The end of capital discipline in mining?

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We examined two peer groups - six copper miners and eight diversified miners - to explore the question whether capital discipline in the mining sector is coming to an end. Collectively, these companies will double their CapEx from $30 billion in 2017 to $60billion in 2025, with management teams less focused on emphasising capital discipline than five years ago.  

Diversified vs. copper miners

Operating cash flows of the diversified miners were relatively stable in the 2019-2021 and 2022-2024 periods, while CapEx rose significantly, overtaking dividends. Sustaining CapEx increased due to higher maintenance and replacement requirements and inflation. Decarbonisation spend and greenfield exploration also saw substantial relative growth. Acquisitions ballooned to $20 billion, while dividends and share buybacks stayed flat. Funding has come from $11 billion in disposals and a $19 billion increase in debt. 

For the copper miners, operating cash flows grew by 38% over the same periods. Despite seeing the same competition for capital as the diversified miners, copper companies focused on growth raising CapEx by 40%, slightly higher than cash flows, by taking on more debt and disposals.  

Looking ahead, despite higher leverage, balance sheet management will remain a priority. Margins for iron ore and metallurgical coal are expected to decline significantly while copper will show resilience. Weaker operating cash flows due to declining bulk commodity prices introduce challenges, however, copper remains a bright spot, with a supply deficit forecasted for 2025. 

The factors shaping capital allocation 

Operating cash flow trends differ for both groups. For the diversified miners, cash flows peaked in 2021 and have now stabilised to 2024 level. Copper miners experienced a similar peak but remain well above the levels of 2019 and 2020. Iron ore majors could see substantial falls in cash flow by 2030 in line with iron ore price forecast.  

Maintaining a strong balance sheet has been a priority for the diversifieds over the last decade and they have maintained gearing ratios below 20%, but ratios are forecast to pass this in 2025, which may suggest a slight relaxation in capital discipline. Copper companies have shown the opposite, as their gearing ratios have trended downwards over the last few years. They operate above the diversifieds’ average gearing, while the diversifieds also return more cash to their shareholders. 

Copper as a growth driver 

Most diversified majors have positioned copper as their key growth driver, making it a key capital draw. The longer-term growth for the 2030sis a powerful signal of where they will be prioritising CapEx over the remainder of the decade.  

Ambition to increase production matches ambition to decarbonise 

Throughout political cycles carbon policy and carbon pricing risks will remain amongst the most material risks for miners and they continue to uphold ambitious emissions targets. With lower absolute emissions compared to the diversifieds, copper miners have  been slower to set interim targets .  And diversified miners also lead the way on investment, with some increasing their decarbonisation capital allocation to around 10% of total spend.   

Dividends, buybacks, M&A and projects 

Most diversified miners have flexible, earnings-based policies designed to adapt to market conditions, having moved away from the progressive dividends once favoured by investors. But we expect fewer than half to increase payouts through to 2026 with operating cash flows under pressure. 

Buybacks have also declined as they no longer generate attractive returns for the diversified miners who may instead prefer M&A or greenfield investments given strong balance sheets. Copper miners, with a strong equity valuations, are well positioned to make scrip funded acquisitions. But, in our view, project development could become the favoured option as acquisition and buyback returns wane, with copper project returns improving relative to the opportunity cost of capital buybacks. 

The outlook 

You can learn more about our outlook on capital allocation strategies and key financial trends in the mining industry by filling in the form above. By doing so, you will receive a recording of our webinar and a copy of the full presentation.