What does Energy Transition Strategy really mean for a miner?
Back in December, Rio Tinto announced it was ‘reluctantly’ seeking acquisition opportunities (check out the Financial TImes 15 December 2022). It wants to buy critical minerals assets such as nickel and lithium. But it’s not exactly a strategy…
“The idea that Rio Tinto may have missed the boat may well be true”
It was an unusual thing for Rio to say, and as close to an acknowledgement that it has ‘missed the boat’ on the energy transition as we are likely to see. Which got me thinking - what does energy transition strategy for a miner look like? Right from the off, let me say by ‘energy transition strategy’ I don’t mean decarbonising your operations. A few turbines, PV panels and a battery are necessary, but not sufficient. Emissions from the world’s mining operations are not really the issue we’re trying to solve here. I’m talking about pivoting your enterprise, away from the old commodity mix of a globalising petro-economy and into the new world of electrification, deglobalisation, and wholesale industrial change that is required to make that happen. Today I’m talking critical minerals! (we can leave modifying your other minerals strategy, for instance iron ore for ‘green steel’, to another day…)
Salar Lithium evaporation
Guerretto, CC BY 2.0 <https://creativecommons.org/licenses/by/2.0>, via Wikimedia Commons
First, Rio. It had the world-class Jadar deposit in Serbia, with plans for a substantial underground mine that would produce enough lithium carbonate to fill 5-10% of Europe’s lithium ion battery gigafactory needs for a few decades. But last year, Rio took the deposit off its reported reserves as the Serbian government stripped it of all permits. In 2021 Rio bought Rincon in Argentina for $825m (2 Mt LCE reserves and at least 5x that at a resource level). For a diversified miner, that’s not a lot. Less than 5% of the global lithium market, no nickel, no graphite. No substantial position in cobalt or manganese. The idea that Rio Tinto may have missed the boat may well be true. But strategy is not just about commodity mix - critical minerals strategy is much more than what reserves you purchase and how quickly you dig them up.
My work on the battery value chain (BVC) suggests a few points of real difference for miners more used to mining and shipping bulks. Scale of production and bottom-of-the-cost-curve production costs are great, of course, but in a deadline-driven energy transition (revolution would be a better term!), speed-to-market may matter relatively more. And with the astonishing sustained pace of growth needed across the ET value chain, all kinds of risks threaten to derail projects that bulk miners have traditionally not needed to worry about. Securing finance, proving and perfecting technology, right-sizing operations and right-speccing products to provide exactly what end customers (with very specific requirements and QC processes) need, without over-sizing/-speccing, securing those customer contracts (needed to secure finance - see above), not to mention dealing with the increasing deglobalisation of supply chains in our geopolitically VUCA world.
Interestingly, when I took a leading South African miner through this thinking late last year, the answer was ‘yup, thanks, we’re doing all that’. Yet arguably Rio has been left behind, bar announcing it’s looking reluctantly for some low-priced nickel and lithium assets (good luck with that one!). So what might a more comprehensive critical minerals strategy entail?
Speed.
“Miners must think about their traditional, linear project study processes - how can these be accelerated?”
In value-chains being driven by 2030-2050 targets, and with new mines taking 10-20 years to get from discovery to production, potential speed to production must be up there high in the opportunity ranking process. Miners must think about their traditional, linear project study processes - how can these be accelerated? Taking project management and governance away from the engineering houses that build linear optimisation models at successively greater levels of detail, and adopting a more agile, parallel and strategic decision-making approach, might help. Thinking carefully about modular developments, minimum viable products, fastest route to permit, and weighing such notions against the ‘NPV-maximisation’ route that mires projects in ever-lengthening evaluation studies and commits capex to bigger and bigger kit. Right-sizing lab studies, pilot plants and product qualification plants to ensure enough samples are available at the right times to secure contracts in a fast-developing downstream industry is also critical.
Integration.
