RCF Mining Market Commentary: Q124

Commodity and Mining Investment Quarterly Update

Commodity Insights

In prior investment environment updates, RCF has noted that demand for metals & mineral products is quietly accelerating to meet decarbonization, sustainability and artificial intelligence trends — even before factoring in demand from population, GDP and rising living standard growth. On top of this, the world will add approximately one billion more people to the planet in the next 10-15 years. Metal & mineral demand is not the issue.

Supply on the other hand is fast becoming something that requires acute focus. In this update, RCF features the S&P Global Metals & Mining Pipeline Activity Index (PAI), which measures the health and readiness of the industry to grow future supply, in response to changing commodity prices. This index incorporates the number of significant drill results, initial resource announcements, significant financings and project development milestones into a single comparable index.

The S&P Global PAI started in Jan 2008, which limits how far back this analysis can go.  However, this starting point is reasonable as it was just a bit over halfway through the prior upcycle (‘Rise of China’), punctuated by the GFC in late 2008-2009, as shown below. 

Figure 1: Pipeline Activity Index vs. Commodity Price

The two measures in the Figure 1 are highly correlated – commodity prices should drive supply side activity. However, the last 15 months do not match the prior 15 years, as shown on the far right of the graph above. From Jan 2023, the correlation between these two measures starts to break down, with metals and mining prices holding and more recently rising, but the PAI continuing to fall, irrespective of price incentive to continue advancing projects toward development to meet future demand.

Going back a bit further, from March 2021 through March 2024, the relative difference between the commodity price (BCOMAMT) signal and the supply-side (PAI) response has changed drastically, as shown in Figure 2 below. For clarity, Figure 2 simply shows the arithmetic difference between the copper line (PAI) and gray line (BCOMAMT) in Figure 1.

Figure 2: S&P Global Metals & Mining PAI vs. Commodity Price Signal

Specifically, the relative difference has gone from its highest level of 46 in Mar 2021 to its lowest of -63 in Mar 2024, which both clarifies the uncertainty and amplifies the opportunity for investors in the metals & mining sector.   Now the latest PAI data point (end of Q1 2024) may be a negative outlier given the downward magnitude of the move, but RCF is watching this situation very closely.  

This data and the associated trends are considered by RCF and are informing investment and fund strategies.   External to RCF, it is informing a bullish consensus developing around the sector and emboldening major banks to forecast $3000/oz gold (Citigroup) and $15000/t copper (Goldman Sachs) as base case scenarios, not necessarily upside cases, over the next 12-15 months.   Suffice it to say, confidence is building.  

The potential returns under these future price scenarios are most welcome; however, the industry still needs to contend with what the head of commodity strategy at Trafigura calls the “30-40-50 problem”.    Projects are 30% smaller, 40% more costly and take 50% longer to develop on average.   So, against these supply-side challenges, very little gets done at current prices.   Which is precisely what the PAI measure is telling the industry and investors more broadly, as supply-side activity slows.    

The takeaway – we believe that the signal is getting stronger that prices must rise substantially higher, driven by the reality that supply and demand imbalances are widening across the industry.

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