Mobilizing Critical Minerals Investment for the Energy Transition

The energy transition is advancing, and some of the most important building blocks forming a path to net zero are critical minerals. These include processed forms of lithium, cobalt, graphite, manganese, copper, and nickel, used in batteries, rare earths used in permanent magnets for electric motors, advanced electrical steels used for transformers necessary for grid expansion, along with many other elements. 

Meeting the demand curve will require significant new critical minerals development. In the United States, demand for some critical minerals will be an estimated 23 times higher in 2035 than 2021, and demand for copper will be twice as strong, according to S&P Global.¹

The scale of the challenge calls for a mass mobilization of human talent and ingenuity. It is solvable. The industry is already fundamentally prepared with the knowledge of where many of the critical mineral resources are and with the methods to extract them responsibly. 

A need for the right framework

The task at hand now is to create a framework for this development that incentivizes private sources of capital to support the transition and herald new projects into existence. Many of the largest pools of capital have been dormant to the mining industry for decades. Creating the framework that will spur them to action is vital.

During a panel discussion at the BloombergNEF Summit in San Francisco, moderated by Kwasi Ampofo, Head of Metals & Mining for BloombergNEF with Amanda Hall, Founder & Chief Executive Officer of Summit Nanotech and Satish Rao, Managing Director of Clareo, we identified opportunities in the mining industry as well as the policy and partnerships that are helping to address some of the challenges in the space.   

Addressing a timeline challenge and price volatility

The timeline for mining development is long compared with capital projects in the downstream sectors driving heavy demand for critical minerals, such as the battery industry. For example, it takes on average 15 years for mining projects to go from siting to infrastructure development, and then to a producing project—and it can be even longer before yielding battery-grade chemicals.  

That timescale contrasts with how long it takes to build a battery factory. For example, Tesla built its 10 million square foot Gigafactory in Austin, Texas in fewer than two years, and the company’s Gigafactory Shanghai in China was reportedly built in just a year.²

There are a number of headwinds to the project development necessary to support energy transition and energy security. These include long permitting processes, the high importance of consultation and collaboration with communities and Indigenous groups, creating projects that respect the environment, mitigating geopolitical risks in countries where resources are located, managing capital and operating cost inflation, all while creating profitable business ventures. The fact that the required investment horizon can stretch over decades can compound the perceived risk for new investors, who must also weigh concerns over the potential of disruption in battery chemistry or mobility technologies.

In addition, commodity markets are driven by near-term supply and demand dynamics related to metal inventories and present demand, much more than future expectations. This year, for example, despite the increasing market penetration of electric vehicles (EVs) and trajectory of demand, near-term dynamics of inventory de-stocking have led to significant declines in prices of critical minerals including lithium and nickel. This volatility creates a critical uncertainty for investors. 

However, none of it changes the long-term need for capital to enter the space for new projects to get funded. And this capital must flow early to prevent avoidable shortages in the supply chain.   

Policy signals can strengthen investor commitments 

The chicken-and-egg conundrum that often presents itself in financing the critical minerals space is challenging to solve. Put simply, the objective is to build investment cases that are likely to achieve solid economic returns while minimizing risk of loss to investors. Such projects are much more likely to be financed than opportunities that are presented as visionary long-tail bets. 

Consistent, repeated, and meaningful policies can have an important signaling role for investors.  

In 2023, General Motors (GM) invested $650 million in Lithium Americas, the largest investment by a Western automaker to produce battery raw materials. The investment supported the development of Thacker Pass, the largest known lithium resource in the United States. BMO Capital Markets advised on the unprecedented deal.  

The deal required the bold leadership, vision, and support of many stakeholders, including GM’s management and shareholders. There was also an important policy backdrop.  

For years, governments around the world have been focused on fuel efficiency standards, and nations, led by the EU, have passed regulation focused on an accelerated transition to EVs. In 2022, two specific U.S. laws were enacted: the Creating Helpful Incentives to Produce Semiconductors (CHIPS) and Science Act along with the Inflation Reduction Act (IRA). Both provided incentives, subsidies, and other financial support to industries directly affecting the energy transition. BMO’s economists determined that there have been $640 billion of publicly announced capital investments tied to the CHIPS Act and the IRA, a quarter of which is focused on EVs and batteries.

The consistent policy signal helps to create an environment that is conducive to private investment by fostering confidence that long-term objectives will ultimately prevail over any near-term fluctuations. No policy is perfect, but the consistent drumbeat of support creates a system where capital allocation is possible. The objective is not to publicly finance the entire transition, but rather, to create sufficient conditions for initial liftoff, such that the movement toward a cleaner future becomes self-sustaining. 

New partnerships, innovation, and social license

Partnerships involving innovative new entrants to the industry will also be helpful as critical minerals mining ramps up and increases the need for efficiency and responsible practices. 

The mining industry itself has been evolving to include a wider group of stakeholders from other segments of the market. For example, original equipment manufacturers (OEMs), energy companies and purpose-driven investors all have an interest in supporting mining’s role in the energy transition. 

In addition, entrepreneurs bringing new technologies to the fore can help the industry operate more efficiently and reduce environmental impact.  

Amanda Hall’s Summit Nanotech is such a company. Summit Nanotech uses a unique technology to improve how lithium is extracted from brine, aiming to use less land, create less waste, and produce minerals in less time. Hall has found that financial partners have been instrumental in helping ensure the industry and her own company stay focused on and meet sustainability commitments. 

Indeed, supporting the mining industry’s social license to operate is important for BMO, whose ambition is to be our clients’ lead partner in the transition to a net-zero world. This topic continues to be one of the major focal points at BMO’s 33^rd Annual Global Metals, Mining & Critical Minerals Conference.  

The energy transition is well underway and supporting it will require a significant mobilization of capital investment in many different industries. The mining industry is fortunately prepared with the capabilities and expertise to respond.

_{¹S&P Global (Aug. 15, 2023). United States Faces New Challenges Meeting Increased Demand for Critical Minerals One Year After Historic Inflation Reduction Act, S&P Global Study Finds [press release].} 

_{²Barnard, Lucy. How the world’s biggest EV battery gigafactories are being built so quickly. Construction Briefing. Aug 21, 2023.}