As demand for critical minerals and rare earths soars due to their importance to future facing technologies and 2050 net zero pledges, 2021 is poised to be a breakout year for critical mineral and rare earth projects in Australia, provided project proponents can source funding and navigate the key bankability issues.
At its core the financing of critical mineral and rare earth projects is no different to any other mining or renewables project. The availability, quality and timing of equity will dictate the project structure, debt arrangements and the development timeline. However, unique to critical mineral projects are the sector's geopolitical issues and an emerging focus on securing supply chain resilience as a matter of national sovereignty, particularly in the technology, healthcare and defence-related equipment manufacturing sectors.
Rapidly evolving technologies
Critical mineral demand is subject to rapidly evolving modern technologies that are often redundant before they reach the consumer. This results in a spot market for each critical mineral or rare earth element that is subject to significant price volatility.
As a result, we expect funders will seek the certainty of offtake contracts rather than accepting market risk and use that as a parameter to determine the size of the debt cheque. In turn, this may determine the size and scope of the project.
Lenders may not be traditional bank lenders
Given the price volatility and niche demand, commercial banks are at present relatively absent as funders of critical mineral projects in Australia, with alternative sources of debt and equity replacing them.
While funding from any source is potentially important, non-traditional sources of debt add complexities and potential costs to transactions, as well as raising the question as to what is 'given up' in order to source funding for their projects.
Government intervention and scrutiny
Diversifying supply of critical minerals has emerged globally as a prominent sovereign concern over the past decade.
In a previous article, we discussed the Australian Government's stance on foreign investment into domestic critical minerals projects. Since the publication of that article, and as of 1 January 2021, Australia's foreign investment regime has been amended to increase the Foreign Investment Review Board's (FIRB) ability to scrutinise proposed transactions concerning 'national security businesses'. In its recently published Guidance Note on the national security test FIRB encourages foreign persons proposing to invest in a business or entity involved in the extraction, processing or sale of rare earth elements, lithium, graphite, cobalt, vanadium, copper and nickel to voluntarily seek foreign investment approval.
Our analysis of the impact of the foreign investment amendments for the energy and resources sector can be found here. In short, while enhanced scrutiny does create speed bumps for foreign investment into new critical mineral projects in Australia, this should not be seen as an insurmountable barrier. This is particularly the case for projects that include a processing component as this aligns with the Australian Government's Resources Technology and Critical Mineral Processing National Manufacturing Priority Road Map released on 4 March 2021.
In Australia, the government has mandated Export Finance Australia (EFA), its export credit agency, to support critical mineral projects. To qualify for EFA support, a project must meet the following criteria:
- the mineral is identified in Australia's critical minerals strategy;
- the extraction and/or processing of the minerals in Australia
are for export;
- a comprehensive feasibility study has been completed;
- the buyer is committed to purchasing the project's
- the project proponents have the necessary financial, technical and commercial capacity.
Separately, if the critical mineral has defence applications, a Defence Export Facility (administered by the EFA) may be available. While the criteria does require projects to be in advanced stages of planning before funding may be considered, EFA's involvement does provide benefits to projects. For example, EFA's support to a greenfield critical minerals project in New South Wales last year enabled the project proponents to escalate engagement with prospective strategic investors.
In addition to the EFA, funding may be sought from:
- the Clean Energy Finance
Corporation (CEFC), who has demonstrated
its willingness to invest in critical mineral projects with its
involvement in Pilbara Minerals Limited's Pilgangoora
lithium-tantalum project in 2017 and 2020; and
- the Northern Australian Infrastructure Facility (NAIF), who, among other projects, is supporting the Coburn Heavy Mineral Sands Project.
EFA, CEFC and NAIF each acknowledge they may all be involved in a project where their mandates overlap.
Funding may also be available from foreign governments as demonstrated by Lynas Rare Earth Limited's announcement on 22 January 2021 that it had entered into a co-funding agreement with the United States Department of Defense to build a commercial light rare earths separation plant in Texas, United States. The US funding is derived from the Department of Defense's Title III, Defense Production Art program.
Public funding is not without its challenges, as many public funds have restricted mandates. For example, the NAIF may currently only invest in physical infrastructure assets connected with the operation of a mine (such as rail and ports). It follows that proponents wishing to obtain NAIF funding may need to structure their project so that the infrastructure assets are held and secured separate to the operational assets.
State and territory governments in Australia have also recognised the importance of the sector. By way of example:
- ASX-listed King Island Scheelite recently secured
a $10 million 10-year loan from the Tasmanian
Government that will form part of the $85 million in
funding required to restart the Tungsten Dolphin project on King
- the Queensland Government is providing an amount of grant funding to the CopperString 2.0 transmission project, which is considered critical to unlocking the critical mineral deposits in the North West Minerals Province in North Queensland.
Unlocking the opportunity for Australia
Critical mineral projects are a growth opportunity for Australia, particularly in light of its abundant untapped domestic deposits, existing infrastructure, stable regulatory framework for the sustainable sourcing of critical minerals, globally recognised expertise in developing and operating complex mines and close proximity to the major demand hubs in Asia.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
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