Buried treasure

No energy transition without mining

Critical minerals are at the heart of the green energy transition. However, despite green transition metals playing a crucial role in achieving net-zero objectives, the extractive sector has long been overlooked as an essential part of the solution.

Increased demand for renewable energy means increased demand for critical minerals. Green energy alternatives such as electric vehicle (EV) batteries, large scale battery storage, and renewables infrastructure and technology all require significantly more copper, nickel, lithium, manganese, cobalt, and rare earth metals than traditional fossil fuel-based energy. A typical electric car requires six times the mineral inputs of a traditional combustion-engine car, and an onshore wind farm requires nine times more mineral resources than a gas-fired power plant.

In the race towards a greener future, market demand for critical minerals from projects around the globe will continue to exponentially increase in the coming decades. Recycling and circular economy initiatives are not yet sufficient to meet the projected demand. New projects are required. Those projects may include as-yet unexplored or underdeveloped land-based mining projects, or even mining new territory such as the seabed or space.

Navigating the opportunities

Despite focused government efforts to secure domestic supply chains of critical minerals, much remains to be done if global supply is to meet the demands of the energy transition.

Not all government efforts pull in the same direction. The US' Defence Production Act 1950 (DPA), for example, currently expands some benefits to non-American companies while the UK focusses solely on domestic production. Navigating this requires careful planning for junior and mid-cap mining companies who want to access the benefits available in a particular jurisdiction. At the same time, access to debt and equity funding for mining projects has become more competitive. With equity markets constrained, volatile commodity prices, and increasing project costs leading to reduced bank risk appetite, it is difficult for junior and mid-cap mining companies to raise sufficient financing to develop greenfield mining projects through to completion and operations. Private capital is expected to continue to fill the gap in some cases, but greater investment and support from development finance institutions and export credit agencies is crucial to meet increased demand.

Beyond questions of funding, these projects face other challenges. Mining for the energy transition must be done as sustainably as possible: consumer, investor and lender requirements in relation to environmental, social and governance (ESG) factors continue to drive high standards. Companies also face hardening legal obligations around carbon emissions, nature and the environment, as well as human rights, bribery and corruption. Sovereign risk is an escalating investment factor, reflected in the increased cost of sovereign and political risk insurance and the growing use of treaty structuring and international arbitration by foreign investors in countries across the world.

Navigating the landscape of critical minerals projects demands a nuanced understanding of geopolitical dynamics, the increasing legal obligations throughout the commodity supply chain (including with respect to ESG), evolving lender and investor requirements, and the importance of managing relationships with communities and host governments.

The risk of undersupply – a return to nationalism?

Undersupply is a key threat to the green energy transition. Since many critical minerals needed for the energy transition are also key inputs in both defence infrastructure and equipment, and technology manufacturing (such as computer chips), undersupply is also a significant national security threat.

Countries including the US, Canada, the UK, the Kingdom of Saudi Arabia and Australia are implementing domestic economic policies and incentive programs to develop, fund and secure domestic critical minerals supply chains, and reduce the influence of foreign state-owned stakeholders in domestic supply chains.

These domestic policies present both opportunities and challenges, particularly for the mid-cap and junior mining companies who are crucial to the development of new projects.

The US approach

In 2018, a congressional report identified that the US government was 100% reliant on foreign sources for 14 critical minerals. In 2021, President Biden used the DPA to establish funds and programs to develop critical minerals projects (both mines and downstream processing) in the US and obtain critical minerals needed for national defence. The US National Defence Authorization Act 2024 has now also expanded the meaning of a “domestic source” to include raw materials from, or goods produced in, Australia and the UK (Canada had already been included under a previous amendment). This gives UK and Australian mining companies with the ability to supply the US, an opportunity to access the nearly AUD 1.5 billion in funds set aside for critical minerals projects under the DPA, where those minerals cannot be obtained from American or Canadian entities.

There is also the influence of the tax credit scheme provided for in the Inflation Reduction Act 2022 (IRA), which encourages US refiners and decarbonisation technology manufacturers to reduce their reliance on “foreign entities of concern” for critical mineral inputs, and instead turn increasingly toward domestic and free trade agreement countries (FTA), such as Australia and the UK. Although not directly offering tax incentives to companies extracting minerals, the IRA impacts the demand for those minerals by progressively increasing the percentage of minerals which need to be sourced domestically (or from FTA countries) for use in batteries for electric vehicles before buyers of the vehicles can qualify for tax credits (i.e. for EV batteries 50% by 2024, and 80% by 2027). At the same time, Australian companies have obtained over USD 590 million in grants from the US Department of Energy to expand critical production in the US. Many expect that following the results of the recent US election, there will be a push in Congress to add a prohibition against US minerals processors importing raw materials. China hawks are hoping for a vote by year end in Congress to deny existing tax credits to US manufacturers of wind turbines, solar panels, batteries and other renewable energy equipment and producers of clean transportation fuels who use raw materials originating in China, Russia, North Korea or Iran.

As well as increasing production, the establishment of a US Critical Minerals Reserve (CMR) is a long-debated issue that gained media attention through an endorsement of CMR tax credits by Vice President Kamala Harris as part of a $100 billion industrial policy vision. Although the immediate outlook in the US following the election of President Trump remains uncertain, with demand for critical minerals expected to increase 400-600% in the coming decades, the USs reliance on foreign sources poses a national security risk. A stockpile would protect renewable energy technology like electric vehicles and batteries, as well as defence systems, from global supply chains and international disruptions.

