Critical minerals for the energy transition
November 2023
A mining super cycle is on the horizon, despite macro headwinds from China. Buoyed by the needs of the energy transition, demand for critical minerals, rare-earth elements and metals is set to more than triple by 2030.1 A total of 99 deals worth over $100 billion were announced in the first nine months of this year alone – 30 more than in the same period last year and the highest level since 2012.
These dynamics mean there are opportunities for institutional investors, who thus far have been cautious about committing funds to large-scale mining projects, resulting in years of underinvestment. The energy transition will not be possible without these raw materials for clean energy technologies – at least not at the pace necessary to halt climate change.
At the recent FT Mining Summit in London, I sat on an expert panel of investors and mining companies to discuss these challenges, how to stimulate the mining sector and where new impetus is coming from.
Despite a bumper year of profits in the sector and a raft of supportive net zero legislation – including the US Inflation Reduction Act and the European Union’s Green Deal – caution still reigns. This is especially true of large deals – a learning from the last super cycle where high premium M&A deals by the mining majors led to significant write-downs as commodity prices came back down to earth.2
1 International Energy Agency (IEA), Critical Minerals Market Review 20232 Mega Miners Are Hunting for Deals After Decade on the Sidelines, Bloomberg
Instead of the often-ill-fated deals we saw in the last super cycle, private investors have focused on smaller projects – as reflected by a 160 per cent increase in venture capital funding for critical minerals start-ups.3
Investors’ caution may also be attributable to Western geopolitical tensions with China, the world’s biggest supplier of critical minerals and rare earths.
Among institutional investors, some of their reluctance to invest in new capacity is rooted in a long-standing focus on yields rather than growth. However, with close to 400 more mines needed over the next decade to build sufficient electric vehicles and energy storage batteries,4 this focus needs to shift.
To de-risk investments in new mining capacity, we as banks need to look at new funding models. One option for countering risk aversion among investors is shared finance, where multilaterals or development banks act as guarantors.
3 International Energy Agency (IEA), Critical Minerals Market Review 20234 More than 300 new mines required to meet battery demand by 2035, Benchmark Source
Building and updating mining capacity also faces some practical issues.
In a chicken-and-egg scenario, permitting and licensing often impede the ability to raise capital for such projects. Efficient permitting processes, especially in light of environmental, social, and corporate governance (ESG) requirements, are crucial to delivering energy metals while maintaining ESG standards. Therefore, collaborating with local communities and governments to minimise negative environmental impacts and foster positive outcomes for the areas concerned must be a priority as miners embark on new projects.
Another fundamental issue is the lack of experience in carrying out large-scale mining projects, even among mining majors and large mid-caps. After decades of underinvestment in the sector, few people have hands-on experience in building large mines from scratch. Not only is there a fundamental lack of engineering capacity, but there’s also a shortage of people – especially in the West – who can manage multiple big projects at the same time. And the latter will be vital given the high number of mines we need to build.
It’s time to look to China, which has significant capacity, and potentially India, where these capabilities are also developing. But miners must also build up capacity in the rest of the world. Vital to achieving these goals is finding new ways of attracting workers into the sector – especially engineering and tech talent – by making mining a more aspirational career option.5
5 Mine 2023: 20th edition, The era of reinvention, PWC
The role of critical minerals in the energy transition will certainly play a part in reshaping mining and creating that draw – as it has already with several new market players.
For one, there are mining majors diversifying their portfolios into critical minerals, particularly those with significant coal assets, but also PGM (platinum-group metals) and gold miners.
At the same time, national governments have moved to secure access to critical minerals through strategic alliances or new trade deals. Examples are the US-led Minerals Security Partnership as well as cooperation agreements between Australia and India, and the US and Japan.6 Sovereign wealth funds like the Public Investment Fund in Saudi Arabia are equally focusing on critical minerals to help diversify their economies away from fossil fuels.7
Finally, end users are increasingly joining the fray. For example, cleantech companies such as electric car and battery manufacturers are investing in the upstream supply chain to secure future supplies of critical minerals, raising their risk exposure substantially by cutting out intermediaries.8
6 Mine 2023: 20th edition, The era of reinvention, PWC7 PIF’s joint venture with Ma’aden to help establish mining sector: top official, Arab News8 Lithium Scarcity Pushes Carmakers Into the Mining Business, The New York Times
These new players will be on a steep learning curve, but their influx will lower the cost of capital in mining. Alongside this, traditional investors need to re-examine their own priorities and overcome their distanced relationship with mining. Combined with reinforced efforts to de-risk such investments, and be mindful of environmental and social considerations, this will create fertile ground for closing the capacity gap and setting the world en route to net zero emissions.
The critical minerals sector is primed for the next super cycle, and with the current market weakness, the time to move is now.
