Critical minerals supply and demand challenges mining companies face

Increasing regionalization of supply chain

China controls the processing of key energy transition minerals stemming from low labor costs and lax environmental regulations. Between 1990 and 2019, China’s production of rare earth elements increased from 30,000 tonnes to 140,000 tonnes, with the US importing 80% of its rare earths from China in 2019 and the EU 98%.⁵ Many countries are seeking to secure a larger part of the EV or battery value chain within their country and reduce their current reliance on China.

Accessing reserves and resources

Historically there had been little investment into critical minerals and project pipeline is thin compared with the demand outlook. However, this is changing as Canada, the US, Chile, Peru and Brazil seek to take advantage of their reserves and resources. Canadian provincial governments are beginning to make strategic investments in projects to access its plentiful reserves of graphite, nickel, aluminium, copper, lithium, cobalt, manganese, molybdenum and rare earth elements. Moreover, electronic manufacturers across Japan, Korea and North America have expressed interest in Canada’s cobalt reserves and in developing cobalt supply chains that could circumvent the Democratic Republic of Congo and China’s dominance over production and processing. EV manufacturers are partnering with mining companies in Canada like Giga Metals to secure nickel supply. However, global battery and EV manufacturers believe chronic underinvestment across commodities over the last 10 years will result in a supply deficit in the near to medium term.

High exploration costs and limited investment

While the race to acquire battery minerals has picked up, in the past we have seen limited investment in these commodities, both in terms of exploration budgets and investment from major miners due to the absence of large-scale projects. For example, the absolute investment in copper exploration budget in 2021 was US$2.3b as opposed to US$249m in lithium.⁶ The potential of the exponential increase in battery minerals demand has gained the interest of large diversified miners. However, there is a lack of sizeable, well-advanced projects in low-risk jurisdictions that are ready to be green-lighted.

High production costs

Ore quality has continued to decline across commodities as high-quality deposits (and higher-grade parts of the deposits) have been exploited in the past. As an example, the average copper ore grade in Chile has decreased by 30%⁷ over the last 15 years. Copper content in Chilean ore is about 0.64%⁸ on average. The deposits in some major mines are depleting and developments are moving to the fringes of exploited deposits. Extracting metal content from lower grade ores is complex, uses more energy and is higher cost, not just for on-site processing, but also for operations along the value chain (e.g., dust suppression and reclamation). Moreover, the deeper the production site, the more cost and energy are required, resulting in higher carbon dioxide (CO2) emissions. Lower-grade ores also generate larger amounts of rock waste and tailings that require careful treatment. Therefore, investment in new resources or technology is required to offset higher costs.

Water management and license to operate

Copper and lithium mining is water-intensive, and mines in South America are exposed to high levels of climate and water stress with ~80% of copper output in Chile being produced in high water stress and arid areas. Further, high ground water consumption due to lithium mining in Chile, has raised concerns among surrounding communities and have stirred up protests. Companies need to invest in desalination capabilities to use seawater, which will likely increase production costs. Moreover, the Chilean Copper Commission (COCHILCO) estimates that desalination and the use of seawater is likely to grow at a steep 230%⁹ during 2018-29. It is expected 15 new desalination plants/seawater impulsion systems expected to come online by 2028. Companies, therefore, need to adopt find cleaner and sustainable solutions; however, even though many technologies have been developed, none are proven to be commercial at scale.

Lack of infrastructure limits access to some resource-rich areas. Further investment in transportation and energy infrastructure will be required to unlock the potential of remote battery mineral deposits. For example, Canada has large underground reserves of lithium but on a hard rock site which makes it difficult to mine. Additionally, remote project locations lacking infrastructure, proximity to end markets and weak lithium prices have been key obstacles for the lithium mining sector in Quebec, Canada.

Geopolitical issues

The mining industry in Chile and Peru is facing risks emerging from political instability in the regions. Peru’s political leader plans to review tax contracts with companies and plans to increase taxes on mining profits. As Gabriel Boric won the 2021 presidential election runoff vote election of in Chile, mining companies are wary of increased taxes on copper and lithium companies, as well as potential delays in project approvals. At the same time, the Chilean government is pledging to create a state-owned lithium company, potentially diverting strategic growth away from private-sector producers. These developments have stirred uncertainty around future investments in mining in these regions among investors. Moreover, in Peru, the Government’s decision to intensify mining operations is opposed by mine workers as they want a better representation of their rights and safety. At the same time, resistance around land rights, reinforcement against hazards from pollution, rationalized compensation and environmental concerns remain causes of friction between companies and local communities in the country.

Access to capital

Access to capital in the mining sector remains challenging even in what appears to be the start of a new commodity super-cycle. Investors are often deterred by price volatility, long project lead times, complex ESG factors and the smaller market size of some battery minerals. In addition, investors and shareholders are holding mining companies to increasingly higher standards of accountability, particularly in the environmental context. Human rights issues, child labour in artisanal mines, provenance from conflict-affected/high-risk countries, political insecurity (excluding China), poor community relations and poor occupational health are also key considerations for investors. These factors coupled with the cyclical nature of the industry means returns can fluctuate. An industry that has returned on average 7%-8% on capital on top of the commodity price cycle will need to find different and innovative sources of capital to fund these changes.

Develop road maps and action plans

Major countries such as the US, Canada, Australia and European nations have created a list of critical minerals that are either essential to energy transition or deemed important to the domestic economy and whose supply is seen as high risk. They are also developing road maps to enable the resources sector to supply the growing markets for raw and refined critical minerals. For example, in the US, the Department of Energy is aiming to release a 10-year plan to develop domestic supply of lithium batteries for electric vehicles. The agency’s Advanced Technology Vehicles Manufacturing Loan Program will distribute US$17 billion to support new research and manufacturing efforts. The Canadian Government is paying close attention to critical minerals through various initiatives such as the Canadian Minerals and Metals Plan and the Joint Canada-US action plan on Critical Minerals Collaboration.

