Energy and Mines Magazine - Issue 52 by energyandmines

ISSUE 52, NOVEMBER 2023

FOR CRITICAL MINERALS, Decarbonization is also Critical

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FOR CRITICAL MINERALS,

Decarbonization is also Critical

emand for critical minerals is soaring as the world makes its way to net zero, but these miners also face the challenge of decarbonising their own production. Can they supply the metals needed for an electrified future while also reducing their climate impact?

“In effect, the energy transition is a commodities transition,” said McKinsey in a September 2023 report. According to the advisory firm, metals and minerals will make up an increasing share of the commodities value pool in the coming years, as low-carbon technologies such as wind turbines and electric vehicles take off.

The rapid deployment of clean-energy technologies as part of energy transitions implies a significant increase in demand for minerals

Source: McKinsey

For critical minerals such as copper, lithium and boron, McKinsey expects supply to fall “well short of demand” by 2030. So the miners of these commodities are scrambling to expand operations and accelerate production. Zeeshan Syed, President of Avalon Advanced Materials, explains that his company has been around for over 20 years, and has accumulated a vast portfolio of assets,”but did very little after that”. “That’s no slight to previous management,” he tells Energy and Mines. “A large part of it is at that time, there wasn’t such a strong kind of push to the ESG and sustainability and climate change outcomes that we’re all kind of moving towards.” Syed became president of Avalon in February 2023 and since then, the pace has picked up tremendously. The company has reconstituted its board and management team and is “galloping ahead” to establish the first lithium processing facility in Ontario. “That is rooted in a broader ideology and a sense for the energy market and where it’s going,” he adds.

BUILDING UP SUPPLY CHAINS (ALMOST) FROM SCRATCH In attempting to ramp up supply, miners are facing a number of challenges. McKinsey estimates that the energy transition will require nearly US$200 trillion in investment through 2050 for EVs, upgraded power grids, and low-carbon power, but junior miners sometimes struggle to raise funding for metals that are still relatively obscure. “People often overlook the significance of critical minerals,” notes Gordana Slepcev, COO at Lomiko Metals. “While gold is universally recognized, graphite, for instance, remains less understood. Different flake sizes have distinct applications, spanning industrial, medical, and battery sectors.” The graphite market, particularly in EV batteries, is rapidly expanding. However, production needs to surge by approximately 35% annually to meet the escalating EV demand. Currently, many producers rely on synthetic graphite, which, as per Slepcev, is “three to four times costlier to produce and carries a carbon footprint five times larger than natural graphite.” But the issues don’t stop at financing. Because critical minerals were in low demand until recently, the entire industry is facing a steep development curve, and the lack of processing capabilities (specifically outside of China) is delaying progress.

According to the International Energy Agency (IEA) Critical Minerals Market Review 2023, the mining of copper, nickel, lithium, cobalt, graphite and rare earth minerals is fairly spread out geographically, between North and South America, Australia, Africa and Asia. But processing is almost entirely done in China. Leon Binedell, President and CEO of Sherritt International Corporation, talks about a “midstream challenge” in Canada. “China has been developing midstream processing and refining capabilities. What has transpired here in North America is we are almost forcing mining companies to become refiners, and doing that with small companies individually, is complex. You’re asking them to get involved in a much more complicated mineral refining capability, and you’re increasing the capital burden on each of those companies,” he tells Energy and Mines. “I believe we need to develop a midstream industrial capability in Canada using our standards, to unlock the upstream miners to come to fruition ultimately using their expectations of lower carbon technologies and carbon capture processes,” he adds.

Source: IEA

“Synthetic graphite is three to four times costlier to produce and carries a carbon footprint five times larger than natural graphite”

A GEOPOLITICAL ISSUE For Syed at Avalon, governments have a responsibility to incentivize the development of regional critical minerals supply chains. He notes that current supply chains are “abhorrent” as miners from all over the world are forced to ship raw materials to China for processing before shipping them back to the country of origin, and adds: “Critical minerals have become a geopolitical issue. And as the process of deglobalisation is taking place, the world is breaking into regional blocks. So countries really need to ask themselves, ‘what are we doing to make sure we are on our front foot and we’re incentivizing the proper outcomes’.” Government initiatives like the Critical Minerals Strategy in Canada, which aims to accelerate project development in a sustainable way, are welcomed by the sector. As part of the strategy, Canada has made C$1.5bn of funding available for projects focused on critical minerals processing, manufacturing and recycling. But the initiative also presents financial incentives for miners. “That 30% refundable tax credit for critical minerals represents 15 to 20% of the total capital that we will spend on the project and almost half of the equity capital that we need to build it. So, you know, it profoundly changes the economics for us,” says Mark Selby, CEO and Director at Canada Nickel. And if part of the purpose of this strategy is to compete against China, decarbonisation will give North American producers a clear advantage. Nickel, for instance, is used not just in electric vehicles, but also to make stainless steel – one of the products covered by the EU’s Carbon Border Adjustment Mechanism. EU importers already have to report the emissions embedded in these products from January 2024, and will have to pay a tax on this carbon from January 2026.

“It won’t be just a choice of, you know, ‘we want to choose a lower carbon product’, it’s going to actually start to have a financial penalty. So a lot of consumers in that sector are very focused on the carbon footprint of the raw material that’s there. Having that low carbon footprint is a big, big selling point,” adds Selby.

