Australia’s position in the lithium mining market

In a world transitioning from fossil fuels to renewables, critical minerals such as lithium are adding a fresh chapter to Australia’s economic narrative. 

Australia is in a strategic position to be a globally significant producer of raw and processed critical minerals. Demand is growing, with the International Energy Agency estimating that the world is currently on track for a doubling of overall mineral requirements for clean energy technologies by 2040. However, a concerted effort to reach the goals of the Paris Agreement (climate stabilisation at well below 2°C global temperature rise) would mean a quadrupling of mineral requirements for clean energy technologies by 2040.

It’s not just about a clean energy future, important as that is. The importance of “critical minerals” (a political, not geological, definition) is interwoven with growing geopolitical concerns about an aggressive China’s near monopoly of many of these minerals. As US-based think tank the National Bureau for Asian Research (NBR), succinctly put it, the strategy around critical minerals is threefold — cementing important bilateral and multilateral relationships, moving from “just in time” to “just in case” and ensuring spare processing capacity.

If heightened tensions around Taiwan, the South China Sea and the Korean peninsula weren’t sufficient cause, then there was COVID-19 and the war in Ukraine.

Sherif Andrawes GAICD, head of global natural resources at audit and tax advisory BDO Australia, believes supply chain issues were brought into focus by COVID-19. “It saw company directors focusing on security of supply, taking steps to reduce dependence on single sources,” he says. “Then Russia’s invasion of Ukraine focused this attention on energy sources, too, accelerating the move to renewables.”

The result was to simply reinforce the thinking in the European Union (EU), North America, and the Asian democracies (notably Japan and South Korea) about loosening their China dependence.

Opportunity knocks

Nowhere has this been more evident than the US. The world’s largest economy is looking to secure long-term agreements to get access to these minerals. In addition, the Biden administration has committed nearly US$400b via the Inflation Reduction Act to hasten progress towards renewables in a move that can only further underpin the demand for critical minerals.

Australia boasts ample supply of some of the critical minerals on the lists of different countries and blocs. It is strategically placed to be a major player in this space with the June release of the Critical Minerals Strategy by the Minister for Resources and Northern Australia, Madeleine King, detailing how Australia can be a globally significant producer of raw and processed critical minerals.

“The strategy outlines the enormous opportunity to develop the sector and new downstream industries that will support our economy and global efforts to lower emissions for decades to come,” she says. “Although the potential is great, so too are the challenges. It makes it clear our natural minerals endowment provides a foot in the door, but we must do more to create Australian jobs and capitalise on this unique opportunity.”

One of the first policy decisions will see the government target $500m of new investment at critical minerals projects via the Northern Australia Infrastructure Facility. Other policies to support the sector include finance through the Critical Minerals Facility and the National Reconstruction Fund, investments in research and development, and grants to help develop early to mid-stage critical minerals projects.

Government enthusiasm is understandable given supply projections, especially for lithium (global demand for Li-ion batteries will soar over the next decade, says McKinsey). Australia produces about half the world’s output. Chile and Argentina are the other big players.

In June, the McKinsey Global report, Australia’s Potential in the Lithium Market, estimated Australian miners could generate an extra $10b in annual revenues and create thousands more local jobs if all mined material was converted into higher- value lithium hydroxide before being exported. It also estimated that Australian lithium hydroxide plants could be the world’s lowest-cost producers over the life cycle of the asset, despite higher construction costs in Australia than in rival nations.

According to the Department of Industry, Science and Resources Resources and Energy Quarterly for June, global production of lithium carbonate equivalent (LCE) will increase from 737kt to 1472kt from 2022–25. On the demand side, the report forecasts global lithium consumption will increase from 814kt to 1350kt over the same period, with rechargeable batteries, mostly for electrical vehicles (EVs), the engine room of this growth. The numbers are compelling — a view the industry largely shares. Former Global Lithium Resources non-executive director and chair Warrick Hazeldine GAICD agrees there is “significant hype” around the critical minerals sector, but argues that lithium is one example of a commodity beginning to live up to it. “We’ve been part of this trend — the enormous growth in our share price since listing on the ASX in mid-2021 reflects this,” he says. “But this growth has been supported by the backing of cornerstone investors, the location of our assets in Tier 1 jurisdictions and the results from our exploration programs, to name a few reasons.”