Ensure adequate levels of government support

Governments are providing funding support to develop projects across the value chain. The US has announced US$1 trillion¹⁰ infrastructure package for industrial metals which includes US$6 billion for battery materials processing and manufacturing projects with another $140 million allocated for a rare earth demonstration plant. Countries are also supporting research projects to study new clean energy technology solutions. In line with Canada’s Critical Minerals Strategy to generate investment and help create jobs in the mining sector, is the Ontario government is investing $363,000¹¹ in Frontier Lithium, a Sudbury-based mining company to demonstrate its newly developed proprietary lithium extraction process. Canada has proposed to create a Critical Battery Minerals Centre of Excellence at Natural Resources Canada with $36.8m of funding over three years for federal research and development to advance critical battery mineral processing and refining expertise.¹² Canada also joined the Global Battery Alliance (GBA) — run by the World Economic Forum — to develop a circular and sustainable battery value chain.¹³ The US pledged up to US$30million¹⁴ to support scientific research to make certain that American businesses can reliably tap into a domestic supply of critical elements and minerals, such as lithium, cobalt and nickel, needed to produce clean energy technologies.

Drive cross-country collaboration

The US, Canada, Australia, India and the EU are actively collaborating to drive industry cooperation, secure and develop a robust critical minerals supply chain and increase reliable supplies. They have developed actions plans, launched various initiatives and/or signed MoUs in the past two to three years. Key examples include the Critical Minerals Mapping Initiative by the US, Canada and Australia¹⁵, to discover concentrations of critical minerals in more than 7,000 mineral samples from 60 countries. In addition, in June 2020, the US and Canada announced explored opportunities to collaborate on securing access to the critical minerals needed for key manufacturing sectors such as communication technology, aerospace, defence and clean technology.¹⁶

Foster collaboration along the value chain

Automotive manufacturers are increasingly seeking to partner with mining companies to combat supply-related risks. They are also actively looking for alternatives to constrained metals. While long-term supply or trade agreements are not new in the automotive sector, companies are now procuring raw materials domestically to support buy local initiatives or only with certain trade partners, e.g., General Motors intends to source lithium from North America for its new range of electric cars, to counter Chinese dominance.¹⁷ There is also more investment in R&D for new materials by downstream companies, e.g., tech companies like Puerto Rico-based EnergyX are experimenting with nanotech membranes that allow for the speedy and efficient separation of Lithium during the refining process.

• Scenario planning: Miners must focus on being agile and prepared for future changes in demand. Scenario planning provides a solid foundation to underpin medium- and long-term business plans objectively and to map out and prepare for possible alternative futures.  
• Optimize portfolios: Miners need to understand the interaction among various parts of their portfolios to enable decisions on investment, divestment, and rationalization to enhance the value of the entire portfolio. Decisions regarding where to invest and allocate capital will need to be taken long in advance and must also include qualitative long-term value measures in the optimization process.  
• Supply chain transparency: This is important from an ethical standpoint but also to ensure good visibility of customer demand for products across the value chain. More transparency may also provide the ability to capitalize on new opportunities (e.g., increasing recycling). Blockchain can enable greater transparency of origin and ethical supply chain. 
• Increase collaboration: Working more closely together with downstream (automotive and technology) players and governments can help lead to positive trade outcomes, as well as policy support. For example, companies can lend their expertise to help inform the development of policies around scrap collection or guide approval processes that facilitate projects in the battery manufacturing industry. 
• Access to capital: While access to capital has remained challenging for the industry, with the availability of green bonds, miners can raise capital for a sustainable project or greener operations. With green bonds, miners can ring-fence their capital for a particular project, reducing risks to investors while accessing cost at a relatively lower cost of capital. It would be, however, imperative, for the company to maintain high ESG scores to secure long-term investors as companies are increasingly being rated on various ESG metrics.
• Circular economy: Recycling rates in the industry are low which presents a huge opportunity to invest in recycling capability. While certain hurdles remain, such as lack of scrap collection policies and programs, scrap contamination and scrap availability due to long product life, governments and companies need to work together to a) carve out policies for efficient scrap collection and management b) investment in product design and innovations that ensure efficient recycling of commodities. For example, less than 5% of all spent lithium-ion batteries are recycled,¹⁸ in large part because the packs are difficult and expensive to dismantle.
• Investing in innovation: Innovating new ways to reduce material intensity and encourage material substitution will alleviate supply constraints, while also reducing costs. For example, 40-50% reductions in the use of silver and silicon in solar cells over the past decade have enabled a spectacular rise in solar PV deployment.¹⁹ Innovation in production technologies can also unlock sizeable new supplies. Emerging technologies, such as direct lithium extraction or enhanced metal recovery from waste streams or low-grade ores, offer the potential for a step change in future supply volumes. While rising costs are a major challenge in the copper industry, the impact of resource depletion can be offset by technology innovation. Chile is seeking innovative technologies to modernize productivity and extraction in its mines, a trend that has been accelerated by the COVID-19 pandemic. Companies are developing their digitization strategies and experimenting with machine learning, IoT, integrated operation centres to gain efficiencies.
• Investing in digital technologies and software companies: As world-class mineral resources in low-risk areas become exhausted, mining companies may venture into frontier areas where extraction has not previously been economically viable. Automation and digitalization will result in more targeted and efficient mining, which could further be enhanced through technological breakthroughs.