The Canadian approach

Canada conducts national security reviews of Canadian critical minerals companies under the Investment Canada Act (ICA). In late 2022, Canada introduced a new policy under the ICA designed to make it more difficult for foreign state-owned entities (SOEs) owned or influenced by “non-like-minded governments” to invest in Canadian companies in the critical minerals sector. Subsequently, the government confirmed that it had already applied the policy in ordering three Chinese investors to divest from three proposed acquisitions, namely of a Canadian miner with lithium assets in Ontario, a Canadian mining company with lithium assets in Chile, and a Canadian company undertaking exploration activities for lithium in Argentina, Canada, and the US¹ (though more recently, a Chinese-owned investor has challenged whether orders can be made under the ICA where the company being acquired does not actually have operations in Canada). Earlier this year, the ICA was amended again to put in place a new mandatory pre-closing notification regime for investments in “prescribed sectors”, which will likely include critical minerals, as well as to provide the government with increased powers to review investments by foreign SOEs – continuing to signal that Canada will scrutinize more investments and take a more interventionist approach to potential national security concerns, including with respect to critical minerals companies.²  The restrictions on SOEs holding shares in Canadian miners of minerals including cobalt, copper, graphite, lithium, nickel and tin both in Canada and abroad presents an opportunity for non-state-owned mining companies and funders from other jurisdictions to further invest in Canadian companies and markets.

The European Union approach

The EU’s Critical Raw Materials Act 2024 is aimed at stimulating intra-EU critical minerals production and enabling the EU to extract 10%, process 40% and recycle 25% of its annual consumption of strategic raw materials by 2030. The Act is also designed to ensure that by 2030 no more than 65% of its annual consumption of each strategic raw material at any stage of processing is from a single non-EU country. Eurometaux estimates that Europe has the potential to satisfy up to 20% of its mining needs internally, with up to 25 to 35% of lithium demand being satisfied by internal reserves by 2030.

The UK approach

Similarly, the UK’s Critical Minerals Strategy focusses on accelerating the UK’s domestic capabilities, by maximising domestic UK production, training the next generation of skilled miners, geologists and engineers and maximising a circular economy of critical minerals in the UK. There are several funds available to support companies with the capital investments required to achieve this, but a number of these funds are focussed on downstream activities (as opposed to mining) and are relatively limited in size. That said, the BEIS Automotive Transformation Fund offers the most meaningful source of funding, with a £850 million pot which has been allocated to date to lithium mining and refining projects, such as those of Cornish Lithium and Green Lithium.

The Kingdom of Saudi Arabia’s approach

Saudi Arabia recently announced its strategy to become a key player in the critical minerals sector, launching a US$182 million mineral exploration incentive programme and issuing 33 new mining licences. This is part of the Kingdom’s Vision 2030 plan, an economic transformation strategy that aims to diversify income sources, move away from dependence on hydrocarbons and develop other sectors such as tourism and mining. The significant capital investment that the Public Investment Fund, Saudia Arabia’s sovereign wealth fund, and other players could offer, make it a key potential player in future critical minerals supply chains.

The Australian approach

Australia is actively courting foreign investment in critical mineral projects in Australia. In January 2024, the Government of Australia released a prospectus of 52 critical minerals projects in Australia for which it sought investment from Japan, South Korea and other allies. This was viewed as a welcome step to better facilitate investment in junior mining companies who carry out the important work of exploring for critical minerals. In parallel, the Australian government extended funding for the Junior Minerals Exploration Incentive. This program uses tax credits to encourage smaller mining companies to carry out greenfield exploration in Australia.

The Australian Government also revealed its Future Made in Australia package in the 2024-25 budget: a $22.7 billion initiative aimed at securing Australia’s place as a renewable energy superpower and maximising the economic and industrial benefits during Australia’s shift to net zero. A National Interest Framework identifies industries that can significantly contribute towards Australia achieving its net zero policy and those that are critical to Australia’s economic security and resilience. The framework will also enhance how the Australian Government can support investment in priority industries. Five industries have already been identified as aligned with the National Interest Framework: renewable hydrogen, critical minerals processing, green metals, low carbon liquid fuels, and clean energy manufacturing.

Starting in 2027, $6.7 billion will be allocated as production tax credits, including $2 per kilogram for green hydrogen production. Additionally, for a decade the government will cover 10% of the cost for refining and producing 31 critical minerals for companies operational by 2030. The Future Made in Australia package also includes reform in simplifying proposals for investment in renewable projects. This includes $134.2 million to expedite renewable energy project approvals and accelerate key projects.

Global convergence?

Recognising the challenges of varying policies, countries around the world have instigated initiatives to engage on the issue. One example is the Minerals Security Partnership (MSP), a collaboration of 14 countries and the European Union which seeks to catalyse public and private investment in responsible critical minerals supply chains globally. In September 2024, countries in the MSP signed a funding agreement to establish a joint financing body for critical minerals to break China’s 70% stranglehold on global output. The US has committed to granting US$166 million to two Australian mining companies, South32 and Element 25, to develop onshore battery-grade manganese refineries.

The urgent need to accelerate the green energy transition makes surmounting these challenges an imperative for governments and the private sector. The only solution is for all stakeholders to work together.