We’ve all heard that the rise of electric vehicles could be disastrous for the oil industry, but could the widespread adoption of Teslas and Nissan Leafs mean bumper demand for other natural resources from copper to cobalt and lithium? That’s what diversified mining giant BHP Billiton (LSE: BLT) is predicting in a piece one top executive recently wrote in the Financial Times.
BHP’s internal forecasting suggests that electric vehicles could account for 8% of the total global market by 2035. If this comes to pass, even accounting for the concurrent decrease in conventional vehicles, these electric cars would require more than 8.5m tonnes of copper, or more than one-third of current global demand. Obviously BHP isn’t exactly a neutral party in this debate but I believe it’s a worthwhile scenario for investors to explore all the same.
The good news is that as one of the world’s largest copper producers, any increase in price is great for BHP. The company estimates that in 2016 every 1¢ increase in the price of copper added $32m in EBITDA. Of course, profits went the wrong way as copper prices continued to slide in the opposite direction all year and in BHP’s fiscal year 2016 averaged $2.22/lb, down from $3.18/lb in 2014.
To add insult to injury, even if copper prices rise significantly it may not be a lifesaver for BHP. That’s because the miner is unique among peers in that it’s also a very large oil producer. In fact, petroleum production contributed $3.6bn in underlying EBITDA last year against $2.6bn from copper assets.
Likewise, it’s also unclear whether copper prices will actually skyrocket in the coming decades. On one hand demand from electric vehicles and other renewable energy sources is increasing rapidly. On the other, demand from China, the world’s largest importer, is slowing and global supply is rising as new mines come online. So, if I were a BHP shareholder, I wouldn’t be expecting electric vehicles alone to send shares soaring anytime soon.
Too much debt
It’s a similar story for the Kazakh copper miner Kaz Minerals (LSE: KAZ). Like larger rivals the company invested heavily during the boom years of the Chinese-fuelled commodity supercycle in new mines that are just now coming on-line or reaching peak production. In the first half of 2016 the company’s copper output jumped 43% year-on-year due to this new production although sinking prices still led revenue to fall over the same period.
Bringing these new mines on-line has been an expensive undertaking, which is why net debt rose to $2.5bn at the end of June. Needless to say, this is a worry for a company that had only $115m of EBITDA in H1. Furthermore, the company expects its net debt-to-EBITDA covenants to be breached when tested at the end of December, which is more than enough reason for me to avoid the shares for the time being.
All in all, thanks to Kaz’s high debt and BHP’s reliance on petroleum products, I would be looking elsewhere for ways to benefit from increased demand for electric vehicles in the coming years.