| Higher interest rates are making debt financing more expensive, which analysts say could impact the development of mining projects, as pictured above. Source: Nouveau Monde Graphite Inc. |
China's lower interest rates relative to other major economies give the country's mining companies an advantage in the global race to source materials for the metal-intensive energy transition, analysts told S&P Global Commodity Insights.
While the US, Canada and nations in the Eurozone have been raising interest rates to combat inflation since late 2021 and early 2022, China's central bank has eased rates in response to slowing economic growth. China's central bank policy rates have held under 4% since early 2020. The US federal funds rate exceeded China's equivalent in late 2022 after skyrocketing from near zero and has held at 5.25%–5.5% in recent months.
The disparate trends are appearing on miners' balance sheets as the price rises for servicing debt exposed to higher rates. Interest expenses for miners outside of China jumped 37.5% year over year in 2023, while they climbed 18.4% for China-based miners, according to S&P Global Market Intelligence data covering publicly traded companies.
As countries increasingly try to secure materials to support energy transition supply chains, disparate debt costs could slow some funding sources for miners.
"This additional cost could certainly hinder project pipeline decisions," Mark Ferguson, director of Metals and Mining Research at Commodity Insights, said in an email. "With China dominating much of the processing capacity, and the country having strong footprints globally for mined material, a lower cost of capital could further benefit Chinese companies."
While interest rates and debt costs are not the only factors driving project development, they certainly help steer decisions around capital expenditures. Higher interest rates typically raise borrowing and debt servicing costs. This added financial pressure can force companies to reallocate capital that might otherwise help fund mines. More expensive debt can also raise the bar for new mine builds or expansions by eating away at projected returns.
"Generally speaking, higher rates do weigh on firms and ultimately are a headwind for new metal supply," Jonathan Humphrey, a senior economist at Benchmark Mineral Intelligence, told Commodity Insights.
Large mining companies, including BHP Group Ltd., Rio Tinto Group and Zijin Mining Group Co. Ltd., did not respond to requests for comment.
China's edge in interest rates is developing as the country hits the accelerator on acquisitions. The transaction value of Chinese investments in metals and mining assets and company stakes leaped 54.3% year over year to $14.7 billion in 2023, according to an S&P Global Market Intelligence analysis. The splurge on metals and mining was the most invested in the sector by China-based companies since 2013, according to a February report by the Griffith Asia Institute.
Analysts point to China's surging mining acquisitions and project funding as giving the country an ever tighter hold on critical minerals supply chains. Battery giant Contemporary Amperex Technology Co. Ltd. and partners are sinking $5.97 billion into Indonesian nickel and an integrated battery supply chain, while companies such as Ganfeng Lithium Group Co. Ltd. have pushed into Africa in search of more lithium.
"Many countries around the world are talking about security of raw material supply as the battle for critical minerals intensifies, but China is showing more signs of real action," Colin Hamilton, managing director of commodities research at BMO Capital Markets, said in a Jan. 30 report.
Zero no more
"The problem is that everyone got comfortable with 0% interest rates, so we are actually shifting back to more normal levels," Douglas Silver, CEO of Balfour Holdings LLC and a mining sector veteran focused on corporate advisory, told Commodity Insights.
Higher rates may not always prevent a project from getting funding, but it could change the calculus in designing financing packages, analysts said. Financing may comprise less debt in favor of more equity as well as metal streaming, production royalties and offtake agreements, said Joe Mazumdar, a mining analyst at Exploration Insights.
Pricier debt will sting most for developers focused on a single asset as they have less cash flow and fewer financing options than bigger companies, Mazumdar said.
"If the debt costs are very high and the internal rate of return isn't very good, the question is, why build the project?" Mazumdar said.
For other companies, there may be little impact on capital allocations for project development and acquisitions. But growing interest expenses can still divert cash flows.
"Discretionary spending takes the biggest hit — that is exploration and philanthropic spending," Silver said.
The top two global miners by market capitalization — BHP and Rio Tinto — recorded 72% and 183% increases in interest expenses year over year, respectively, to $856 million and $980 million in 2023, according to Market Intelligence data. Interest expenses for Zijin and CMOC Group Ltd. — the top two China-based miners by market capitalization — climbed 39% and 41% year over year, respectively, to $659.1 million and $584.8 million in 2023.
While China-based miners do not exclusively hold domestic debt, they are far more exposed to comparatively lower rates than other companies.
"Yes, they have the advantage," said David Davidson, an analyst at Paradigm Capital.
Government backing
Still, analysts and mining veterans did not paint a dire picture for miners and project developers.
While Chinese miners may get a small advantage from a lower cost of capital, it is offset by higher metal prices, increasing government intervention and relatively healthy balance sheets in the mining sector.
"Balance sheets are much stronger today," David Harquail, chairman of streaming and royalty giant Franco-Nevada Corp., told Commodity Insights. "Carrying debt [is] not the issue it was in the past."
Meanwhile, booming metal prices help offset the concerns that miners face in rising interest rates, Harquail and analysts said.
"So, at least in the case of copper, higher prices in particular may have trumped this [interest rate] negativity," Benchmark's Humphrey said.
Likewise, miners have leaned on all-share or share-heavy deals in making acquisitions and avoided the need to tap debt altogether in some cases, analysts noted. They pointed to BHP's recent failed attempt to take over Anglo American PLC as an example of such an all-share deal.
"Acquisitions are mostly done with scrip for Western operators," Harquail said.
In recent years, the US, Canada and the European Union have launched critical minerals strategies to bolster supply chains for metals needed for the energy transition. These policies are directly aimed at easing dependency on China for key materials such as lithium and rare earths. Through such initiatives, the US and other governments have started to play a more direct role in the mining sector, including issuing loans on favorable terms.
"There's government money out there now," Mazumdar said, pointing to $2.26 billion in funding for Lithium Americas Corp.'s Lithium Nevada project, also known as Thacker Pass, among other US deals. Governments can pass on low-interest rates that would otherwise be tough, if not impossible, for mineral developers to secure for high-risk projects.
But the extent to which government-backed debt will help miners and developers amid higher rates is unclear. Mazumdar noted that US funds are geared to projects that produce a finished product rather than those that churn out materials such as copper or nickel concentrates. Meanwhile, Chinese support for mining appears to be less picky, some analysts said.
"It therefore remains to be seen if policy/regulations in developed countries, such as the [Inflation Reduction Act] or critical mineral alliances, can sufficiently stimulate new mining and processing operations to build more secure/ESG-friendly supply chains," Ferguson said.