- The global mining industry is changing minerals that drove mining activity and profits are slowly being eclipsed by the emergence of a new class of resources, PWC reports.
- The pursuit of net zero emissions has altered the global mining industry which is increasingly leaning towards the production of minerals used in renewable energy and away from the production of fossil fuels.
- According to PWC Fossil fuels still contribute substantially to global mining companies despite critical minerals taking center-stage.
- Global mining activity despite the threat of global warming is not slowing down. It is to the contrary on the rise as the world looks for ways of reducing carbon emissions.
- At the turn of the millennium the global mining industry was driven by mass urbanization of emerging market economies like China, Brazil, India and Russia this projected to slow down or lose ground to the pursuit of renewable energy sources.
PWC’s Mine 2022 reports that the global mining industry looks nothing like what it was 12 months ago. Mass urbanization is not the key driver of activity in this space. The key driver now is the race to reach net zero and the role of the global mining industry in aiding the world to reach this goal. A near cluster of minerals has emerged and is growing at an exponential pace.
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The pursuit of net-zero by the leading nations and corporations of the world has changed what it means to be a miner. Perhaps counterintuitively this race to net-zero will result in an increase of mining activity, not necessarily a reduction. As leading economies of the world work conscientiously towards reducing carbon emissions this has led to the growth in demand of certain minerals that are widely believed to be critical to shift the world to a future where clean energy is dominant. The rapid adoption of low emission energy systems of the future like solar, wind power, electric vehicles (EVs) and grid scale batteries will be highly material-intensive. Research conducted by PWC and published in their annual Mine 2022 journal posits that the production of a solar farm requires three times more mineral resources than a similar sized coal plant and constructing a wind farm needs thirteen times as much as a comparable gas fired plant.
The energy transition is demanding more resources; however, providing these will take more than mining more of the same minerals. The dynamics of the global mining industry is changing because the world now needs more critical minerals and raw materials to power the global economy of the future and these resources will need to be mined sustainably and responsibly. A year ago, a person would be hard pressed to even explain what these critical minerals are that have emerged in recent times and are reshaping the business portfolio models of the largest mining houses in the world. These critical minerals, according to the PWC report are needed at all stages of the low carbon energy cycle. They include silicon, rare earth elements, and uranium. The applications of these minerals are mainly in the generation of power.
Copper, aluminum, and steel are used mostly in the transmission and distribution of energy and battery minerals including lithium and cobalt which are used for storage of energy. Several governments around the world have established critical mineral lists to highlight what they see as essential resources for meeting their net-zero commitments and for applications in high tech, defense, and other vital industries. It is this subset of critical minerals that PWC believes direct application of these minerals to the energy transition will lead to the greatest growth and dominate the mining industry of the future. Demand for these critical minerals is forecast to grow significantly over the next three decades.
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The International Energy Agency (IEA) estimates that the annual demand for critical minerals from clean energy technologies will surpass US$400 billion by 2050 which is equivalent to the annual revenues of the current coal market. For example, copper, lithium, and cobalt are already experiencing supply constraints and these supply imbalances will continue in the near term. These supply constraints will have implications for the ultimate uptake and adoption of energy transition technologies. Raw materials are the largest cost component of an electronic vehicle battery the report says. Therefore, the supply and price of the input battery metals will have a high impact on whether electronic vehicles will reach what the report described as cost parity and gradually eclipse traditional internal combustion vehicles.
There is an opportunity for the largest mining corporations in the world to play a leading role in the world’s clean energy transition and create value for their shareholders at the same time. However, the changing face of the global mining industry poses significant headwinds for the largest mining houses. For any mining company development timelines always pose a risk. These are not unique and have no regard for the type of commodity or mineral involved. It is more poignant with these newly attractive critical minerals. For new mining projects, the process of exploration, permitting, financing, construction, and commissioning can take more than ten years. This risk is especially significant because market dynamics and fundamentals can and will certainly change. What is to say that a company that commits to develop a lithium mine for example in 2022, and commissions it in 2032 will find that the market for lithium has changed drastically from the time that it began developing its project? This could very well be the case. Miners and investors are, according to PWC, not allocating capital at the level needed to keep up with projected demand.
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Many critical minerals are said to have volatile price histories and have limited price visibility. These features mean that conventional financing methods for mining projects will not be easily accessible and will therefore, require innovative financing solutions. Whenever there is a departure from conventional methods of financing in a mining project, the promoter of the said mining venture can expect to pay a higher price for their funding because of the perceived and real risk. PWC is of the view that going forward, the role of the off taker will be more important than ever in developing critical mineral projects. This concept of offtake arrangements is critical to appreciate. Arrangements like these involve say, an end-user of a product getting into an agreement with a producer of the commodity they need where they agree beforehand on the quantity and quality of the commodity they will purchase and at what price. The buyer in an offtake agreement will usually pay in advance for the commodity in question or at some specified future date. A producer of critical minerals with significant offtake agreements under their belt can then approach their financial backers for funding packages. General Motors and Tesla have reportedly reached similar agreements with lithium and cobalt miners.
Stakeholder expectations are both an opportunity and challenge. ESG principles have transcended from being nice to have and/or optional extras, to being industry imperatives from both governments and other stakeholders. The interests of these parties will need to be carefully managed to maintain stakeholder trust. It may sound somewhat disingenuous given that the PWC report was set within the context of the 40 largest mining companies in the world but economies of scale will be essential to the success of those mining companies that pursue a strategy of extracting critical minerals. This is because critical minerals are not considered bulk commodities. The reason for this is that deposits of these critical minerals tend to be discrete and smaller in scale. This sparse nature of these deposits will require that the largest mining companies carefully consider their threshold of investment.
Surprisingly, Mine 2022 reports that economic resources of critical minerals are being depleted. This is said to be the case for copper, nickel, and cobalt. The fast-depleting deposits mean that those that remain will be complex to extract and/or be in jurisdictions in which doing business is markedly complex. The former risk can be mitigated by improvements in technology for exploration and extraction which will be essential in keeping up with demand. As the face of the global mining industry changes so too are new mining companies emerging to take advantage of new opportunities and new dimensions. These companies are responding to demand and reaping the benefits. In 2021 PWC notes that the market capitalization of the top five lithium, graphite, and rare earth producers grew by 56 per cent, 101 per cent, and 154 per cent respectively. By comparison the combined market value of the 40 largest mining companies in the world grew by 7 per cent and the S & P 500 index as of June 2022 was down by at least 11 per cent . There is an opportunity here for investors with long range investment horizons.
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These changes have brought about marked trends. According to PWC for instance miners are moving down supply chains into value added processes where miners are evolving into producers of value-added chemicals. Secondly, Original Equipment Manufacturers and end users are getting into partnerships with miners which has been extensively explored earlier. The most successful miners will be those that can understand how to generate value and have responded accordingly to market fundamentals.
