Series 2 Episode 2: Critical Minerals in Energy Transition

Transcript

Elisabeth Hunt:

Welcome to our Innovation in Energy Podcast. Today, we're going to look into the resource requirements to deliver energy transition, and the impact of critical minerals for the energy transition journey. As countries and companies move forward with their net zero targets, there's going to be an enormous increase in demand for certain minerals, especially those that support electrification and energy storage. This unprecedented increase in demand for these minerals has been forecasted to lead to an increasingly significant demand supply imbalance from about 2025 onwards. I'm delighted to be joined in the virtual studio by three experts from across our global network. Jonathan Lee, UK mining and metals leader for PwC; Lauren Bermack, PwC Canada's mining deals leader; and Lachy Haynes partner in PwC Australia's environmental and transactions advisory group. Welcome to all of you. It's great to be on the line together and I welcome Jon from London, Lachy from Melbourne and Lauren from Toronto. We're recording this at 8 p.m. in the UK. So good morning, good afternoon, and good evening to each of you. What do we really mean by critical minerals in energy transition? John, perhaps I'll start with you first, it’d be great to get your thoughts.

Jonathan Lee:

Yeah, thanks Liz, and it's great to be here today to talk about a really important topic actually, because delivering the minerals or to create energy transition and make sure that we make that a global success is something that really needs a lot of focus for some of the reasons hopefully we're going to explore in this podcast. By critical minerals, we really mean the minerals required to deliver energy transition, and a lot of those are focused around electrification. Those minerals such as copper, nickel, cobalt, lithium, graphite, and many of those are focused on battery components and battery technology as that becomes more and more important to delivering 24/7 power from renewable sources. As the world ramps up this, we are going to need more and more of these types of minerals. For example, some of the forecasts we've seen are around the copper and nickel investment over the next 10 years, between the regions of $250 and $300 billion of capital investment alone. There are many other minerals that we're going to need in enormous quantities as we move through energy transition.

Lauren Bermack:

Right, and Jon, I'll just add on to that, this is really tricky in mining. Well, there are a lot of identified resource projects out there, many aren't even anywhere close to being developed. Many just haven't been economically viable in the recent pricing environments. This is driven by a lot of reasons, a lot of the high grade lower cost mines have already been built. Some of these critical minerals like graphite and lithium, the projects tend to be smaller, they're more difficult to develop. They have really unique chemical compositions and can be quite expensive. Higher price environment is really needed to make these projects economical. While we are clearly moving towards that higher price environment, mining projects take so long to develop, I'd say 10 to 15 years is the average from discovery to first production. You can't really flip the switch quickly. Shortages in mining really, they could take years to recover from which could lead to price impacts over a very long period of time.

Elisabeth:

Lachy, I'd like to bring you in here. What are your thoughts on this?

Lachy Haynes:

There's been much written about the transition to net zero and I'm sure our listeners are aware of that, but relatively little about the role of critical minerals and this role has been underestimated. The critical minerals will make or break the energy transition. For example, Australia is seeking to develop its advanced manufacturing capability, including renewable energy componentry. This is going to require the development of the upstream capacity and capability to deliver the requisite volumes of critical minerals at the necessary quality and price. There are also a number of countries that have made net zero commitments that are reliant on the deployment of low emissions technologies and that includes Australia. The sharply increasing costs of critical minerals will challenge the accepted wisdom that tech costs always declined through learning curve effects in the development of supply chains. For example, the cost of solar PV is being challenged by near tripling of polysilicon and silicon prices over the past 12 months. Bloomberg is forecasting the first increase in lithium ion batteries in 2022 for over a decade. Lastly, we should bear in mind that climate technology cannot scale indefinitely given its reliance on critical mineral inputs.

Elisabeth:

With all of these challenges, it sounds like we're going to be entering a more volatile price environment with potentially much higher prices as a result of the increasing need for these critical minerals. Lachy, perhaps staying with you, what are the impacts of this likely to be, do you think?

Lachy:

What's worth bearing in mind is that many critical minerals are bought and sold in opaque markets. There are exceptions with base metals like copper and nickel that are traded in the London Metal Exchange, but this is not true for all the critical minerals. The issue here is it makes price discovery and price certainty challenging. The impact of that uncertainty is on the availability of funding for the development of the mines and the associated infrastructure that we will need. We should expect to see exchange traded contracts emerge over time to address these challenges.

Lauren:

Maybe, I'll just add on some additional impacts that I'm thinking about as well. Globally, there really is a drive to localise supply chains. Right now, there is high geographical concentration for many critical minerals. When you think of cobalt in the DRC, and graphite in China. Also, as you move downstream, there is a huge concentration of refining capabilities in China. By localising supply chains, countries will reduce risk of future disruptions and have more control over supply. We’ve seen the impacts of this with the pandemic, in areas outside of mining. It has really come into focus as a major issue. Another thing would be greater resource nationalism, which falls from localising supply chains. Really when the supply constraints and commodity prices are high, it can really lead to heightened risk of governments trying to take over mines in other countries or taking larger ownership stakes, and also raising taxes and royalties to ensure that more of the profit stays within the country. We're definitely seeing these impacts in countries around the world. One of the other impacts that we are going to see is that projects will have to get built faster. Governments, they're going to have to start streamlining the permitting process, and also provide financing support and more investment tax incentives to get these projects built faster.

