Supply anxiety is the new hope for developing energy transition mines
Can “supply anxiety” drive the next mining boom and deliver the minerals vital for the energy transition?
A fear that the world won’t produce enough copper, lithium, aluminium and other metals vital for electrifying virtually everything that runs on fossil fuels is an increasingly common theme.
Almost every speaker at this week’s 121 Mining Investment event in Melbourne made the same point: There isn’t enough production to meet anticipated demand, there aren’t enough projects in the pipeline, and even when new mineral deposits are discovered, the regulatory and financial barriers to developing them take years to navigate.
The overall message from many in the mining sector is that the energy transition is at real risk of being slower and costlier than anticipated because of a looming shortage of critical minerals.
The solutions are both obvious and hard to achieve.
The most urgent task is to speed up and ease permitting of new mines and expansions of existing facilities, but if anything the momentum is heading the other way.
Ensuring a project is the best it can be as far an preserving the environment is concerned, as well as winning social licence from a variety of stakeholders, is getting harder and more time-consuming.
Governments across the globe are putting in more regulations and requirements, not fewer, and taking longer to approve mining projects.
The other major problem is financing, with many banks in developed countries pulling back from lending to miners, preferring to focus their climate change efforts further down the value chain in things such as battery factories or renewable energy projects.
And finally, the major miners like BHP Group BHP.AX and Rio Tinto RIO.AX have curtailed capital expenditure in recent years, preferring to run disciplined operations and return profits to shareholders.
Where the majors are spending capital, the majority is tending towards maintaining output levels at existing operations, or developing resources peripheral to the energy transition, such as BHP’s move into potash.
The question then becomes: What is the trigger point to spark more investment in mining?
This is where supply anxiety comes to the fore, as the downstream users of critical minerals start to realize there isn’t enough supply for them to produce their products.
This dynamic can already be seen, especially with what are called Original Equipment Manufacturers (OEMs), such as vehicle makers.
At first, it has largely been OEMs seeking offtake agreements with miners that may involve providing funding or financial guarantees.
But increasingly OEMs seem prepared to take more direct steps to become involved in mining.
Stellantis STLAM.MI, the world’s third-biggest carmaker by sales, invested $155 million in February to buy a minority stake in a copper mine in Argentina run by a subsidiary of Canada’s McEwen Mining MUX.TO.
The carmaker has also signed an offtake agreement for 170,000 tonnes of nickel and 12,000 tonnes of cobalt sulphate with Australia’s Alliance Nickel AXN.AX, as well as buying an 11.5% stake in miner for 9.2 million euros ($10.1 million).
Alliance will use the money to develop its NiWest project in Western Australia state, and Stellantis’ offtake agreement represents about 40% of the venture’s planned output.
Other carmakers such as General Motors GM.N and Volkswagen VOWG_p.DE have signed joint venture and other agreements with miners as they move to shore up their supply chains and boost production of electric vehicles.
But the flurry of recent activity by OEMs to secure supplies of metals such as lithium and copper is unlikely to be enough to boost supply to the levels energy transition requires.
The tipping point of when the initial trickles of backing miners becomes a flood is still some distance away.
Miners will have to learn a whole new way of doing business to access the capital that OEMs are willing to commit.
The traditional method of exploring for a resource and then building a new mine by gaining equity and debt financing as the project reaches development milestones is getting harder.
OEMs, meanwhile, must become willing to take on more risk in their investments by backing smaller miners at initial stages, and hope for a big payoff should the mine come to fruition.
Source: Reuters (Editing by Gerry Doyle)