The incentives for processing minerals in Australia represent a concrete opportunity to build on a COVID-19 induced resurgence, putting Australia back on the map as a manufacturing destination of choice.

Earlier this year we published our article, ‘The critical importance of critical minerals'1 which highlighted many initiatives and incentives rolled out over the last few years. Such initiatives highlight how government policy decisions have referenced the importance of certain critical minerals and their role in the technological advancements necessary to combat and manage climate change, including the Federal Government's Technology Roadmap announcement in 2020.

The development of the country's critical minerals manufacturing sector was also a vital component of the Federal Government's Economic Recovery Plan, released last year. More recently, the 2021 Federal Budget made it clear that the Government has its sights firmly set on reinvigorating Australia's manufacturing sector as a core driver of the nation's long-term economic growth, with a further $2 billion allocated for manufacturing research and development (R&D) initiatives.

These developments present the critical mineral industry with an excellent opportunity to value-add to the downstream processing of minerals in Australia, to diversify global supply chains and increase the value of Australia's critical minerals sector, by bringing manufacturing operations back home.

What are critical minerals?

The term ‘critical minerals' is generally a reference to mineral or metal elements which are crucial in the development of future technologies. These include lithium, graphite, cobalt, vanadium, scandium, copper, nickel and rare earth elements – each increasingly an essential component in solar panels, wind turbines, batteries, electric vehicles and other low emissions technologies.

The main geographic export source of these minerals for the global economy is China. However, over the last few years, countries such as Australia and the USA have actively sought to diversify supply chains of critical minerals to manage the security risk of being over-exposed to one export source.

Australian critical minerals provide one of the most secure supply chains in the current geopolitical context, especially compared to other globally dominant deposits of critical minerals such as the Democratic Republic of Congo.

Australia – a supply chain safe haven

Currently, the processing of most of Australia's critical minerals, such as lithium, graphite, cobalt, tungsten and nickel, is being undertaken overseas. Australia is home to just a few larger critical minerals processing companies, with the remainder of the sector made up of a handful of smaller players.2 Overall, Australia is likely to generate just a small share of potential critical minerals processing output globally in 2021.

However, Australia's reputation as a safe and stable economy, particularly in the wake of the Global Financial Crisis and the COVID-19 pandemic has sparked renewed interest in domestic mineral processing. With volatility still present in certain overseas markets, Australia has a strategic opportunity to mine, process and ultimately utilise critical minerals in manufacturing industries onshore which will diversify Australia's global supply chains and increase the value of the country's exports.

Challenges to overcome

What has added to the challenge to develop better capabilities for onshore processing of critical minerals is that the smelting, refining and processing of minerals have traditionally been seen as environmentally dirty, capital intensive, and providing low margins. However, with new processing technologies, a greater focus on the development of domestic manufacturing opportunities and significant government investment in the sector, now is the optimal time to reconsider critical mineral processing and subsequent manufacturing in Australia.

Separately, there are also ongoing concerns about market barriers which have traditionally inhibited processors to scale operations. Critical mineral technology and processing companies generally struggle to access finance to develop their technology in Australia, and capital markets have been reluctant to support this sector because of slow adoption rates. This means that many SMEs have struggled to commercialise their technology, or have moved offshore to raise capital and develop commercial opportunities.

In theory, these financial barriers may lower because of the Federal Government's increased funding across the broad manufacturing industry. In addition to the Modern Manufacturing Strategy (discussed below), the Federal Government announced in May 2021 that it will invest a further $1.2 billion in developing Australia's digital economy strategy, to enable Australian businesses to create new products, markets and industries including in the priority area of ‘resource technology and critical mineral processing'. This is in addition to the $2 billion allocated for manufacturing R&D initiatives.

The Critical Minerals Facilitation Office (CMFO) is also actively focused on connecting Australian critical minerals projects to investors and strategic partners to provide downstream opportunities. The CMFO encourages eligible projects to apply for funding from agencies such as Export Finance Australia, the Northern Australia Infrastructure Facility, the Clean Energy Finance Corporation and the Cooperative Research Centre.3

Modern Manufacturing Strategy and critical minerals

As part of the 2020-21 Federal Budget announced in October last year, the Federal Government revealed a $1.5 billion investment over four years for a Modern Manufacturing Strategy – an initiative designed to develop Australia's manufacturing industry to create jobs and a more internationally competitive market.  Critical minerals processing was identified as one of the Government's six National Manufacturing Priorities. There was also funding for a $107.2 million Supply Chain Resilience Initiative designed to identify gaps in critical supply chains, as well as the development of ‘road maps' with key industry players to identify barriers to achieving scale in manufacturing and opportunities for global market diversification.

The Federal Government has announced its intention to focus on three key growth opportunities in the critical minerals processing sector. These growth areas include capturing additional value from Australia's critical raw materials, focusing on both commercialisation and innovation of manufacturing processes, and leveraging Australia's world-class environmental, social and regulatory credentials.

Critical minerals demonstration plants

Competition is heating up between the Australian States to assist with funding the development of critical minerals demonstration plants. In early June 2021, the Queensland Premier announced that her Government is working with a number of vanadium proponents to support a proposed demonstration plant in Townsville so as to secure the manufacturing of vanadium batteries in Queensland.4 A properly designed demonstration plant could also service the broader North West Minerals Province in Queensland and open up further critical mineral manufacturing opportunities in the region. Whilst State and Federal Government's are expected to assist with partial funding of critical minerals demonstration plants around Australia, significant industry investment will also be required. If properly structured, these demonstration plants also present opportunities for effective infrastructure sharing across the sector.

Regulatory and structural considerations

Australia's success on the global stage is rooted firmly in the resources sector. Decades of sophisticated exploration, development and commercialisation of traditional energy resources means that at both a State and Federal level, Australia already has a robust regulatory regime and governance policy as well as tested investment models.

Proponents investing in critical minerals will be required to comply with this same regulatory framework. Those proponents, and players in this sector more broadly, should be encouraged by this position, as a well-trodden path is always easier to follow.

The same thing can be said about the variety of investment and operational structures available to the critical minerals industry. The resources industry often utilises different investment and operating structures (such as joint ventures, special purpose vehicles, partnerships and trusts) to account for the specific risk, reward and taxation of resources projects. Getting the right structure up front is critical to achieving desired investment outcomes. Specialist advice should be sought to consider which structure is the most appropriate in particular investment arrangements.

Whilst every business will have its own unique set of considerations and drivers, we expect to see players in the critical minerals industry leverage the experiences of the resources sector. These businesses should take comfort in the fact that these structures have withstood the cyclical nature of resources' demand.

The next chapter

Manufacturing is an emotive topic in this country, with the deterioration of the automotive industry over recent decades still raw and painful for many. But Australia is well-positioned to leverage itself as a premier destination for critical minerals processing. Under the Critical Minerals Manufacturing Road Map, the Department of Industry, Science, Energy and Resources plans to improve the manufacturing sector's capabilities over the next two years. In the longer term, it is hoped that Australia will become a regional hub for critical minerals processing and manufacturing, with significant R&D advancements.

Just as Australia's resources industry has developed over the decades, so too has McCullough Robertson's experience and cognisance of this evolving industry. Our rich experience in the resources sector means that we have a deep understanding of the legal hurdles that companies will face in the critical minerals space, as well as key insights about how best to overcome the commercial and practical barriers to enter and compete in the market.






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