Jonathan:

I think you raised some really interesting points there, Lauren. Actually, the localisation of the supply chain is going to be a real driving theme. Actually, digging into that a bit deeper, no pun intended, the role of the commodity traders in that is going to be really interesting. Really thinking about what the supply chain of the future looks like and looking to support the growing Gigafactory economy that we're seeing. That's really echoing a theme that I expected to emerge, which is an increase in awareness by the miners of the fact they need to be more customer centric. I can see a world emerging, where a customer is looking at getting specific mineral products, for example, specific metals that have, maybe, a bespoke carbon content, or something like that, or some degree of specificity just for that customer, rather than what we've had historically, which is a generic LME graded products with one size fits all. What that might mean is that actually means that those aggregators are traditionally some of these entities, that we've seen more as tolling entities, are earning that kind of place on the value chain, may actually be able to bring more value to customers and capture some more of the value chain potentially from the miners as they aggregate material and provide a better shop window for the customers.

There's also another interesting trend that we'll see that this price environment volatility will drive. That's probably the impact of substitution and effectively new technology solutions and effectively creating more uncertainty in the market where, as you mentioned, we've got a very long development time and you need certainty for that funding and to press the button on developing a mind. A really good example of that we're seeing at the moment is electric vehicle battery technology. We are increasingly seeing a move to bespoke battery technology. Lithium iron phosphate, for example, is now coming into fashion, which is not as good a solution as the nickel, cobalt, aluminium or NCA batteries that are in most electric vehicles at that moment, because the energy density is so much lower and recharging times are longer, and but it costs a lot less to produce.

We're starting to see Tesla, for example, in China moving to a model where model trees are going to be built around LFP battery technology rather than NCA battery technology. You'll probably start to see shipping if that moves to electric batteries, using less energy dense forms of batteries because it's less important for the overall cost base and maybe even static battery storage as well. That move actually will have a really interesting impact on commodity demand as that comes through, and potentially you could even see an environment where, with a really high quantity price environment, real scarcity of critical minerals. Maybe that actually hastens the introduction of the hydrogen economy as a way of storing energy and providing energy to mobilisation and movement potentially. That might be an extreme example, but certainly, it's one that shouldn't be discounted out of hand.

Elisabeth:

Jonathan, thank you for that. I never knew that there were so many different types of battery technology out there. Lauren, perhaps turning to you now. What does this mean for how a miner can create value in this price environment?

Lauren:

Well, one way is through M&A. A lot of miners right now are looking at their portfolios and trying to assess whether they have enough exposure to critical minerals and will be assessing whether they need more. We're already seeing deal activity pick up in this area. A few deals to highlight, in Canada there was a recent battle for Noront and its Eagle's Nest nickel deposit between BHP and Wyloo metals. With Wyloo eventually emerging as a winner. Wyloo paid a significant premium for an asset that's actually quite challenging. While it's very high grade, it requires significant investment in roads and infrastructure to get built, as well as agreements with many areas of First Nations communities. Some other acquisitions that we've seen in the lithium area, some recent ones, in 2021, Rio Tinto has announced acquisition of Rincon’s lithium project and Zijin’s acquisition of Neo Lithium. These are definitely a pickup of lithium acquisitions in the recent months. In addition to straight M&A, the fast growing battery supply chain is also seeking to secure raw material supply. This ability to enter into long-term partnerships with diversified production bases is really an advantage to miners. We've already seen several of these, one was Tesla's recent partnership with New Caledonia’s Goro mine. We expect to see a lot more of those coming in the future.

Jonathan:

Lauren, I have a habit of always agreeing with you. Once again, I find myself agreeing with everything you say. For me, the really interesting move is, we're seeing a bit of a changing of guard at the majors now, but it has been in the air for the last few months, but is actually gathering momentum all the time. As we move from this historical steady as you go type policy, actually, there is a reality, which is focused on production and returning cash to shareholders. There's a real change in terms of how the miners in the future create value for shareholders through the resources boom that's going to come due to the demand for energy transition. That in itself will attract new market entrants as well. I suspect we'll see increasing vertical integration re-emerging as a trend, particularly the battery manufacturers or even the automotive sector as they seek to secure supply, and actually who bears the risk for securing that raw material will be really interesting. The OEM is actually going, this is such a core component to us that we need to seek supply security rather than they'd be the emergent battery manufacturer class that we're seeing. I suspect private equity will start looking in a more focused manner.

