How do you see the role of critical materials evolving in the context of emerging techologies, such as new battery chemistries and renewables?
Critical minerals are generally understood to be those that are used in critical applications, which are historically defence and infrastructure, but which now also include energy transition and energy security.
In addition, securing the supply of these materials is not guaranteed, either due to natural endowment, processing bottlenecks, government regulations, or controls, etc. So, as long as we continue to need these materials to make our lives better, and as long as these resources are finite, this category of critical materials will continue to be pretty high on the agenda for policymakers.
We are seeing more specialized departments getting set up at the government level and on corporate boards around critical minerals, which means the understanding of the criticality of the sector is becoming more embedded across all stakeholders.
Looking at emerging technologies, I think the biggest development is the recognition that there’s not going to be a single technology that wins the entire energy race. Whether it’s wind versus solar, hydrogen or energy storage, nuclear or sustainable fuels, it’s becoming increasingly clear that there are different use cases for each technology across all those big sectors we need to decarbonize.
So if we manage to reduce duplicated efforts, it would be a very positive evolution in how we think about critical materials because it should make resource allocation more efficient.
Given your focus on forecasting trends, what are some potential shifts in commodity markets you see arising as we move towards 2025?
So, far in 2024, we’ve seen some very, very strong upward moves in the prices of major industrial commodities and this has been reflective of this nice Goldilocks scenario we’ve had. That is to say, we are in a moderating inflation environment and managing a soft landing.
The fact that critical minerals prices haven’t participated as strongly as the big macro commodities, I think, is because of a lack of awareness, liquidity, and in the ability to trade these minerals for broader macro-focused investors.
Going into 2025, the energy transition and energy security continue to be very important themes.
But, I think the big one that’s really going to drive commodities going into next year is this continued deglobalization theme, which introduces volatility and uncertainty into markets, but for commodities, can actually be quite positive. Critical minerals demand should accelerate as we continue to decentralize supply chains and therefore diversify the funding pool.
Part of it’s going to be driven by China. China has had a weak property market overhanging commodity sentiment for the last 2.5 – 3 years. This has had an impact on consumer activity, but we’ve seen recent policy announcements where the government is starting to allocate capital to clear some of this housing inventory. This could be the step change that markets have been waiting for, so we might see a positive inflection in terms of sentiment for China, which flows through to commodity markets.
Another big part will be driven by a growing narrative from Saudi Arabia, and the formation of this third sphere of influence, which is the Middle East, Eastern Europe, and Central Asia, down into Africa. This is a new regional supply chain for critical minerals that is starting to emerge. And with Saudi’s Vision 2030 plan, S&P estimates around US$150B to US$170B will be deployed to support their metals and mining supply chains.
Therefore this deglobalization momentum should grow into next year and will drive not only energy transition projects, but also broader construction and infrastructure projects around the world.
Where is the money coming from to finance these critical materials projects? Do you see access to capital improving as demand for critical materials grows and as we see governments mandating new regulations to help spur that investment?
The build out of this new energy economy has to be driven by policy first and foremost. Climate change is everybody’s and nobody’s problem at the same time.
The key to mobilizing capital is to stabilize the rules by which we’re all playing. In the past, it was all about taxes and royalties. Now we need stability in climate regulation and targets, and project economics to be incentivized by long-term emission penalties as well as environmental credits.
From a policy perspective, 2024 is a big election year. Half the world’s population will have held national elections this year, and so 2025 becomes a year of policy implementation. I’m hoping that we see the policy stability needed here, or, better yet, more commitments to maintaining longer term stability.
On top of regulations, I think we will also see more government funding being deployed into critical mineral supply chains near term. Combining this post-election implementation environment with the trend of continued deglobalization, as well as a lower funding rate environment, means there should be an increasing sense of urgency to get through this backlog of energy infrastructure and energy transition projects while we are in a healthy economic place.
Finally, I think we will continue to see development of new financial instruments and price assessments that can be written into contracts that reflect the critical minerals industry and what we’re trying to build, to attract broader pools of capital.
