A Critical Time for Miners Says PwC’s Mine 2022 Report

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By Mining Review Africa

The race to net zero is changing what it means to be a miner. Demand for critical minerals is surging, operating environments are getting more challenging, and new players are emerging.

Can the Top 40 respond quickly enough to transform themselves and thrive in a net-zero future?

The shift to net zero will require more mining, not less. The rapid scaling of the low-emission energy systems of the future—solar and wind power, electric vehicles (EVs) and grid-scale batteries—will be highly material-intensive.

Critical minerals are needed at all stages of the low-carbon energy cycle. They include silicon, rare earth elements and uranium for energy generation; copper, aluminium, and steel for distribution networks; and ‘battery minerals’ such as nickel, lithium and cobalt for energy storage.

Many governments around the world have established critical minerals lists to highlight what they see as essential resources for meeting their net-zero commitments and for applications in high tech, defense, and other vital industries. But it’s the subset of critical minerals with direct application to the energy transition that will experience the greatest growth and dominate the mining industry of the future.

A leading role

Demand for critical minerals is expected to grow significantly over the next three decades. The International Energy Agency estimates that the annual demand for critical minerals from clean energy technologies will surpass US$400 billion by 2050, which is equivalent to the annual revenues of the current coal market. This might seem like a long way off, but miners are already struggling to keep up with the demand for critical minerals.

For example,  lithium, copper, and cobalt are already experiencing supply constraints, and supply imbalances are likely in the near term. The industry’s inability to meet demand could have major implications for the cost—and ultimately the pace—of the global uptake and installation of energy transition technologies. Raw materials are the largest cost component of an EV battery. The supply and price of the input battery metals will have the greatest impact on whether EVs will reach cost parity with, and replace, traditional internal-combustion vehicles.

The Top 40 can play a leading role in the world’s clean-energy transition and generate significant stakeholder value while doing so. But they face some challenges.

Development timelines

For new projects, the process of exploration, permitting, financing, construction, and commissioning can take more than ten years. Miners and investors aren’t allocating capital at the level needed to keep up with the projected demand. Price volatility. Many critical minerals have volatile price histories and limited price visibility. These characteristics mean that innovative financing solutions are required. Going forward, the role of the off taker will be more important than ever in developing critical minerals projects.

Geopolitical risks

The critical importance of the end-use industries to the economic health of nations has exacerbated the geopolitical risks of supply chains. Stakeholder expectations. Higher expectations for ESG performance are here to stay, as governments and other stakeholders turn up the pressure. More than ever, miners need to maintain stakeholder trust.

Economies of scale

Critical minerals typically aren’t considered bulk commodities, because deposits often are more discrete and smaller in scale. The Top 40 may need to reassess their threshold for investment. Scale could also be achieved through aggregating supply at distinct infrastructure hubs that miners share.

Economic resource scarcity.

Economic resources are being depleted for many critical minerals, including copper, nickel, and cobalt. The Top 40 will likely face more complex deposits and jurisdictions, and potentially higher costs in extracting the product and getting it to market. Improvements in technology for exploration and extraction will be essential in keeping pace with demand.

The Top 40 should have a sense of urgency to invest in the exploration, production, processing, and refining of critical minerals now, not in a few years’ time. The market is demanding it, and a new generation of miners is fast positioning itself to deliver the next generation of minerals.

The emerging ‘new miners’

The miners that are responding to the demand are reaping significant rewards. In the 12 months through 31 December 2021, the market capitalisation of the Top 5 lithium, graphite and rare earth producers grew by 56%, 101% and 154%, respectively. By comparison, the Top 40’s market capitalisation grew by 7%.

The surging demand for critical minerals is transforming what it means to be a miner. For example, some miners are shifting focus towards higher-value ‘precursor materials’ rather than comparatively lower-value unrefined or concentrate products. Precursor materials are the more refined inputs into energy transition technologies, such as lithium hydroxide rather than spodumene concentrate, or cobalt sulphate rather than a cobalt concentrate. In the past three years, over US$5 billion has been invested in lithium hydroxide projects in Western Australia alone.

Diversified critical minerals producer IGO Limited is an example of this new type of operator. In December 2020, the company entered a US$1.4 billion transaction with Tianqi Lithium to acquire a stake in the Kwinana processing plant and the world’s biggest lithium mine, Greenbushes, in Western Australia.

The Kwinana plant will convert spodumene from the Greenbushes mine into lithium hydroxide to sell directly to battery manufacturers in South Korea and Europe.

Other miners are partnering with OEMs and end users, evolving the traditional business-to-business mining model into a business-to-consumer one. For miners, this change represents an opportunity to establish a reliable point of sale, and for consumers it means the chance to secure a steady supply of materials.

In April 2022, Lake Resources entered into a lithium supply deal with Ford Motor Company to supply 25,000 tonnes of lithium a year from its Kachi project in Argentina. Both companies view the deal as an opportunity to scale up environmentally responsible production and ensure high-quality lithium products to support Ford’s aggressive EV play.

The next generation of critical minerals miners will focus on extraction, processing, refining and, potentially, manufacturing to deliver a more secure and higher-value supply chain while serving their stakeholders better.

Adapting to more risk, scrutiny, and volatility

The new generation of miners is highly aware of the industry’s rapidly changing operating environment. Governments, investors, customers, employees, suppliers, and local communities are demanding that operators meet higher standards. Governments are taking on more activist roles to set higher ESG standards for operations, secure supply chains for critical minerals and manage increasing geopolitical risks.

For example, the EU has signalled its intention to increase its scrutiny of supply chains, with particular attention to modern slavery and environmental breaches. The draft rules target various sectors and industries, including mining, and allow for fines and hefty sanctions. Companies and boards will need to demonstrate that they’re addressing risks and could be held liable if risks aren’t adequately managed. Victims of abuse could sue companies directly for compensation.

This more assertive regulatory posture comes on top of other factors that are changing the operating environment for the mining industry. The COVID-19 pandemic and the war in Ukraine are placing global supply chains under enormous pressure—and, in fact, actively reshaping them. Governments are responding to geopolitical risks by forming new partnerships and alliances around critical minerals, such as the 2021 Canada–EU critical minerals strategic partnership.

Defence pacts such as the Quadrilateral Security Dialogue (Australia, Japan, India, and the US) and AUKUS (Australia, the UK, and the US) also reflect the need to secure supplies of critical minerals and materials. Given the strategic economic importance of these minerals, resurgent resource nationalism is evident in countries that have significant resources.

The transformation of mining

The Top 40 are where they are because they historically have understood how to generate value and responded to the market accordingly. Now, the combined impact of the energy transition, geopolitics and stakeholder expectations is changing what it means to be a miner. It’s no longer simply about extraction.

There’s no single approach to address the complex task of transformation. But companies need to position themselves strategically, and with urgency, to benefit from the changing market dynamics and the growth in demand for critical minerals and materials necessary for the energy transition.

Considerations for Top 40 miners

  • Review exposure to critical minerals and materials needed for the energy transition.
  • Evaluate opportunities to own more of the supply chain and to partner directly with OEMs and local suppliers.
  • Incorporate low-emission technologies into operations to position as a preferred supplier for carbon-conscious end users.
  • Increase transparency into ESG performance and stakeholder management.
  • Evaluate development models around shared infrastructure, potentially expediting development timelines and lowering upfront capital costs.
  • Prepare for a more challenging and assertive push by regulators.

Source: Mining Review Africa

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