Critical minerals and their role in the global response to the energy transition
31 August 2023
31 August 2023
As the energy transition gathers pace around the world, the race to secure a supply of critical minerals for use in existing renewable energy technology and future technology has become more topical. Australia and Africa boast some of the world's largest deposits of critical minerals, which has made both countries an area of interest to foreign investors.
This article explores the prospects for critical mineral mining, examining the unique opportunities and the developing regulatory environment of global markets.
Critical minerals, including copper, cobalt, nickel, lithium, chromium, zinc, platinum, rare earth metals and aluminium, provide for a green transition away from oil and gas, with each mineral being a key component to the production of green energy technologies.
While the global demand has skyrocketed, the critical minerals market faces a unique issue: there is a high geographical concentration of production, much higher than that of oil or natural gas. Take cobalt for example, where the People's Republic of China and the Democratic Republic of Congo are responsible for 60-70% of its production. This high geographical concentration poses a major threat to many country's net zero goals, and is one of the several bottlenecks that will impact the critical minerals market in the future.
The global demand of critical minerals is estimated to more than double by 2030, meaning diversification of supply of the geographical concentrated areas will become of vital importance.
Many countries have implemented policies to ensure a diversification of international supply which provides a unique opportunity for critical mineral rich countries to capitalise. For example, African governments have capitalised this opportunity, expressing an intention to use their own critical mineral resources to help "leapfrog" their own energy production over oil and gas into the green hydrogen energy space. In alignment with this aim, the African Continental Free-Trade Area (AfCFTA) was implemented in 2021, incentivising public-private collaboration in exploiting African mineral resources in a manner that can underpin broad sustainable growth and socio-economic development for their communities.
African nations (such as Namibia and Zimbabwe) have shown they are encompassing these ideas by passing trade restrictions that limit the export of unrefined minerals. The idea behind the restrictions is to utilise public-private collaboration to develop capacity to process these minerals locally so that they can maximise income from exports, provide employment to the community and develop infrastructure.
The opportunities in Africa have not gone under the radar of foreign bodies. Australia, the EU and the US have recognised the increasing interest in Africa's supply of raw minerals and released new policy announcements aimed at levelling the playing field to keep their own local suppliers competitive in the market.
Despite the current and expected efforts of foreign investors to keep the local suppliers of critical minerals competitive, the fact remains that the current local supply will not be sufficient to meet the forecasted demand. Both foreign investors and African governments are aware of the role Africa will play in the critical minerals market and are preparing accordingly.
As the global demand for critical minerals grows, interest in project financing to fund the exploration, development and operation of critical minerals projects is also increasing.
Financing for projects producing critical minerals is a well-trodden path in Australia by both local and foreign lenders (but, depending on the commodity, not without challenge around the offtake markets). The course is less clear for project financing in Africa. Various additional challenges include:
Alternate funding structures such as royalty and streaming finance, and offtake and prepayment arrangements are other options that may be available to miners in the early stages of exploration and development, when more typical project financing arrangements are unavailable.
It remains to be seen whether the focus on energy transition globally, coupled with the high concentration of critical minerals in Africa results in traditional project financing structures for critical minerals projects in Africa becoming more accessible and common in the future.
The global energy transition has heightened the significance of securing critical minerals for current and future renewable energy technologies. With countries such as Australia and Africa holding substantial reserves of these vital resources, foreign investment and strategic partnerships are reshaping the landscape of critical mineral mining.
As demand for these minerals surges, the need for diversification in production becomes imperative, particularly due to the concentrated geographical sources. Recognizing this challenge, various nations are initiating policies to encourage collaboration and sustainable growth in their local sector. Africa, in particular, is embracing its critical mineral wealth to accelerate its shift towards green energy, evident through the implementation of initiatives, such as AfCFTA. However, despite proactive measures by both local governments and foreign players to ensure a steady supply, the impending surge in demand for critical minerals underscores the pressing necessity for innovative strategies and collective action to meet the world's evolving energy needs.
Authors: Jessica Davies, Partner; Zoe Woolford, Senior Associate; Chris Minus, Lawyer; and Jade Campbell, Lawyer.