DECARBONISATION STRATEGIES Canada Nickel is leveraging Ontario’s low-carbon grid to electrify its operations with electric rope shovels, trolley trucks, and plans to introduce more classes of electric vehicles over the next few years, when they become commercially available. Ultimately, its Crawford mine will produce nickel, cobalt and iron trademarked as net zero – a clear sign of the competitive advantage the company expects. Lomiko Metals is in the exploration phase and has already secured the ECOLOGO Certification for Mineral Exploration Companies. This certification involved a rigorous field audit, evaluating the company’s environmental practices, safety standards, and ethical business conduct, among other criteria. Avalon has been reporting on sustainability for 12 years, and is working with local universities and technical colleges to help create the bespoke skill set needed for lowcarbon lithium midstream processing. “The engineering students of today are not suited to work in this emerging sector that’s taking off like a rocket,” notes Syed. And until Sherritt starts to build new projects, it’s all about building ESG criteria into current expansion plans, specifically reducing carbon intensity as part of its 20% output increase. As Binedell says firmly: “As an industry collectively, we cannot sacrifice ESG standards for the sake of increasing production.” And it looks like everyone else is on the same page.

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UNCOVERING THE VALUE:

The Path to Achieving PRICE TRANSPARENCY in Critical Minerals Markets by State of Play

Image courtesy B2Gold

ining is an inherently risky industry, typified by its capital intensity, long payback periods, price volatility, geological uncertainty, and in select locations, heightened sovereign risk. While critical minerals are subject to the same features, there are several more layers of complexity that exacerbate the risk equation further. Contributing to such complexity are the market mechanisms used to deliver critical minerals – they are immature, opaque, and poorly understood. As it stands there are no central spot prices, no derivative markets, and an overall lack of liquidity. As a result, it is difficult to achieve price transparency within critical minerals markets. It’s predicted that many of the critical minerals fundamental to the energy transition will experience shortages as soon as 2030. The demand side pressures are well documented and will likely continue to escalate over the coming decade. With 84% of industry reporting transparency of price and supply as an issue in developing critical mineral markets, it is important to examine the link between price transparency, market maturity and investment, and how such structural market complexities will need to be addressed to accelerate industry progress, and importantly supply.

CRITICAL MINERALS COMPLEXITY There are several challenges the critical minerals industry current face. Small trading volumes are still commonplace, largely because of the dominance of longterm offtake contracts in trading. Offtake agreements can provide benefits to buyers and sellers, providing security in supply at an agreed price and specification, however given the opaque nature of these agreements, they can also become a hurdle to price transparency. As good practice, anything between 10 and 20% of a companies’ supply is typically not locked into long-term contracts, however this leaves a small proportion of an already limited amount of product to be transacted through other means. In the recent State of Play Critical Minerals: Developing Price Transparency report both buyers (59%) and sellers (56%) listed the lack of a central spot market as the greatest challenge with transacting outside long-term contracts. A lack of standardised products also poses challenges for price discovery and market efficiency. While lithium stands out as a relatively promising example, other critical minerals like rare earths and various graphite products exhibit limited homogeneity. This doesn’t make price discovery impossible, but it does add an extra layer of complexity. Without a central spot market, determining the price for a critical mineral at any point in time becomes a complex exercise- there are virtually no benchmarks or indices that can be used, due to the lack of liquidity and product standardisation. As it stands, 40% of industry determine the price for critical minerals through direct negotiations. This places a greater emphasis on trade relationships and the ability to collect “on the ground information” to validate critical price assumptions, which can be a costly and time-consuming process. As an industry that currently relies on substantial foreign investment and trade, critical minerals are not immune to the turbulent geo-strategic backdrop. Despite many countries taking targeted policy action to secure critical minerals supply, the dominance of countries such as China has resulted in increasing complexities with supply and price transparency. As one resource company CEO succinctly summarised it, “there’s not a battery on the planet at a commercial scale that’s manufactured outside of China exclusively”.

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KNOWLEDGE GAPS These challenges have contributed to a market with little liquidity and poor understanding of forward price demand, which has left traditional capital markets hesitant to invest, especially in niche critical minerals such as rare earths. This requires investors to access non-traditional sources of equity or have a number of offtake agreements secured to provide a level of security for banks. Whilst banks have ongoing concerns around the volatility of pricing, price transparency does have a role

to play in providing a level of confidence for traditional capital markets to invest in critical minerals. The Critical Minerals: Developing Price Transparency report highlighted price transparency as a mechanism to improve bankability and create confidence in project valuation. To date, 55% of respondents believe there is currently very low to low levels of price transparency in critical minerals markets. As a clear enabler for broader levels of investment, how can the industry best create and encourage price transparency in critical minerals?

THE HOW Previous industry examples, such as the development of GlobalOre for the iron ore industry in 2012, provide insight into how industry can encourage price transparency through marketplaces. As it currently stands, there are several platforms that have begun facilitating trade for critical minerals outside of long-term contracts, however these are yet to develop traction, or are bespoke to a specific company. Despite this lack of movement, marketplaces may offer a number of benefits, including visibility of price and supply, access to buyers and sellers, efficiencies in negotiations and executions and reduced risk of market distortion. For those looking at building a marketplace, industry feedback indicates critical mass of buyers and sellers, global reach, and publication of benchmark pricing as the top three critical components required for a successful marketplace.

If a critical mass of participants and a global reach is achieved, a successful marketplace could be the key that accelerates price transparency in critical minerals markets, enabling the publishing of trusted benchmark pricing information and spurring the investment required to finance the next wave of critical mineral projects. To read the full Critical Minerals: Developing Price Transparency report for free, head to the State of Play website.

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