We've got the specialist private equity mining firms that have been ever present in the market, but certainly I am seeing renewed interest from mainstream private equity funds looking at allocating some capital to mining, as well as the pension funds and the sovereign wealth funds also refining their appetite for investment in the sector. There will be an interesting change in value perception, and certainly the carbon content will have a new focus and potentially create new value opportunities. Where you've got a local supply chain that's maybe hydro powered for example, and that goes from miners through to smelting and refining, through to the end user. That could suddenly become very powerful in minimising the carbon emissions from moving minerals around the world. That low energy or low carbon or low cost energy access will also help create, so that people will have a different perception of value, and also create some interesting dynamics that different investors will treat differently. Lachy, I know you've got some perspectives on this as well with an Australian tone to them.

Lachy:

Yes, from my perspective, I would urge critical mineral producers to reconsider their propensity to collaborate. I'm not referring to the industry consolidation by M&A that Lauren mentioned, although that certainly has a role, but seeking to collaborate on the development of downstream processing facilities and infrastructure. The Kwinana battery hub at Perth in Australia is an interesting case study and possibly represents an industrial strategy to replicate. Collaboration of this sort may also provide opportunities to attract new pools of capital that have not traditionally invested in the commodities industry, notably superannuation or pension funds; they could pursue infrastructure-like returns while limiting exposure to commodity risk.

Elisabeth:

Well, as the transactions tax partner, it's really exciting to hear about all that future M&A activity clearly going to keep us busy. We're running up the end of the podcast now, it'd be great if we get some final thoughts from each of you. There's clearly an enormous amount of change that's needed in what has historically been a relatively steady industry, one that perhaps hasn't seen huge shifts in business model or disruption in the same way that many other industries have. This must be a really exciting time to be part of that journey. Lachy, what are your reflections on what the future might hold?

Lachy:

It is Liz, but that said, despite the change and disruption we've discussed today, there are some long standing challenges that remain and cannot be overlooked. These include things like securing social licence from local communities as you seek to develop mines, managing the ESG aspects of new projects and processing facilities. There is a lot more focus and attention on those aspects today than there has been. Obtained finance for project development is continuing to prove a challenge and a lengthy timeframes for project development that Lauren has already mentioned today. There is also an ever present geopolitical element to the way in which the critical minerals industry develops from this point. For example, we've seen recent announcements around establishing new or deepening existing ties between allies like the US, the UK, Australia, India, and Japan, through Orcus and the Quad, and each of those has a significant focus on developing the critical minerals industry.

Lauren:

I'll just jump in here as well. Liz, like you said, this is a really exciting time. There is going to be a huge amount of growth, and across the whole battery supply chain in the next few years. Really, a lot of what's going to happen in the next few years is really going to shape the sector for the coming decades. Clearly investments are going to come here, and new battery supply chains are going to get built, but there's still a lot of uncertainty about where exactly these supply chains are going to be built, and which jurisdictions are really going to become the leaders in the area. We are seeing governments trying to give their jurisdictions a leg up by being proactive with incentives, and initiatives to ensure that they have in place. Speaking from a Canadian perspective, Canada really could be and actually should be a world leader here. We have a huge amount of resources. We have a skilled workforce, we have high ESG standards. We're really close to the US. There's a lot of end user demand there. That's a goal right now of the Canadian government, but it still remains to be seen whether that's going to happen in Canada. Maybe I'll pass it over to Jon and see if he has a UK perspective to add in there.

Jonathan:

From a UK perspective, it's really exciting. We've historically been a very important financing centre for mining and metals globally, as well as being the head office location for a number of very large mining operators. We're going to see a considerable pickup in activity over the next decade, as effectively the critical minerals need to be mined to meet the energy transition demand. That's tremendously exciting for those of us who are really passionate about the industry here. One of the things that I am also very focused on with a UK hat on, that we haven't actually spent much time or any time talking about on this podcast is the rise of the circular economy. What part of the value chain evolves around recycling, and effectively one of the ways in which we can meet this huge demand boom that we're facing is by better recycling. Now, that's not going to solve it all, but it can take a big step to helping us get there. It's really interesting to see from, the UK how that recycling value chain develops, and in particular, how that's funded through growth stage, because clearly we're years away from having a sustainable circular economy in the UK with mass adoption of EVs, for example, and recycling of EV batteries as an easy example. That's certainly one of the things I am spending a lot of time thinking about and talking to people about how that circular economy looks, as well as the need to get the primary mining investments over the coming years.

Elisabeth:

Jonathan, Lauren, Lachy thank you so much for sharing your thoughts and insights today, and for joining me at various times of the day around the world. It's been a fascinating discussion. Clearly there are some exciting times ahead as the industry starts to tackle some of these challenges. That's it for another episode of our Innovation in Energy podcast. I'd like to say a huge thank you to all of you, our listeners. Please don't forget to rate and subscribe to keep up to date with all of our brilliant podcasts. See you next time.