Geopolitical uncertainty is a growing risk to mining and metals companies, as highlighted in the EY Top 10 business risks and opportunities for mining and metals in 2021 report. Regulatory changes and trade protectionist measures are threatening production and trade of some minerals. This is prompting countries to consider developing domestic capacities or diversifying supply by setting up processing facilities outside of China. The US Government is investing in critical minerals, the EU is focusing on developing an EV supply chain2 and discussions continue in Australia around investing in battery mineral processing facilities.
2. Capital investment is challenged by price volatility
Developing the new projects required to meet soaring demand will require a significant amount of capital. Canaccord Genuity estimates that more than US$20b of capital investment will be required to fund lithium greenfield projects alone to meet 2030 demand forecasts.3
But even with a positive demand outlook, access to capital in the mining sector remains challenging. Investors are deterred by price volatility, long project lead times, the need to increasingly assess ESG factors and the small market size of some battery minerals.
The industry’s volatility and cyclicality can cause severe fluctuations in prices, which can affect the economic fundamentals of projects even when there is a positive outlook for demand. For example, recent years saw lithium miners invest heavily in new projects to increase supply and meet demand for EV batteries. However, slower EV production in late 2019 and COVID-19 in 2020 saw rising supply hit volatile demand, and lithium carbonate prices fell from a global average of US$16,031/t in November 2017 to US$6,387/t in October 2020. Subsequent liquidity challenges have led some miners to put capital expenditure on hold. Tianqi has delayed its investment decision on the Kwinana plant,4 while Eramet has put its Argentinian lithium mine on hold.5
Countering this price volatility means that shareholders must be prepared to invest for the longer term and factor in long project lead times. It can be three to five years until a mining project is operational, sometimes longer. It may take more than seven years before lithium brine projects begin production.
Commodities with larger markets — for example, copper and aluminum — are more easily able to attract capital compared with minor minerals. Even with demand growth, the annual trade value of lithium and cobalt in 2025 is still forecast to be less than a tenth the size of copper. But major miners are beginning to invest in battery minerals. BHP has formed an alliance to explore for nickel in Canada,6 while Rio Tinto has invested in a lithium project in Serbia and is producing lithium as a by-product of its US Boron mine.