
  • The Assay, Iron Ore – The Gift That Keeps On Giving
  • mining.com, Column: Iron ore’s short-term outlook at odds with longer optimism
  • Reuters, Morning Bid: China’s Q4 data dump
  • CNBC, China reports 3% GDP growth for 2022 as December retail sales, industrial production beat estimates
  • Minerals Council of Australia, Record high for resources export revenue
  • AFR, Mining exploration spend of $1b hits record levels