Where to next: Resource nationalism

By Sander Grieve

In the resource business, sometimes, one wrestles with certain subjects that can leave you questioning your own sanity. You talk to smart people about interesting issues regularly. Many of them are good at a variety of disciplines, geology, geophysics, construction, project estimation, supply chains, demand forecasting, off-taking, and, eventually, simple math. You listen to people talk about ideas, such as electrification, net-zero and the advertized imperative of driving electric cars. Then you talk to smart people about what makes electric cars go. Where is it? How much is forecasted to be? Who owns it? How might you get your hands on it? What does it cost? What might it cost in the future when you need it?

This is where it gets hard. This is the point at which math leads you to conclude there is a big problem coming, and it is coming fast. The Organization for Economic Cooperation and Development (OECD) expects lithium demand to rise to 42 times current levels by 2040, and graphite by 25 times. On the way to what many see as a modern-day utopia, it is going to take a lot of stuff to get there, and that “stuff” is in short supply.

At which point do we arrive at the business end? As we pursue the questions of where, what, and how much of certain resources we will need to “run the future,” we cannot help but come to the stark realization that we need to hang on to what we have and take control, directly and indirectly, over ownership, exploitation, and sale of critical resources. For several decades, foreign investment in critical minerals was welcomed, the belief was that the owner cannot move the resource, so ownership is not the most crucial factor. As the timing around development, off taking, and sales arrangements have become more important, governments have now arrived at the table looking for direct interest. The toolkit includes the following:

> 1 Foreign investment reviews and divestiture orders: Canada, an open economy, with a huge reliance on foreign direct investment, recently went “all in” on restricting investment. The government published new advice on critical minerals with an advertized hostility to state-owned enterprises (SOEs). As though to make the point more directly, they ordered three divestments by minority shareholders in lithium companies. The investors in question were Chinese SOEs. What does this mean for a country reliant on foreign direct investment? What does it mean for the future opportunities to finance companies in Canada? We are implementing a no-fly list, but without transparency on how future financing needs will be met and what the impact will be on valuations.

> 2 State ownership: Chile, Zimbabwe, and Mexico have publicly announced that lithium will be nationalized. This is the most aggressive of all responses, but it is likely to spread as countries seek security that they alone will control the critical mineral opportunities inside their borders.

> 3 Export controls: Export controls are on the rise as host countries look to benefit from their resources and, more importantly, leverage them into domestic supply and vertical integration of their economies up the value chain of the battery economy. The OECD identifies total export controls on industrial raw materials surging from 3,337 to 18,263 between 2009 and 2020. The message is increasingly clear; you might own it, but you cannot have it.

> 4 Public incentives: The Government of Japan has announced that it will subsidize up to 50% of the cost of mine development and smelting projects undertaken by Japanese companies in critical minerals. The subsidies will include geological surveys and technical reports as to feasibility. A key condition will be a commitment to continue operations for no less than five years. Enforcement of this condition remains a new frontier for state action.

This is not a regional or novel development. You can find incentives everywhere from Canada’s critical minerals flowthrough tax credit program to the U.S. government’s $1.6 billion commitment to support raw material production from mining through smelting.

Two generations ago, we were a nation obsessed with stopping foreign money at the border for fear that we would be hollowed out; a branch plant economy. Now, we, along with many other countries, are desperately scrambling to redeploy the tactics of protectionism with a new goal. The future suddenly will be dictated by the oldest rule; “he who has the gold rules.” However, this time, the gold is replaced with copper, nickel, manganese, indium, rare earth elements, helium, lithium, cobalt, graphite, and potash. CMJ