As I’ve hinted at, in critical minerals, downstream integration is far more important than has been the case in, say, copper and iron ore. Not just to get things like design (tech, specs, capacity) right, but to tie in timings. There’s no point bringing your lithium plant on stream three years before your customers’ gigafactories have been built, and if you are three years late they may have sourced their product elsewhere. And to secure customers. Sure, in early stage/small cap world, signing a memorandum of understanding or even a heads of terms with a big downstream player can help reassure investors (it shouldn’t!). But to underpin billion dollar developments, financiers need a little more. And who’s going to sign big take-or-pays without certainty around finance, tech etc? Which leaves one realistic option - get equity involvements from downstream players, whether as JVs, partnerships, or outright equity stakes. Not dissimilar to what we experienced with key thermal coal projects back in the day in NSW and Qld.
Technology.
Some of the capabilities required for the new minerals are core strengths of incumbents’ - especially moving, crushing, and transporting rock. But there are nuances (the need to be carbon neutral - totally; the need to satisfy auto OEM product qualification and QC processes throughout production). And there are some very new technologies that firms need at least to understand if not acquire or develop - for instance, producing and extracting metal from hydrothermal brines. Mining companies don’t even have an accepted way of reporting ‘ore reserves’ and resources for hydrothermal brine systems at the moment. And most don’t have the exploration or production capability to make them work. When Anglo (formerly Sirius) decided to mine polyhalite under the North Yorkshire Moors National Park, they had to completely reframe underground mining in a way that minimised surface expressions. That meant burying headframes under teh surface, and boring a 30km long tunnel to move the mined rock underground, popping up to surface in an industrial area where a processing plant could be built. Sirius/Anglo put the local community at the heart of their project plans practically from day 1. If Rio had come up with such a plan for Jadar, might it just still have its permits (and reserves)?
Location.
Produce at the lowest cost and ship to wherever the customer wants is over. Battery Value Chains are aligning on three principal axes - centred on ‘end markets’ (technically, where the battery gigafactories are being built): North America, Europe and Asia. North America is blessed with critical mineral resources and should be able to achieve something close to self-sufficiency in may of them. So to be present in that market, you need a ‘North America’ Strategy. Understand that imports from elsewhere will suffer an economic penalty. And customers will reformulate products to avoid locally unavailable inputs (eg cobalt). Asia at the moment is more of a cost-game - Australian world-class resources may be well placed to compete, but the traditional rules of the cost curve are likely to apply. However, selling substantial volumes there (let alone equity-partnering with producers) may exclude global players from or hinder them in Europe and North America. And Europe is complex - without enough resources for self-sufficiency, the emphasis politically and economically will be on securing as much local value-add as possible. There will be incentives to bring on local production, even if not world-class in volume and cost terms. And for overseas production (eg an Australian or African lithium deposit), balancing in-market value-add (eg a European lithium refinery, pCAM and CAM plants) with economics of processing closer to mine will be key.
Where does that leave us? Well, in Rio’s case, I hope they are doing a lot more than ‘reluctantly looking for acquisition opportunities’.
Key elements of a critical minerals strategy for a diversified miner
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Which is it seeking to grow and why?
Which value chains, and which steps along them, will accrete the most value?
And which fit best with the firm’s assets, capabilities, and ambitions?
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Where does it want to play, to what extent? (and therefore what are the implications for locations of downstream processing, value-add, licence-to-operate activities etc)
What are the implications in terms of market access and likely partners?
What about shareholders and other stakeholders? This isn’t just about China eg Johnson Matthey Battery Materials’s strategy of sourcing nickel and key raw materials from Russia did not play well in its search for Polish partners - the chosen location for its product qualification plant.
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For instance, how will it reframe processes for speed and downstream-orientation?
How will it cut time to SOP by years, and fit SOP into customers/partners plans and schedules?
Can it win at hydrothermal basin exploration, brine production etc? Can it even evaluate those things when considering acquisition?
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What technologies must the company have on board to ensure/derisk success? eg direct lithium extraction
And how will it secure these? (organically, acquisition, partnering…)
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How will it secure finance in the face of technology, market, geopolitical uncertainties, as well as the need to bring on board…?
What role can alternative forms of finance play in bringing the required relationships together (eg royalty finance)? Can they be used to reduce capital requirements from players that are needed on board, but may not have the cash or appetite to fund? (eg auto OEMs?)
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Whom will the downstream partners be, not just to better secure ultimate offtake, but also feed customer requirements into the projects in a continuous and timely way?
How will this play with chosen target markets, geographies, customers?
