Let’s start by looking at the impact of the global macro environment on financing and the implications for the junior sector. How do you see what’s currently happening globally impacting investment?
Erez Ichilov: I don’t want to turn this into a support group with us all crying on each other’s shoulders, but there are difficulties in raising money and implementing everything that we know is critical. We also have this time constraint — the 2050 net-zero global goal and how we get there.
In exploration, there is a bit of optimism and that’s due to technology. So, we do need to discover a lot more resources and as quickly as possible, but it’s currently very difficult for juniors to raise money for exploration.
In terms of who invests in the mining sector, I saw a statistic that the total AUM of major funds and pension funds has dropped substantially from previous decades, including in major hubs like London and Toronto. So, that’s an issue.
But in exploration, where perhaps there’s less risk of a disruptive technology pulling the rug from under the feet of the incumbents, we are seeing companies that have ways of exploring using AI, machine learning, and mass data crunching of regional and global data, and coming up with actionable targets. So, at least perhaps that part of the 15 years, whatever it takes from discovery to production, we can shorten the timeline and waste less time and money on false positives or, what some cynics will call, lifestyle companies. We also need to avoid missing out with false negatives, letting a perfect resource slip under the radar.
So, in exploration, there are a few rays of sunshine, although it really is hard to raise money, even for fantastic assets and not just marginal ones. The work in US, the LPO, the DOE, the ARPA programmes, the DODs, all these programmes and stimulants have gotten things moving. But, there are still a lot of issues, especially regarding the trust between the public and the mining industry.
Things are starting to slowly move in the right direction. It’s just that these are aircraft carriers, not skateboards. So, these things take time and this is really a race against time for humanity.
Keith Spence: I would say the biggest issue facing the exploration sector is global geopolitics. I’m based in Toronto, the heartland of exploration, with most junior companies listed on the TSX and based in either Toronto or Vancouver. In all my years in the junior space, I’ve seen at least three or four major downturns. I was around during Bre-X, so I’ve seen downturns. I would put this moment now as maybe the third worst, similar to the time post-Bre-X.
Since the Ukraine war began, the world bifurcated into two halves with Russia, some of the BRICS, and other, non-aligned countries on one side, and on the other side you have the US, the EU, Canada, and Australia. What has happened now is that we have much less available money for financing. In the old days, you had a big pot, now you have basically half of the pot of money available.
In addition, the amount of money that was available for financing junior projects, typically in the gold, precious metals, base metals, and copper space, is now going into critical minerals. And a high percentage of that money is not going into the more traditional critical minerals like nickel and copper.
Lithium has stolen the thunder from traditional metals financing – it’s way up there with gold in terms of the amount of financing. So, now we have a smaller portion of financing going to only one area of the metals space.
Hamid Rashid: Geopolitics is definitely playing a role, and the bifurcation of the market means resources are not available globally or available to the best use case. It’s politics and other factors coming into play that determine where the money goes.
In addition, after a decade of near-zero interest rates, we have entered a monetary tightening phase. And this high interest rate is going to stay at least for the foreseeable future, meaning that the rate that we have right now, will not, at least not imminently, go back to the near-zero that we had between 2009 and 2020. It was difficult to mobilize resources for mining in that decade. And now, with the higher interest rates, money is chasing higher returns, which can be found elsewhere. So, I think that a high interest rate environment is not going to help the mining sector as much.
Technological choices are also making a huge difference. Lithium is the current champion, but people are also looking for the next winner, which is also preventing money from going into mining sectors where you could have good returns. There’s a wait and see mode among investors, especially the large investors who want to see a trajectory of the technology that we have at hand and where it could go.
So, I think a lot of uncertainty is playing a role and that is making it very hard for the juniors to get the money they need.
Keith Spence: We’ve talked about interest rates but haven’t mentioned inflation. Even in the junior space, inflation is a big factor because the amount of money used, for example, to drill 100m of hole, is now more than double when you go back a decade or so. All the other additional costs are higher. So, we have a higher cost environment and less money coming in.
A lot of what’s driving this focus on critical minerals is regulation. Let’s look at some of the lessons learned from the IRA, and whether it has driven the amount of change that is required for the industry.
Erez Ichilov: In terms of stimulating the mining tech ecosystem, it’s definitely done quite a lot. It has also made a difference in terms of planning and approving for midstream conversion. The Electric Transportation Act, the CHIPS Act, the IRA, the new section 301 proposal on tariffs on foreign entities of concern, all make a difference.
