How co-ownership and common-user infrastructure can kickstart Australia’s new economy minerals boom

Kate Swain and Liam Davis, Partners, McCullough Robertson

Australia has an opportunity now to apply learnings from past mining booms, by setting a strategy from the outset that both enables efficient project development, and delivers long-term financial benefits.

In particular, we see a significant opportunity for the development of ‘co-use’ and ‘co-owned’ infrastructure for the processing of critical minerals.

The Australian Government’s Critical Minerals Strategy 2022 lists 26 minerals as priority areas for development and investment in Australia. These minerals are not new discoveries, but their application to new technologies presents a significant economic opportunity for Australia – they represent a transitional sector that will reduce carbon emissions, and are a major national security consideration.

Despite this, project developers continue to face the challenges experienced by any new entrant to the resources industry, the most significant being upfront capital costs for project development and delays in obtaining the required approvals.

State of play

One of the greatest hurdles for Australia’s critical minerals industry is the lack of an established supply chain, specifically in relation to transport, processing and manufacturing.

Global demand for critical minerals is increasing, including for lithium, nickel, vanadium and cobalt. While this places Australian producers in a prime position to become leading global exporters, we continue to process very little onshore. Further, we are competing with other countries, particularly China, which is already well-established in the critical minerals production market.

Adding to this, the effects of COVID-19, combined with recent political and trade challenges with China and Russia, have emphasised the importance of a resilient and stable supply chain. As a result of these market pressures, Australia is left in an excellent position to capitalise on this current and unique opportunity. We’re already seeing overseas investors such as Tesla, Ford and Toyota engaging with the Australian Government with respect to co-investment in critical minerals processing developments.

What are the challenges?

A key difference between the extraction and processing requirements for critical minerals compared to commodities such as iron ore and coal, is that, once out of the ground, critical minerals typically require extensive processing to produce a useable resource. The processing stage is technologically complicated, can require significant amounts of water and energy, and can produce tailings that often require storage and appropriate management.

These factors are further compounded by the fact that critical mineral deposits are commonly discovered in remote locations with limited or no access to established infrastructure including water supply, reliable electricity and rail connections. This culminates in significant upfront capital requirements for developers of new projects, and creates barriers to timely development or expansion of these resources.

The large upfront capital expenditure is not a new hurdle, and there are many examples of it being overcome with public sector investment – the Bravus ’royalty holiday’ being an example. However, without a developer willing to invest large amounts of capital, and without public sector commitment to provide further financial or regulatory support, the development of critical mineral hubs may stall.

Opportunity for change — ‘co-use’ and ‘co-ownership’

During the early 2000s coal boom, miners invested significantly in the construction of wash plants and other infrastructure on-site, to ensure access for coal production and to reduce transport and other costs.

Recently, however, we have seen smaller coal miners enter into toll washing and access agreements with neighbouring coal miners to carry out the wash process, as the capital expenditure required to construct dedicated wash facilities for each new mine has become commercially unviable or untimely. While this is not a silver bullet, this provides smaller miners with a stronger balance sheet and avoids significant upfront capital output.

Taking inspiration from the coal sector, we see a ‘co-use’ and ‘co-ownership’ model as a path forward for critical mineral miners to carry out their operations and add value to their product onshore.

Co-use or co-ownership involves multiple parties pooling their resources to achieve a mutual advantage. There are existing examples of this, being:

• a publicly funded, common-user new economy mineral processing plant in Townsville, which will initially process vanadium. The project will give developing vanadium miners access to a shared processing facility to assist in the export of their mineral, while reducing overhead costs and lead times

• a private co-use and co-ownership enterprise – the Newcastle Coal Infrastructure Group – which is an incorporated joint venture between BHP, Yancoal Australia, Whitehaven Coal, Peabody Energy and Banpu Public Company that owns and operates rail, coal storage, and ship loading facilities servicing the Hunter Valley.