Certainly, the rush is on, especially for lithium. But this lithium rush could differ from previous mining booms in a major way — the focus on downstream processing. The federal government and the West Australian government have signed up to value-add, with some of the world’s largest lithium producers teaming up with local players to process lithium. By the end of 2023, it’s expected they will be producing about 10 per cent of the world’s supply of lithium hydroxide, a figure expected to double by 2028.

North Carolina-based Albemarle Corporation recently announced plans to expand its Kemerton lithium hydroxide processing plant, about 160km south of Perth, from two to four processing trains, making it the biggest and most advanced lithium hydroxide processing plant outside of China. At full capacity, it will produce 100,000 metric tonnes a year. In another project, the WA-based conglomerate Wesfarmers has joined forces with Chilean chemical company Sociedad Química y Minera de Chile (SQM) with the goal of producing lithium hydroxide by the end of 2024 at a volume of 100,000 metric tonnes annually.

Caution advised

The Productivity Commission says downstream value-adding in Australia will be limited to basic processing of raw materials, with little prospect of establishing significant industries in end products such as batteries. Its annual Trade and Assistance Review stated, “The presence of critical minerals mining in Australia suggests there might be a cost advantage for processing in Australia, because large volumes of earth need to be processed to generate small quantities of processed minerals. However, to the extent that these critical minerals are low- volume once processed and refined, and thereby low-cost to transport, a domestic processing capacity is unlikely to create an appreciable cost advantage for a domestic battery industry.”

It’s not just the commission urging caution. Hayley Lawrance GAICD, a non-executive director of Global Lithium Resources, says downstream investing is costly, not technically easy and requires scale. “Although Australia does have potential to add value to its critical minerals sector by investing in downstream processing, the reality of bringing these projects online is complex and their ability to deliver value to shareholders is an ongoing challenge for boards of junior developers.”

Rick Crabb FAICD, Leo Lithium Limited (LLL) non-executive chair, makes a similar point. “Having visited lithium conversion and battery manufacturing plants in China, one needs to appreciate the major investment they represent, the IP involved, and the policy and regulatory support required from government,” he says. “Leo Lithium’s Chinese partner, Ganfeng, has superior technology and a cost advantage of about one third compared with a WA converter. Australia has a chequered history with downstream processing while being a world mining leader.”

Crabb and Lawrance are not naysayers to downstream processing. They are just realistic about its prospects. Despite Australia’s deserved mining reputation, there are cautious words, even when it comes to extracting critical minerals.

Neil Hackett GAICD, a non-executive director at Hastings Technology Metals, says, “Critical minerals require complex processing flowsheets, significant metallurgical and chemical engineering expertise, access to strategic off-take and large pools of capital to achieve profitable production. Directors need to be mindful that the key to successful critical minerals projects will be less about exploration success and size of the resource, and more about whether the critical minerals can be efficiently mined, processed and have binding off-take with reputable global partners.”

Be aware of the pitfalls

Certainly, directors will need to be mindful of the risks, according to Mark Southey GAICD, non- executive chair of mineral exploration company Arafura Rare Earths.

“The challenge for directors is that the roller- coaster ride will put pressure on boards during the inevitable downswings, and they need to be prepared for this journey,” says Southey. “The development cycle of a major project is a long one and many stakeholders hold shorter-term positions. Other risks include regulatory and environmental challenges, technical disruptions, supply chain vulnerabilities and — possibly the most challenging — project delays and cost overruns.”

Like all mining booms, there will be casualties. “For lithium, there is a lot of additional supply coming on via expansions or new mine openings,” says HLB Mann Judd corporate advisory partner Marcus Ohm. “With any such rapid activity, there are always associated risks and it is important that projects being brought into the equity capital markets are quality ones. Although there is potential for bumps in the road, particularly given the degree of interest, activity and future potential, compared with other booms there is a more broadly based macro underpinning across the globe due to the energy transition. This is further supported by the importance being placed on ESG principles.”

Hackett notes that the global energy transition is being legislated globally. “Legislative support and international government commitments to fast- track permitting and providing tangible financial support for strategic mining and processing projects are driving the critical minerals sector.”

Critical minerals: it’s all politics

China’s near monopoly poses a strategic challenge.

The term “critical minerals” has a long history. During WWI, the US drew up the War Minerals List of five minerals in scarce supply in the US — tin, nickel, platinum, nitrates and potash. Fast-forward 100 years and geopolitics largely inspired the EU to compile a list of 14 critical minerals. Producing about 97 per cent of the world’s output, China had decided to cut exports of rare earth minerals in 2018 and Europe responded. But it was when the US drew up a list as part of the trade war with China that the term “critical minerals” became part of the mining industry lexicon.

