7 minute read
Chris Berry (House Mountain Partners)
Advertisement
In the year 49 BC, Julius Caesar said ‘alea iacta est’ while his army was crossing the Rubicon into Northern Italy. This phrase, which translates into ‘the die is cast’, implies the beginning of a new challenge. Given recent governmental and corporate announcements to allocate billions of dollars of capital in global electrification and decarbonisation programmes, Caesar’s words spoken two millennia ago are especially pertinent today.
The global battle with COVID-19 has been a monstrous catalyst to widespread change in all facets of the economy, particularly in the technology and energy sectors. The pandemic, coupled with a renewed focus on ESG mandates, provides an opportunity for all economic stakeholders to develop a clear, coordinated, and executable strategy to decarbonise economic growth. ‘Green growth’ is all the rage in the financial markets and the need to
Chris Berry
Based in Washington DC, Chris has been an independent analyst since 2009 with a focus on energy metals supply chains including lithium, cobalt, graphite, nickel, copper, vanadium and rare earths with a roster of global clients including investors corporates and academia.
His advisory work has a specific focus on how energy metals supply chains are evolving to create opportunities and threats during the energy transition in the coming decades. Before shifting focus to analysis of these trends, Chris gained 12 years of capital markets experience on both the buy side and sell side.
He has visited and performed economic analysis of metals deposits on six continents and has been featured in multiple media outlets including the Financial Times, The Wall Street Journal, Bloomberg, NPR, the South China Morning Post and CNN International.
a j
play catch up to the Chinese juggernaut is obvious.
The Middle Kingdom has quietly and successfully dominated critical metals supply chains through ‘state supported capitalism’ and placed environmental concerns aside in recent decades. The shock that COVID has provided to the global economy has forced the West to come to terms with the critical metals advantage that China now commands. Canada, with its natural resource wealth and mining and production technology advantages can play an important role in this challenge. Competition for battery metals supply chain dominance will take many forms, and while allies must cooperate, a closer
examination of specific country and company strategies around costs and regulation can be instructive.
Recently General Motors, Stellantis, and Daimler have pledged over US$110 billion to their vehicle electrification programmes. One wonders just how these sums can be spent efficiently and effectively in the timeframe noted. Interestingly, this flood of capital is accompanied by an accommodative financial sector offering a low cost of capital, and global pronouncements by governments offering incentives to co-locate pieces of the battery metals supply chain.
However, this seemingly one way push presents a paradox (and an opportunity for Canada). While decarbonisation is a worthy goal, this will require orders of magnitude more - not less - of battery raw materials, more energy needed to process materials and the resulting carbon dioxide emissions as a by-product absent a technological leap. It is imperative that these resources are extracted and purified with a minimum (preferably net zero) carbon footprint.
Lithium demand at a 20% compound annual growth rate (CAGR) or rare earth elements (10 to 15% CAGR) throughout the current decade coupled with a stronger ESG focus across the supply chain puts a premium on where
materials are sourced. With this backdrop, it does shine a favourable light on ‘commodity centric’ economies such as Canada. To be fair, Canada has a rich history of innovation whether it be with the Mach 2 Avro Aero or CANDU nuclear reactors amongst other innovations. This spirit of innovation is now required for Canada to stake its claim along the EV supply chain. While the downstream aspects of the electrification supply chain are important, none of this is relevant without a steady supply of battery raw materials and this is where Canada can make an immediate impact.
Most battery metals aren’t rare. However, finding them in economic quantities and refining them to ‘battery grade’ quality is a difficult and an expensive part of the supply chain. This challenge sits at the core of the decoupling debate and the desire of Western governments to loosen the Chinese grip on the supply chain. Additionally, since the line between economic security and national security is now blurred, it is more important than ever to find ways for the public and private sector to work together to try to build resilient and dynamic supply chains that achieve the goals relative to the greening of the global economy.
Canada’s role in the transition
Few countries are better placed than Canada to benefit from the enormous challenges associated with decarbonisation. Despite a chequered history of lithium project development,
the potential for lithium and other battery metals positions Canada as a major contributor to and beneficiary of the decarbonisation thesis. Companies such as Nouveau Monde, Northern Graphite (both graphite), Critical Elements, Frontier Lithium (both lithium), First Cobalt (cobalt), Commerce Resources and Geomega Resources (both rare earth elements) are a few examples of Canadian companies not yet in production but aiming to join the ranks of producers and demonstrate the potential for Canada’s mining sector.
These companies must manage costs while navigating a regulatory and permitting maze as well. The mining sector is a relatively small but important piece of the Canadian economy contributing $109 billion (5% of Canada’s GDP in 2019) and was responsible for 16% of exports (in 2018) according to the Mining Industry Association of Canada. The Canadian federal and provincial governments have offered support for domestic EV adoption mainly through incentives and rebates but much more needs to be done. One example is First Cobalt and their plan to operate a cobalt refinery in Ontario. The company has secured a total of C$10 million in interest free loan and nonrepayable grants to accelerate the refurbishment and operation of the facility. This is a positive sign, but a drop in the bucket relative to the capital needs across the industry. In short,
Canada must do more to compete for capital.
ESG: fuel for innovation?
The ESG movement has taken on an elevated level of importance in recent years and shows no sign of slowing. Mining companies must factor in an added layer of oversight from the corporate boardroom to the mine face amid uncertain results. While this may increase the costs of doing business, the threat of higher costs can spur just the level of innovation that the battery metals sector requires to hit aggressive decarbonisation goals.
This fuel for innovation also helps in cross-border supply chain building. In the United States, President Biden made it clear that the US will rely on allies in part for sources of battery metals. This is an opportunity for Canadian resource projects and is bolstered by the USMCA, the free trade agreement between Canada, the US, and Mexico that is the successor to NAFTA. While the agreement covers a multitude of sectors of the economy, the automotive sector is a focus given its importance for jobs and the tax base. Under the new rules, 75% of a vehicle’s content must be produced in North America
(up from 62.5% under NAFTA). While this may raise costs at first blush, it underscores the potential opportunity for innovation along a shorter and more robust localised supply chain – one in which Canada can play a central role.
Conclusion
Despite the optimism and hype surrounding the electrification thesis, the size and scope of the challenge is only beginning to be felt. Stakeholders across the public and private sector alike in Canada must step up and face the challenge head on. Raising billions of dollars in capital to build new mine supply and infrastructure, allocating the capital in a timely and efficient manner while ensuring the efficient operation of a more regionalised supply chain structure, adhering to stringent ESG requirements which embed sustainability, and delivering a return for investors are some of the issues mining companies in the battery metals supply chain must reckon with.
I began this essay with
Julius Caesar and his quote ‘alea iacta est’. Given the pronouncements from governments and companies worldwide, the die has been cast for the electrification thesis and now the work begins. Canadian resources and intellectual property must play an increasingly active role in accomplishing the aggressive and worthy goals of global decarboniasation.
