Fables of the Reconstruction — Flawed road to a carbon-neutral economy
by Joe Mazumdar
There is a conflict between the western world’s ambitious climate goals and the path to achieving them.
The mining industry is facing an uphill battle to find, extract, and process the critical minerals required for the green revolution. The potential crisis is being exacerbated by decades of underfunding in exploration and compounded by low commodity prices due to slower global economic growth, China’s zero-COVID policy, and a stronger US dollar, (Fig. 1).
As expected, the IMF has lowered its forecasts for global growth in 2023, (Fig. 2), especially in the US and Europe, due primarily to tightening monetary policies put in place by central banks worldwide to slow down runaway inflation.
Many of the affected commodities are considered critical for the carbon-neutral technologies required to achieve the 2015 Paris Climate Agreement’s goal of limiting the global rise in temperatures to below 2 degrees Celsius by 2050, (Fig. 3).
Yet, lower mineral prices combined with the risk of capital cost escalation and a higher cost of capital may be enough to dissuade miners from undertaking new development projects, making the long-term goal harder to achieve.
Divergent critical mineral policies and technology driving demand
Although the US, Europe, Australia, and Canada have set out critical mineral policies to frame their multi-decade plans to meet the Paris guidelines, underinvestment in the supply chain of essential minerals in the next few decades will hinder the execution carbon-neutral energy plans, (Fig. 4).
A lack of consensus about what minerals are considered critical and how and from where they will be procured adds to the problem. For instance, the US Energy Act of 2020 directed the US Geological Survey (USGS) to establish and update a list of critical minerals, which currently includes ~50 elements from the periodic table and commodities, (Fig. 5), whereas the Australian government has declared only 26 elements and commodities as necessary, and Europe and Canada have put forward only 22.
Since the International Energy Agency (IEA) considers copper a cornerstone for all electricity-related technologies, (Fig. 6), it is surprising that neither the US nor Australia does so. Europe and Canada, on the other hand, have included it on their lists.
According to the Copper Development Association Inc. (CDA), copper usage in hybrid electric (HEV) and electric (EV) vehicles is estimated to be, respectively, 2.5x and 4x higher than in internal combustion engines.
However, despite the increasing use of copper in new technologies, its forecast demand in this realm by 2040 is not as significant as that for lithium, cobalt, and nickel, (Fig. 7).
EVs and battery storage are expected to surpass consumer electronics as the largest consumers of lithium and will become the largest end users of nickel by 2040. Cobalt demand could be anything from 6x to 30x times higher, depending on the evolution of battery chemistry.
Another risk to the supply chains of critical minerals and battery parts is a new US-based EV tax credit, which restricts the sources of materials to the US or countries with whom the US has a Free Trade Agreement (FTA). The policy intends to increase the uptake of electric vehicles, emulating successful programs, albeit more generous, in China and Europe, which currently account for the vast majority of EV global sales, (Fig. 8).
Half of the tax credit in 2022 (US$3,750) applies if the vehicle has at least 40% of its battery’s critical minerals sourced from the US or FTA countries, increasing to 80% by 2027, (Fig. 9). A similar theme has been put forward for battery parts, which must be 100% sourced from the US or FTA countries by 2029.
Where will critical minerals come from?
Currently, the US is well-positioned to face its energy needs with a fossil-fueled energy mix including abundant oil and natural gas resources, while Europe is not, due to its overdependence on Russian natural gas imports, (Fig. 10).
However, neither economy is capable of securing locally all the critical minerals required for the green energy transition. Still, the US has the advantage of being able to obtain some of these resources from nations with whom it has an FTA, such as Chile (Cu), Peru (Cu), and Australia (Li).
Its neighbor to the north is another key partner via the Canada–U.S. Joint Action Plan on Critical Minerals Collaboration, finalized in January 2020, (Fig. 11).
But Canada is also a potential supply source for European car manufacturers according to a recent memorandum of understanding (MOU, link here) signed with Volkswagen (VOWG.XETRA, VLKAF.OTC) and Mercedes (MBGn.XETRA, DDAIF.OTC).
Also recently, Canada and UK-based Rio Tinto Ltd (RIO.LSE, RIO.NYSE) announced a C$737-million (US$533.6 M) investment over eight years to improve the mining company’s emissions and expand research and development at its Fer et Titane facility in Québec, which process titanium dioxide and scandium oxide.
Australia also hosts significant critical mineral resources, especially cobalt, lithium, manganese, tungsten, and vanadium, (Fig. 12). To grow its critical minerals strategy, the government plans to help projects advance through technical expertise, infrastructure, and financing.
It also seeks to diversify its customer base away from China by expanding relationships with the US, Japan, Korea, United Kingdom, India, and EU members. For instance, the US-Australia Critical Minerals Collaboration seeks to develop both countries’ assets in tandem.
Under the agreement, Australia-based Lynas Rare Earths (LYC.ASX, LYSDY.OTC) signed a $120-million deal with the US Department of Defence to build the company’s first commercial-scale heavy rare earth (HREE) separation facility in the US, (Fig. 13), which would help the government’s efforts to reduce its reliance on China.
Development timelines put carbon-neutral plans at risk
Securing the lowest-risk geopolitical sources of critical minerals gets the consuming nations only part of the way to achieving a carbon-neutral goal, given that the average development timelines from project discovery to production is ~17 years, (Fig. 14). Therefore, if a project hasn’t been discovered yet, the probability it will come on-line to impact the 2040 timeline is low.
A victim of the long timelines in the US was Trilogy Metals (TMQ.T, TMQ.NYSE), previously part of the Exploration Insights portfolio. In early 2022, the company lost about one-third of its value on 11-12x its average daily volume after alerting investors that the US Department of the Interior had filed a motion to retract the final environmental impact statement on the Ambler Access Road and suspend the right-of-way permits issued to the Alaska Industrial Development and Export Authority (AIDEA), the lead proponent of the road.