• In Queensland, a similar model is used at Wiggins Island Coal Export Terminal in North Queensland, which is also an incorporated joint venture between Aquila Resources, Glencore, Coronado Curragh and Yancoal that owns and operates similar port infrastructure.

Each project involved multiple parties in the same sector funding the development, construction and operation of port infrastructure to ensure access and capacity.

While this latter example is a more traditional case of co-use and co-ownership, more creative arrangements can also be adopted. These arrangements may include each party contributing different assets ‘in kind’, such as land, capital or technology. It is rare to find an explorer with all three attributes, and by pooling resources and spreading investment risk between participants, each party will receive stronger financial and operational outcomes.

There are various corporate structures that can be adopted, each with its own advantages and drawbacks. The appropriate structure will depend on the specific circumstances of a project, including location, minerals and development stage.

Approvals considerations

The development and operation of shared infrastructure present a number of challenges and opportunities from an approvals perspective. Key considerations include:

• land access and ownership

• responsibility for undertaking environmental assessments and obtaining approvals

• ongoing operational compliance with approval conditions and statutory obligations.

Beyond the significant financial benefits, there is a long list of positive environmental outcomes, such as reduced vegetation clearing and lower cumulative noise, dust and water impacts.

Development considerations

Development of any project of this scale will present a myriad of issues that need to be addressed during the environmental assessment and approval process. Common issues that miners are confronted with for this type of development include:

• biodiversity offsets

• water licensing

• native title and Aboriginal cultural heritage

• bushfire risks

• traffic management

With the public and private sectors working together to develop Australia’s onshore critical minerals processing and manufacturing sector, we see an opportunity for governments to play a key stakeholder role in the environmental assessment and approval of co-use and co-owned infrastructure. This will ensure that a robust process is undertaken, while a timely outcome is achieved. This potential could be realised during the following critical steps:

• There is a clear opportunity for government to pave the way for miners by kick-starting this sector through initial funding, approval and construction of shared infrastructure. One scenario could involve State governments using existing State land, or using compulsory acquisition powers to secure land in centrally located areas near tenement clusters or port facilities to construct common-user processing facilities.

  This approach would be similar to the NSW Government’s establishment of EnergyCo to advance the development of renewable energy hubs in NSW.

• To progress environmental assessments and approvals for a common-user facility, the detailed design of the facility needs to be resolved. This requires input from the mining sector to ensure that the operational design meets the current and future needs of the industry.

  This will be particularly relevant if the developers of the facility intend to sub-let excess capacity to industry in the future. If government and industry are able to align on the key components of a common-user facility, then this approach could produce long-term benefits for the broader industry and economy.

• The next step is to ensure that these precincts have access to electricity, water and rail. In terms of linear infrastructure, including water pipelines and rail infrastructure, governments could again fast-track the approvals so that essential infrastructure is established in a centralised location.

  Each miner would then ordinarily be responsible for progressing the approvals and construction of significantly shorter segments of such infrastructure to their mine sites or to privately-owned common-user processing facilities.

The final piece of the puzzle is the upfront capital investment that will be required to construct the infrastructure. Federal and State governments already provide grants and low-interest loans to miners to fund the construction of these projects and associated infrastructure.

But the size of any government contribution is typically not sufficient to ensure that the project can proceed. Therefore, governments need to either significantly increase financial contributions to bolster the whole industry or take active steps to develop common-user infrastructure for the benefit of the broader sector.

A coordinated approach is required from the public and private sectors to ensure Australia’s onshore critical mineral processing and manufacturing sector gets the opportunity it deserves.

Where to from here?

With significant investment, the development of a critical mineral processing and manufacturing sector in Australia will generate significant national, state and local economic and employment opportunities for decades to come.

With so many participants being at the same early exploration or development stage, provided there is genuine whole-of-government financial and approvals support for shared infrastructure, the potential for cooperation in the development of this ‘critical’ infrastructure could be fast-tracked for the benefit of all participants and the sector as a whole.