What it hasn’t done yet, is stimulate the upstream. Not a lot of mines have actually started and opened up, and that probably has a lot to do with past legacy, with NIMBYism, with the idea that the upstream can happen somewhere else. The EU is now implementing the next version of their own Critical Minerals Act, which has created some hope that they will actually start supporting the demand side through creating strategic stockpiles of some of these relevant materials. But if you actually read through the various targets that they created, their goal in terms of mining and upstream is only 10% local content — for conversion and downstream, it’s much higher.
This signals that perhaps they’re giving up on mining on the regional level and are assuming that through international partnerships and other arrangements, the upstream can come from somewhere else to be processed, and to keep within the region these more added value aspects.
This is another point of friction for developing and developed countries. A lot of the resource nationalism that created the mining law in Indonesia in 2009 was based on the assumption that the real money is made on the added value and not on the mining, and that we’re actually at some sort of a cost-plus arrangement, ripping these countries off in an unfair way, distributing the wall-to-wall benefits. And that the real benefits are from the further advanced industrial activities.
This is not necessarily true. Many times you make money on the mining. So, if you think from a global perspective, both the EU and the US might be sending the message to Africa, Latin America, and to places where a lot of the upstream is, but there’s also an ambition for these places to turn more technological in their industry. I don’t know how to overcome that friction.
Hamid Rashid: This reconfiguration of the supply chain should’ve started even before COVID, but after COVID, you can see that all countries, especially in the West, are trying to reconfigure and reduce their dependence on China. But that has put the developing countries between a rock and a hard place in terms of current strategies.
China brings a lot of money and technology, and traditionally get things done very quickly, but then they are shut off from accessing the European or US markets due to regulations.
On the other hand, if you’re aligned with the US and Europe, you have market access, but can’t produce anything. Meaning that there isn’t the money or the technology that can quickly get the goods off the ground. That’s where many countries are now struggling. As an economist, what we see is that there are two effects of this kind of policy intervention in free trade, like you have trade creation and trade diversion. Trade creation is desirable.
However, trade diversion means that trade is diverted away and it doesn’t really add new trade to the global scheme of things. That’s where the risk lies right now, because any kind of tariff structure that you put in place creates distortion and the market configuration we are expecting to see will take time. Meanwhile, we’ll see less trade and supply of critical minerals. If you look at the global trade aggregate numbers, last year it was the lowest trade exports and imports globally for goods in any peacetime year.
It was even lower than the exports and imports in 2009, which was during a major global recession. So, this is not a very rosy picture that we are looking at with the trade restrictions that are coming into play. In the long term, it may benefit some of the producers, but in the short term costs will be very high.
Again, I’m not an unashamed advocate of free trade, I’m very critical of free trade. You have to have fair trade and you have to have mechanisms in place where developing countries can compete in the marketplace in fair terms. Now that geopolitics is playing such an important role, I think it’ll be harder to choose the right trading partners, right investment partners, and ultimately that will have a huge impact on consumers.
The final point I would make is that, obviously, China has attained a huge advantage over other countries in terms of cost efficiency. Their EVs are one-third the price of comparable EVs made in Europe. So, they have a huge cost advantage. You can argue that yes, there are a lot of subsidies given by the state, but the subsidies are everywhere. We must realize that subsidies play an important role and can ultimately benefit the consumers.
Keith Spence: The IRA provided US$300B for the energy transition, in addition to the pre-existing Defense Production Act, which went back from the Second World War, which was there to support strategic minerals that could be used in wartime. Of that US$300B that is supposed to be deployed in the energy transition, less than 2% has been deployed in the critical minerals space. I would argue this goes back to pre-existing conditions here in the US and pre-existing political conditions.
In order to deploy a large amount of money into the mining space, you’ll have to go against traditional distrust for mining by the Democratic party, the same party that put the IRA into play. They are concerned about environmental issues, so they have a constituency that wants the energy transition, but they also have a constituency that is very protective of the environment.
In many states in the US, especially in the West, it’s almost impossible to develop a mine. In addition to that, a high percentage of the money is being targeted at the downstream, which is essentially processing. But the processing of critical minerals has mainly been outsourced to China for the last two decades.
Everybody talks about lithium, saying we should source and process our own lithium. But the little secret is that more than 70 – 80% of all the processing of lithium is done in China. And processing lithium is a dirty business. So that US$300B has been allocated, but if there’s a change of government, we may not see that money spent.
