An evolving clean energy transition calls for an evolving approach to energy security; policy makers must expand their horizons and act to reduce the risks of price volatility and supply disruptions. The demand for critical minerals is set to soar over the next two decades as the world pursues net zero goals; overall mineral requirements could rise by as much as six times, but individual minerals, led by lithium, graphite and nickel could rise even faster.
The rise in political risk has potentially divided the global trade interests and resource nationalism has become a focus of all governments and trading blocs. Onshoring of mineral and metal supply is the new lexicon in corridors of power, but (EU) bureaucrats are not miners – there lies the problem.
Put simply, the mining industry is undercapitalized and restrained by bureaucracy and permitting red tape to meet this massive demand annuity in ‘green metals.’ Governments in Europe and the United States have bold public sector initiatives to develop domestic battery supply chains, but most of the supply chain is likely to remain Chinese through 2030. For example, 70% of battery production capacity announced for the period to 2030 is in China. The priority must be on expansion of mining and refining capacity in an environmentally responsible way to be able to securely supply materials for EV battery supply chains around the world.
EUs response was to form the European Raw Materials Alliance (ERMA), created in 2020 as a part of the EU’s Action Plan on Critical Raw Materials. Along with working on regulatory bottlenecks and stakeholder engagement, its focus is to act as a pipeline to catalyze investment for projects. ERMA has announced plans to launch a raw materials investment fund planned for 2022. In November 2021, the European Parliament voted in the Critical Raw Materials Strategy, with a focus on open strategic autonomy, with access to alternatives and competition when sourcing critical raw materials. Other aspects include sourcing critical raw materials from within the European Union member states, increased recycling and circular use of resources, and investment in refining and separation capacities (including lithium).
A bold step, EU’s response to a critical shortage of strategic metals, develop another focus group to look into ‘Important Projects of Common European Interest.’ EU Bureaucrats are not miners – there lies the problem. The lead time from resource discovery to production must drastically shorten, and governments must leverage private investment in sustainable mining and ensure clear and rapid permitting procedures to avoid potential supply bottlenecks.
After an extractable resource is identified through exploration, it can take anywhere from 5 to 15 years for a mine to begin commercial production. This period of resource development needs to be financed and the nearer the deposit gets to being mined the more capital is required, as the mine moves into a construction phase.
As fund managers, we have the technical and financial ability to conduct technical due diligence on the mineral deposit and generate an investment-risk return at each stage of the asset’s development. However, if there is permitting uncertainty with the investment this generates a binary outcome. The development of the mine cannot proceed for perceived fatal flaws be it environment or social factors. This potential investment has zero return in our view, as the asset has been sterilized by permitting.
Alternatively, the asset might be at the engineering stage, where long lead times are often required to secure financing and the necessary permits. Up to this point the company has financed the exploration and development with private equity investment. Securing permits can take from one to 10 years due to some countries requiring multiple permits or due to permitting delays. At this stage, the potential of the mine getting developed in a timely fashion within our ‘investment return window’ is low and we would look to exit our investment. This general market reaction depresses the company’s valuation, making it harder to raise future capital for mine construction – and the death spiral continues.
Natural resource investors are comfortable taking on commodity and development risk because they can quantify it. Permitting uncertainty and multi-agency bureaucracy creates delays which can’t be quantified and generally leads investors to reject the investment, even though the asset quality is high. Just like the mineral supply chain, the permitting process needs to be consolidated and less fragmented.
The focus on ESG and the potential carbon footprint of a mine is considered as part of the investment process. Europe is an attractive investment destination as the route from mine to market is considerably shorter than from China. Over time we believe the onshoring of low carbon footprint minerals and metals in the battery supply chain will command a premium from OEM’s and consumers alike. Decarbonizing the supply chain is key and there are willing investors, like ourselves, to support this, if we get clarity on the permitting framework.
There are plenty of investment opportunities in Europe for investing, we just need a coordinated approach to fast tracking their development.
For graphite – a key component for battery anodes, the Talga Group is developing Europe’s largest graphite resources in Sweden. This vertically integrated mining and materials company is looking to produce anode graphite which could save 2,900kg CO2-eq per electric vehicle, when compared to Chinese synthetic graphite anodes. The resource at Vittangi (Sweden) has the ability to support and expand the European battery supply chain for decades. This mine must be permitted as only 2% of Europe’s current natural graphite is domestically sourced.
For lithium – Vulcan Energy Resources is aiming to become the world’s first integrated lithium chemicals and renewable energy producer, based in Germany. Vulcan’s unique Zero Carbon Lithium Project aims to produce both renewable geothermal energy and lithium hydroxide for electric vehicle batteries from the same deep brine source in the Upper Rhine Valley. The EU is the fastest growing lithium market in the world with a projection of 30 million EVs by 2030. 90% of the lithium hydroxide comes from China. Vulcan has the potential of producing 40Kt of lithium hydroxide per year and 74MW of renewable power. Again, this project must be permitted on strategic grounds.
One of the classic cases of NIMBY’ism was from the Serbian government. They rejected the development of the Jadar project, one of the largest greenfield lithium projects in the world. If developed it would have placed Rio Tinto as a top 10 lithium producer, providing 58Kt of lithium carbonate, or 90% of Europe’s current demand.
For manganese – the forgotten battery metal, is essential in cathode chemistries. Euro Manganese is developing the Chvaletice Manganese project in Czech Republic. It will be EU’s only primary source of manganese (Mn) sourced from recycling of historical mine tailings. The project could supply 50Kt per annum of Mn metal equivalent for over 25 years.
For rare earth elements – Greenland hosts one of the world’s largest REE deposits, but the government decided to ban all uranium mining in the country. The Act No.20 was introduced on 1 December 2021 and prevents exploitation of an orebody containing more than 100ppm of uranium. The Kvanefield deposit owned by Greenland Minerals contains over 11Mt of Rare earth oxides, having the potential to be one of the world’s largest suppliers. But the uranium bi-product ensures the project falls foul of the new legislation.
For most of the aforementioned examples, they will likely get the permits to develop, but as global resource investors we have an opportunity cost of investing in a great company that gets delayed on development. That flight of capital to other regions of the world will only exacerbate the problem of under funding in the resource sector, particularly in Europe, if we don’t get a change. The EU has to coordinate the development and permitting of mineral projects in a systematic and strategic fashion, rather than being driven by the domestic agenda of the country hosting the resource.