Australia compiled its own list of 24 critical minerals in 2019, which it expanded to 26 in 2022 with the addition of high-purity alumina and silicon. As defined by the Australian Trade and Investment Commission these are, “metals, non-metals and minerals considered vital for the economic wellbeing of the world’s major and emerging economies, but whose supply may be at risk due to geological scarcity, geopolitical issues, trade policy or other factors”.

Of these 26 minerals, Australia has known deposits of nine, including lithium (46.9 per cent of world production), zircon (21 per cent), manganese (12 per cent), rare earth elements (eight per cent) and cobalt and tantalum (four per cent).

Mark Southey, non-executive chair of Arafura Rare Earths, explains. “China’s near- monopoly poses a clear strategic challenge, with over 85 per cent supply control over rare earth minerals such as neodymium and praseodymium,” he says. “The major concern is the level of uncertainty around supply security and the opaque nature of supply.”

Rugged terrain

The volatility of boom and bust resources cycles has long presented challenges for both regulators and investors.

In the late 1960s, speculative nickel miner Poseidon NL (not to be confused with ASX-listed Poseidon Nickel) was trading around 80 cents. Six months later, it was trading near $280, at which price it had a market capitalisation of $700m, about three times that of the Bank of NSW (Westpac’s predecessor). Driving this buying frenzy were both sides of the economic equation — supply and demand. The world’s largest producer, Canada, was experiencing supply issues and the Vietnam War was fuelling demand.

But the share price collapsed on negative news and the speculative nature of the business triggering a parliamentary inquiry by the Select Committee on Securities and Exchange. When the five-volume report was handed down in 1974 (and a further volume in 1975) it documented unethical, inefficient and corrupt practices in the securities and mining industries and laid the groundwork for improved market regulation.

But market booms are a bit like wars. Just as the preceding major conflict defines military tactics in the next war, so regulators are limited by past experiences when dealing with market implosions. Since tulip mania in the Netherlands in the 1600s, history suggests market regulation typically plays catch-up when a boom and bust leaves a trail of chastened investors holding valueless scrip.

ASIC recently saw fit to warn investors about the activities of David Zohar for promoting an investment in Lithium Lakes. Its concern centred on the fact that Zohar, while the sole director of Lithium Lakes, sent unsolicited letters to investors advising that it was about to issue an ASX prospectus. Here was a chance to get in on the ground floor with a stock name boasting today’s investment elixir — lithium. Other companies associated with Zohar where investors have received letters making similar claims are Greensand Mining, Silver River Resources and Wattle Gully Nickel. To date, none has issued a prospectus. Zohar has a history with ASIC dating back to 2005, when
the regulator took successful court action against Zohar and Swancove Enterprises for engaging in unlicensed financial services.

For investors, it’s not just the potential to fall foul of sham investment schemes. Market volatility will also exact a toll. In the past year, lithium stocks such as Pilbara Minerals and Allkem have seen share prices gyrate sharply, between $5.50 and $3.40, and $17 and $10, respectively.

The primary cause for these swings was a 70 per cent drop in the price of lithium carbonate from nearly 600,000 yuan a tonne in November 2022 to an April 2023 low of 172,000 yuan. At time of writing, it is trading around 300,000 yuan — a 74 per cent gain on its April low.

It was not the first reminder investors got about how volatile lithium stocks can be. In June 2022, the lithium explorer Lake Resources’ share price fell 55 per cent in the first week of being included in the S&P/ ASX 200 Index. Other lithium stocks also came under immense selling pressure amid market fears that the spectacular bull run by battery metal shares had run its course. But Lake Resources also had to manage the departure of managing director Steve Promnitz, who sold 10.2 million shares for an estimated $11.1m immediately after resigning on 17 June 2022.

Critical minerals, lithium in particular, will continue to entice investor interest. Global Lithium’s Hayley Lawrance puts it this way: “The mining industry is cyclical. We have witnessed this in the lithium industry in recent years as prices have risen to all-time highs and then fallen away. However, the long-term demand fundamentals for lithium and other critical minerals represents the bigger- picture opportunity that lies ahead.”

This article first appeared under the headline 'Mission Critical’ in the October 2023 issue of Company Director magazine.