07 December 2023
As the energy transition gains momentum globally, pressure is building on the supply chains for essential clean energy technologies like electric vehicles, wind turbines and battery storage. Meeting the growing demand for these technologies in an efficient and affordable way will be contingent on manufacturer access to supplies of the necessary mineral inputs, some of which – like lithium, nickel, copper, and cobalt – are classed as “critical”.1 Disruption to supplies of these critical minerals could derail clean energy investment plans and global climate ambitions, thus it is imperative that their value chains are expanded speedily and sustainably.2
In this article, we explore the current state of play in critical minerals, considering the barriers to scaling up supply and actions needed to overcome these. We also draw case studies from Macquarie’s significant experience supporting companies in the critical minerals value chain to demonstrate the role financial institutions can play in facilitating the sector’s next phase of growth.
Beyond funding major capex, financial institutions can help companies in the critical minerals value chain to meet their operating expenditure requirements, especially in the early stages of a project when revenues lag spending. This is especially valuable for smaller firms with a limited financial buffer to weather the periodic cashflow pressure driven by cyclical swings in mineral prices. They can also help companies manage risks by hedging their exposure to other variables like FX and interest rate volatility. As more production comes online and liquidity grows in markets for critical minerals, they will be increasingly able to provide physical and financial hedging of minerals.
In 2022, Macquarie’s Commodities and Global Markets group provided a $US90 million working capital facility, via a four-year prepayment structure, to support the development and ramp-up of Terrafame’s battery chemicals plant and production of battery-grade nickel and cobalt sulphate in Finland. The solution met the constraints of Terrafame’s existing capital structure while allowing them to retain full control over the marketing of their product. Macquarie will also provide physical execution and logistics expertise to intermediate cargoes of nickel sulphate between Terrafame and its end buyers.
Investment in mineral production is primarily driven by price signals. Commodity price volatility can deter non-specialist investors from making the large and long-term capital commitments required to develop upstream mineral extraction projects. Volatility in cobalt and lithium prices in recent years provide a stark demonstration of these swings.
Commodity price volatility is not unique to critical minerals and investors can manage it when they have certainty of demand resilience. A greater challenge is overcoming the uncertainty of long-term mineral demand projections. Lithium-ion batteries used in electric vehicles are the biggest single driver of energy transition demand for key critical minerals like lithium, nickel, cobalt, and graphite.3 However, this technology is still rapidly evolving, and the automotive industry has a proven ability to engineer reductions in its demand for minerals in the face of persistent high prices or ESG concerns.
The market shift in recent years towards low or no cobalt EV battery chemistries like NMC 811 and LFP is a case in point of the impact technology advances can have on the long-term demand outlook for minerals. With progress being made on battery chemistries that favour cheap bulk metals over critical minerals (e.g., LFP and sodium-ion batteries13), analysts’ demand projections for other critical minerals could also become less bullish over time.
Demand uncertainty significantly affects the long-term financial viability of projects across the critical minerals value chain. It could also have sustainability implications as lower demand drives down the price of a mineral and undermines the business case for recycling it. Therefore, demand signals from governments and consumers will be crucial to giving investors the confidence to commit the large volumes of upfront capital needed.
Governments have a keen interest in securing critical minerals access given the energy transition implications and can provide financial incentives to reduce project costs, as done in the US with the IRA. They can also provide demand signals to developers with mechanisms like guaranteeing offtake of minerals, as foreseen by the joint buying proposal in the EU Critical Raw Materials (CRM) Act.14 Public concessional capital – like government loans, grants and guarantees – can attract private capital to projects on the cusp of commerciality and unlock investment in new jurisdictions and technologies. However, it is crucial to note that public capital will be most impactful when deployed in a targeted manner that complements rather than crowds out private investment with uncompetitive scale and terms.
A ‘one size fits all’ policy approach is also unlikely to be successful, with different critical minerals having vastly different market fundamentals and challenges. For example, nickel and cobalt are oversupplied in the near term and have a high reliance on a single country, while lithium has a more diversified supply but faces a supply deficit.15
Downstream consumers of critical minerals, like auto and battery manufacturers, are already boosting the bankability of upstream projects by signing long-term offtake contracts for minerals. They are also going beyond this to directly invest in extraction and processing projects, with some even pursuing vertical integration.16
Expanding critical minerals value chains should be sustainable by design. Reducing emissions by shifting energy supply from sources like coal and diesel to solar and wind with batteries is a fundamental aspect of this. Operators can also implement technology solutions to enable more efficient use (and reuse) of resources like water and the responsible storage or disposal of waste. Improving sustainability will increase the net environmental and social benefit of switching to clean energy technologies and could help speed project development by minimising a potential source of public opposition.
Beyond setting sustainability targets and mandates, governments can provide low-cost financing and guarantees to mobilise private capital for novel sustainable production methods. An example of this is the US Government’s $US700 million conditional loan commitment to the Rhyolite Ridge Lithium-Boron Project in Nevada on which Macquarie Capital advised.17 Governments can also streamline planning and permitting processes for the development of dedicated renewable energy infrastructure and give companies in the value chain priority access to brownfield sites to reduce initial capital requirements.
Large consumers of critical minerals products can incorporate sustainability criteria in procurement decisions to drive action from producers. Consumers can form alliances, leveraging their collective purchasing power to send demand signals to the industry. An example of this is the First Movers Coalition launched at COP26, whose corporate members pledged $US12 billion for scaling climate solutions in hard-to-abate industries such as steel, cement, and aviation.18
Financial institutions can help address the capital constraints that limit sustainability investment in the critical minerals value chain. As co-investors, they can share the risk and capital outlay on sustainable infrastructure and assets while enabling access to potential upside e.g., from selling excess power from dedicated renewable energy assets to the grid. They can also finance and lease sustainable assets to operators, eliminating the need for upfront capital.
Beyond the climate imperative, there is an increasingly strong business case for embedding sustainability in critical minerals value chains. Governments and consumers will tighten their sustainability requirements for critical minerals supply chains over time, making early investment in sustainability a future-proofing strategy. The EU is advancing on this front with policies like its Batteries Regulation and Carbon Border Adjustment Mechanism (CBAM). Policies like these will drive higher realised prices, or a “green premium”, for critical minerals products with cleaner supply chains.