By Craig Mellow

This should be a great time to be a mining company. The global transition to electric vehicles and renewable energy will drive copper demand up by half, nickel more than twice, and lithium 11 times from 2020 to 2040, the International Energy Agency predicts.

Markets apparently missed the memo. Shares in the two industry giants, BHP Group and Rio Tinto, are both down by a quarter from peaks in early 2023. Total returns look better thanks to hefty dividends but are still negative. The surprise resignation of Rio Tinto CEO Jakob Stausholm, announced May 22, isn't a bullish sign.

Part of the sector's problem is cyclical: The stocks went on an irrationally exuberant tear coming out of the pandemic. Part is structural, too.

Most of BHP and Rio Tinto's cash flow comes from iron ore, says James Whiteside, head of metals and mining corporate research at consultant Wood Mackenzie. Iron ore prices have fallen by 20% in the past 18 months as the biggest buyers, Chinese steel makers, get smacked by their country's ongoing real estate depression.

"Companies have to find replacements for the iron ore bonanza of the past 20 years," echoes Jon Mills, mining equities analyst at Morningstar. "It's a difficult job."

The Big Two and everyone else are scrambling to switch into copper, whose price has jumped 30% over the same period.

That takes time, lots of it. Mining has devised no equivalent to the shale drilling that allows oil and gas producers to react to markets in months rather than decades.

Production costs for copper have tripled since 2010, Whiteside estimates, as old reliable orebodies like BHP's Escondida in Chile mature and new prospects are "more remote, harder to develop or water-starved."

The industry is too Balkanized to meet green transition demand, adds George Cheveley, a portfolio manager at asset manager Ninety One. "BHP and Rio are the only ones big enough to pursue a $10 billion greenfield on their own," he says. "Everyone else would risk the company on a single project."

A raft of mergers have been pursued or rumored in recent years: BHP with Anglo American, Rio Tinto with Glencore.

Few have materialized. China's state-owned Zijin Mining Group is a competitor on offense, targeting a 50% rise in copper output from 2023-28 as it expands recent acquisitions from the Democratic Republic of Congo to Serbia.

Nothing illustrates the perils of bold moves in mining better than Stausholm's march into lithium at the helm of Rio Tinto. The firm sank nearly $10 billion into the essential metal for EV and energy storage batteries, while the price plunged 90% from a 2022 peak.

Stausholm may be proved right in the long run, investors think. "The time you want to buy into a metal is when everybody hates it," Morningstar's Mills says. Rio Tinto is "trading at a relatively large discount to our valuation," Woodmac's Whiteside adds. Nevertheless, Stausholm will soon be out of a job.

Mining stocks can turn very hot when they get on the right side of the supply-demand equation. BHP quadrupled in total return terms over five years following a trough in 2016. The world needs them to succeed going forward, dimly as that may be understood by the ESG crowd.

"If nothing happens, copper prices will go nuts," Cheveley notes, taking prices for greener vehicles and power grids with them.

The ride for investors looks bumpy, though.

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

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May 30, 2025 12:23 ET (16:23 GMT)

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