Energy & mining companies who reinvent themselves through M&A will come out on top
Opportunities abound for ESG-conscious energy and mining companies amid the clean energy transition.
Among those at the heart of the discussion are mining and energy companies whose activities are still contributing to the problem.
Mining and energy deal activity was relatively subdued in 2021 while the market stabilized post-COVID, but experts anticipate an upswing in 2022 and beyond as more and more companies turn to M&A to progress their green goals. According to Bain & Company’s Global M&A 2022 report, energy transition deals accounted for 20% of all energy sector deals greater than $1 billion in 2021.
The expectation in 2022 is that more companies will use M&A to facilitate clean energy projects, strengthen ESG credentials, and acquire new technologies that can advance sustainability initiatives.
Boards globally are focused on the opportunities presented by the transition, and any company seen to be doing the right thing from an ESG perspective is going to attract investors. According to the White & Case 2022 Mining & Metals market sentiment survey, responding to challenges of climate change and energy transition is the number one priority.
Opportunity abounds for those dealing in clean energy resources
While much of the activity in 2021 centered on climate-risk avoidance, 2022 is the year we will start to see meaningful climate change unions. Mitigating corporate exposure can no longer be considered equal to tackling the problem. The public is becoming more aware of ‘greenwashing’, and deals in 2022 and beyond need to focus on actually reducing greenhouse-gas emissions.
This is already playing out among the biggest players, driving divestment activity. 2021 saw multinational mining, metals and petroleum company BHP exit oil & gas and shift away from thermal coal, while mining giant Anglo American exited thermal coal completely. In July, BHP signed a nickel supply deal with Tesla for a cleaner supply chain.
“Demand for nickel in batteries is estimated to grow by over 500 per cent over the next decade, in large part to support the world’s rising demand for electric vehicles,” said BHP Chief Commercial Officer, Vandita Pant.
Glencore is also partnering with Tesla to trace responsibly produced cobalt from the mine to the electric vehicle.
There is also record demand for copper, iron ore and lithium, all of which will continue to rise as the demand for ESG-friendly commodities grows.
Activity is likely to be driven by further industry consolidation to unlock efficiencies, especially within sustainable battery minerals. According to the White & Case survey, 42 percent of respondents expect consolidation in the battery minerals space this year (up from only 13 percent one year ago).
These large-scale energy transition projects are not without their challenges. Lenders may be more willing to finance projects that meet ESG criteria, but mining and energy companies will continue to be held to the highest regulatory standards by both regulators and investors. Public scrutiny is at an all-time high, and proactively addressing ESG issues will be critical for companies to succeed.
We are already seeing an increase in ESG-related nationalism, whereby mining companies are expected to make commitments to host communities and maintain a social license to operate, which is resulting in ‘rising tensions with local communities around the world’ (White & Case).
Mining and energy companies are also subject to the same trade tensions and inflationary pressures currently being felt by all industries in the current economic climate. The real challenge will be working towards the goal of a low carbon, sustainable future while keeping the lights on for their businesses in such a climate.
The great green rebrand
'At its heart, the energy transition requires all companies to reinvent themselves.' (Bain & Company)
In order for the energy and mining sectors to be seen as key players in the clean energy transition, they needs a rebrand. The following years will see a monumental shift as the sectors prove that they can become cleaner and more sustainable - fighting climate change rather than contributing to it.
M&A strategies will play a huge role in supporting this rebrand, as mining companies turn their focus to the materials that will support a green transition.
The hottest clean asset of 2022 is copper, with lithium coming out at a close second - both of which will be key materials for the clean energy transition. Copper hit record prices of over US $10,000 per ton this year, and is picked by 31% of White & Case survey respondents as the ‘big winner’ for 2022.
With strong competition and scarce resources, we can expect to see this activity continue well past this year.
Who will come out on top?
The mining and energy M&A dealmakers who will win in this climate will be the ones ready to act. ESG considerations need to be built into regular due diligence practices to understand the true value of the deal from an environmental perspective.
Regular strategic reviews of diverse portfolios and assets will be essential for making the right decisions, whether those entail further investment to improve ESG performance or the divestment of assets that don’t meet the mark.
There will be no shortage of opportunities for those companies who are ready and willing to reinvent themselves and transform portfolios. While there will be challenges at every step of the clean energy transition, the winners will be those who are future-focused on the unlimited possibilities.