From an ESG perspective, how do you assess the risks and opportunities associated with these critical minerals projects?
I think too often companies with critical mineral operations or projects believe that by virtue of their commodity exposure to the energy transition, this is good enough. The reality is, if you own a piece of property that contains lithium minerals, that in itself is not an “ESG credential”.
We are already in a greenwashing battleground and the critical minerals industry does not need to contribute to it by making superficial statements. So, let’s stop talking about that and really dig down into what ESG due diligence is about, which is essentially a framework to value investments on a holistic basis.
It’s important to note, ESG is not a pass or fail exercise. That type of screening exercise is a very simplistic way to think about ESG. Let me walk you through how I think about it.
So, the environmental part of the framework is pretty straightforward in that it’s quantifiable, and it’s absolutely related to project economics.
Waste, emissions, water, and biodiversity management are, first and foremost, key for permitting and reclamation. Again, this is not a pass or fail exercise, but understanding the metrics that can improve the future value of an asset.
Also, carbon accounting should be an input into valuation because we have to think about the future cost of capital, the future availability of capital for this project, and whether there could be carbon taxes or credits as well. So, from a financial statements perspective, environmental assessment matters.
The social part of ESG is really about operations resilience as the technical risks are very high with these projects. So, do you have the right people in place? Can you attract and retain a good workforce? How are community and government relations being conducted? This is all related to running sustainable operations, and having a social licence to operate.
And then finally, governance is about business resilience overall. I look at your executive team, who is on your board. You have to have teams that have diverse capabilities, but they also have to be empowered and informed to evaluate and support a long-term business strategy.
It’s not as simple as it sounds because part of long-term planning for a mining project is being able to manage through short term commodity cycles and shocks, and sometimes it takes a few quarters for investors to buy into what you’re working on. But this is also why the G part of ESG should not be overlooked.
Are there specific challenges or opportunities within the sustainability space that you want to highlight moving forward for the industry?
I think the biggest challenge for the critical minerals sector is still the education piece, which is essentially the means to securing financing – how are we going to finance the build out to meet our energy transition goals?
Looking at mining companies focused on industrial and critical metals, about US$120B is spent on capex every year just to maintain production levels in aggregate. Now, if we want to meet growing demand for critical minerals, we need to spend an additional 25 to 50% every year. This means that we need sources of funding beyond corporate balance sheets.
Keep in mind this is also just for mining. The midstream portion of the supply chain is also severely underfunded outside of China. Again, how do we finance our sustainability goals?
Now the reality is, of course, that the industry as a whole faces an uphill battle with the public’s perception of mining. Further, there is a perception that critical minerals supply chains generate a higher carbon footprint than that which the end products are reducing.
These two “public perception” issues are a challenge, but we must take it as an opportunity. So, sustainability, which is what we’re talking about at the end of the day, is ultimately about a Just Transition. If we want to drive capital to the sector, and we want to fund the critical minerals projects that are needed for this new energy economy, we need to do more than just stake another rare earths deposit and say I’ve got my ESG credential right.
We, as an industry, need to show how our work benefits everyone, and I think part of the way that we need to do this is to step outside our echo chamber. We need to tell our stories to schools, students, and to government players outside of the natural resources and energy divisions.
We need to talk to communities, we need to engage a lot more with our customers and suppliers and, it sounds naive, but at the end of the day, we need to get consumers to connect the dots. It is this education piece to make sure that people understand that what we do is really for a broader Just Transition.
Another question I have is: Why don’t our community liaison colleagues sit on executive committees? I used to focus on getting meetings with the CEO or the GM to understand the DNA of a mining company. Now I also want to know what the community and sustainability officers are doing because sustainability strategy is essential for businesses everywhere.
At the end of the day, this industry takes on big projects with big equipment and big workforces, and we’ve got exposure to price cycles that would give most people heartburn. But this comes with an amazing ability to manage risks and I think the public could be quite inspired by what our teams go through to deliver these critical materials into their hands and into their homes That’s what I view as the best opportunity, ultimately.