We have to remember what critical minerals are. The essence of critical minerals, which is a rebranding of the old strategic minerals, are minerals that if my enemy has it, I want to have it from them and if I have it, I’m not going to give it to my enemy.
There is an election coming up in the US later in the year. What do you think a potential change in the administration will mean for critical minerals policies and programmes moving forward?
Keith Spence: Let’s assume there’s a change in government. The Trump administration has always been pro-mining. They like hard assets. They see the energy transition as one of the mix of other forms of energy, in addition to fossil fuels, etc.
From a strategic point of view, the government could see that we should be producing a lot of this stuff here in North America. And I could see them removing a lot of the environmental regulations that slow the development of mining. I think it will be a boom for mining in general, critical minerals, and traditional base metals.
Erez Ichilov: I agree that there is more inherent friendliness to the extractive industries in general. We are seeing the extractive industry itself having a bit of a Kodak moment and going into critical minerals. We are seeing Exxon in the US focusing more and more on lithium and trying to find ways to extract lithium from production water. So, it gives another life to decommissioned assets.
Another angle is that a lot of the downstream is going to happen in what they call red states, which also supports the concept that there’s no reason for a Republican president to necessarily fight against electrification of mobility.
Hamid Rashid: I’m not a US citizen, so I have no views personally, or from the UN about the political transition in the US. Having said that, I think we should be careful about what we wish for, not in terms of political transition, but in terms of where the market is going.
The mining boom may lead to a mining glut and a collapse of prices, which we’ve seen play out over and over again in the past. I think the biggest challenge for the critical minerals sector is price volatility. The average volatility of lithium prices is three times higher than other traditional metals and minerals.
When price volatility is high, it’s very difficult to invest. They may come out as winners on some risky bets, but on average, most investors lose out when the price is highly volatile.
From the industry perspective, it’s desirable to have steadily increasing prices, not a price that fluctuates too much, too frequently. Looking at the lithium spot prices, if you look at what happened in the last 16 – 18 months, the price fluctuation and collapse was astounding. A lot of early investments went in and everyone was expecting there to be a huge increase in supply in lithium, but it actually drove down prices.
Now the downward adjustment for lithium is very painful for many investors because the returns were adjusted to the expected price of lithium, but the expected price and the realized price are very different right now.
So, if the market can work without too much political interference, it is a good thing. I’m in favour of regulation. Regulation provides predictability, but if every investment decision is a geopolitical decision, then chances of mistakes are very high and there’ll be overproduction.
Erez Ichilov: One of the issues that we have with these new critical minerals value chains is that a lot of the elements are consumed as intermediates. The price volatility of them is sort of exponential. And a lot of them don’t have terminal markets, or even when they do, like cobalt, it’s not really a big enough one. Although the CME and the LME are trying to create futures and so on, it’s still very difficult from that perspective to stabilize your financial model going forward beyond the normal volatility of commodities that we’re all familiar with.
A couple of weeks ago, we were in DC and had some meetings with the DOE, amongst others, who asked how they can do better for the industry. And one of the things that came up was that if you enable commercial lending by figuring out where the things are that don’t work, this has to do mainly with political risks and with pricing.
And with price volatility, you don’t necessarily need to be the lender of last resort and replace the commercial lending. For example, you could provide a price guarantee to a certain minimum to enable project finance.
And perhaps through that your firepower will become more effective because, ultimately, it is. Even if you have to allocate for the downside risk, guaranteeing a US$1B loan is still less burdensome on the public budget than actually lending the US$1B. And there are some of those sorts of mechanisms, where governmental support or maybe even international support through the mechanisms that Hamid is preaching, could enable the market to flow in a more standardized than normal way within the existing solutions.
Let’s end with your outlooks for the future. Looking at investment, are there solutions in place to facilitate more investment into the critical minerals space?
Keith Spence: Overall, the critical minerals space is quite volatile. Lithium is one, and also copper is, in fact, one of the key critical minerals. And the outlook for copper is very, very strong. It’s a traditional industrial mineral, so goes the economy, so goes copper, but it has this aspect of the energy transition to it. The future for nickel is also as both an industrial and critical mineral.
In fact, just last night, we had a call with a buyer for a project in Argentina. And I’ll tell you, there are a lot of buyers still looking at lithium, notwithstanding the price softness right now, because the general consensus is let’s try and buy while the prices are down. And so, going forward, I think the future is bright.