The access road is critical for the development of the copper-dominant Arctic open pit project, a joint venture with a large, diversified miner - South32 (S32.ASX) - and a native corporation (NANA), (Fig. 15).
The original positive Record of Decision (ROD) was given in July 2020 after about five years of work, numerous public meetings, and thousands of pages of documents, (Fig. 16). The setback pushes the project back at least a few years in the best case scenario.
Environmental impact of mining negatively impacts social license to operate
The mining of critical minerals generates environmental and social impacts, (Fig. 17), especially projects with the following attributes:
- large open pits using diesel-fueled trucks
- processing facilities requiring power from carbon-based fuels (diesel, natural gas, coal)
- projects requiring large volumes of water
- operations generating large volumes of waste, specifically those with potential acid-generating rocks and/or large wet tailings facilities
Many porphyry copper projects share several of these attributes and, problematically, the trend to mine lower grades means that more tonnes will need to be mined. Hence, larger environmental and social footprints will be generated to maintain the same copper production profiles, (Fig. 18).
To reassure stakeholders concerned with the net impact of these developments, companies need to show that their project is on the low end of the spectrum for greenhouse gas emissions, (Fig. 19). Yet, many high-emissions projects are operating in countries like China where the environmental oversight of the mining industry is less enforced.
In countries where the environmental movement is strong, recent examples of local protests denying mining companies the social license to operate, include (Fig. 20):
- In January 2022, Serbian environmental groups forced the government to revoke Rio Tinto’s (RIO.LSE, RIO.NYSE) mining licenses covering the US$2.4-billion Jadar lithium project. At full capacity, the mine was expected to produce 58,000 tonnes of refined battery-grade lithium carbonate per year, which would have made it Europe's biggest lithium mine by output.
- The State Defense Council (CDE) of Chile launched a legal action against Albemarle (ALB.NYSE), Antofagasta Minerals (ANTO.LSE), and BHP Group (BHP.ASX, BHP.NYSE) in April 2022 over the rate of water extraction from an important aquifer in the Salar de Atacama. Albemarle countered that its freshwater usage is negligible (<1%), and the majority is unsuitable for human consumption. That said, the copper producers are estimated to employ about 46% of the freshwater from this aquifer, while tourism takes the remainder.
- The Thacker Pass US$1.0-billion open pit lithium clay project advanced by Lithium Americas (LAC.NYSE, LAC.T) received a positive ROD in January 2021 from the Bureau of Land Management and is expected to begin construction in 2023. However, it continues to be opposed by environmental groups, a local rancher (water usage), and Indigenous groups (sacred site).
- Newmont Corp. (NEM.NYSE, NGT.T) officially abandoned the development of the multi-billion-dollar Conga copper-gold project in Peru in 2016 due to community opposition, but the CEO indicated the potential for its reactivation in May 2022. Unfortunately, foreign investors have all but lost faith in the Andean nation’s President’s ability to move mining projects forward and quell protests delaying a US$50-billion project pipeline earmarked for the country.
Processing of critical minerals dominated by China
Once the critical minerals are extracted from the ground, they are processed into intermediate materials and, eventually, into the final products required by different clean-energy technologies.
However, since most of the processing is done in China, (Fig. 21), which has successfully built up this capacity over the past two decades, the US attempts to mitigate its ‘undue reliance on critical minerals from foreign adversaries’ are at risk.
To cope with this challenge, the US and its economic allies should have already started ramping up their processing capacity. Yet, this endeavor may prove as difficult as advancing mining projects. On the other hand, new technologies are being developed that could potentially supplant the processing capacity built in China.
Minerals considered critical by the western world for the transition to a carbon-neutral economy by 2050 have become strategic due to the current geopolitical landscape, which constrains their sourcing to highly endowed countries like Canada, Australia, Chile, and Peru, among others.
Although the US, Europe, Canada, and Australia have created policies to become more self-sufficient, they don’t consider the same minerals to be critical (e.g., copper). Furthermore, the timelines to advance projects from discovery through delineation to development and production are getting longer (15-18 years), resulting in higher capital and financing costs.
Also, the environmental cost of mining operations is increasingly impacting the social license to operate (SLTO) risk in many countries; yet, the global trend to mine lower grades suggests that some projects’ footprint (diesel, waste, tailings) will only grow.
Finally, mining is only half the solution for a carbon-neutral economy. Processing is the other half, but most facilities are located in China, underpinning another significant risk.
Given the uncertainty of obtaining the volume of critical minerals required to power carbon-neutral technologies, it is not surprising that the International Energy Agency forecasts that the revenue from coal production won’t be surpassed by energy transition minerals until 2040, (Fig. 22).
I have the following suggestions for policymakers:
- Better alignment - to understand the volumes required and secure the supply chains, I would align not only the minerals considered critical among the major players in the western economies but also the technologies.
- Fastrack acceptable mining - actively support the advance of critical mineral mining projects in countries not considered ‘foreign adversaries’ through technical, financial, and bureaucratic means, especially when projects have a hard time accessing the capital markets or are held up in a permitting logjam.
- Establish processing hubs - mining is not enough; like-minded nations must also have a clear idea of where to process the mineral into products meeting clean air technologies’ standards.
- Do not underinvest in carbon and nuclear technologies - given that the energy transition will not happen overnight, I would not underinvest in carbon- and nuclear-based technologies to avoid an inflationary environment prior to 2040.
- Set realistic expectations - a more pragmatic approach is required with some key milestones along the path as opposed to just signing off for a carbon-neutral society by 2040. Granted, a long-term plan is probably easier to execute in an autocracy like China, where Xi may be in power for as long as Chairman Mao.