Heavy metallers mosh for battery assets

The battle for Noront pits BHP, the world's largest diversified miner, again Wyloo Metals, a vehicle of Andrew Forrest, owner of another Australian mining powerhouse, Fortescue Mining. The dance between BHP and Wyloo has seen Noront bid-up from an initial C35c in May to BHP's offer of 75c in October, with Wyloo also converting a debt instrument to bump up its shareholding as it seeks to prevail.The story behind the story is one of a lack of producing assets and a scantly-populated pipeline raising concern that there will be material shortfalls before long of metals such as copper, nickel, cobalt, manganese, lithium and PGMs. This, and the fact that the deposits of many battery minerals may not be in friendly countries has seen some Western governments state that exploration and development is strategic to their future. Scarcity is bringing transactions to secure supply, but as it is also driving commodity prices higher there are opportunistic reasons for some projects being increasingly coveted.The battery metals mosh pit is drawing non-traditional participants in for a slam as the race for assets intensifies. August saw Bill Gates crowd surf into the thick of the action when KoBold Metals, an investment of his climate and technology fund Breakthrough Energy Ventures (BEV), entered into a joint venture with Bluejay Mining to partner on Bluejay's Disko-Nuussuaq nickel, copper, cobalt, platinum magmatic massive sulphide project in central West Greenland.KoBold invests in artificial intelligence to process geological data to help identify areas for exploration and identify deposit signatures or indications that may pass unnoticed by geologists and it typifies the convergence of different sectors, skill sets and sources of capital entering the fray to meet the climate crisis. And in this instance, it brings a vast software fortune to the task of developing new metals supply.Investors in BEV include other technology titans Michael Bloomberg and Jeff Bezos, which Howard Klein of RK Equity labels philanthropic venture capital. "It's a venture capital mindset driving those investments, making bets on a lot of different things. They're now focused on climate venture capital, to a degree. They're involved with BEV, which has made investments in new technologies for direct lithium extraction. Entrepreneurs like this are buying into new technologies for extraction, but they're not necessarily yet buying into more conventional mining technologies or building chemical plants. They still think that those things are dirty industrial businesses, they are not sexy like a great car. Anything about digging a hole in the ground has a black eye to it," Klein told Mining Journal.Large sums of money are being raised for battery metals exploration and development via SPACs (special purpose acquisition companies) often led by former and current mining executives and achieving eye-watering valuations of billions within a matter of months.In July, Metals Acquisition was formed to raise US$250 million for energy transition opportunities, with former Detour Gold execs Michael McMullen and Marthinus Crouse at the helm.. That same week, Osisko's Sean Roosen, John Burzynski, Don Njegovan and Alexander Dann formed Osisko Green with a $287 million raise, "to search for target businesses or assets involved in the shift away from fossil fuels to green energy and related industries and commodities such as mining of battery minerals, refining and processing, technology and supply chains."In March, former Xstrata boss and private equity manager Mick Davis founded Vision Blue Resources (VBR) in a $300 million SPAC for battery metals investment. The entity has invested $11.5 million in Ferro-Alloy Resources to help develop the Balasausqandiq vanadium project in Kazakhstan and $29.5 million into NextSource Materials, which is building the Molo graphite mine in Madagascar.In January, Robert Friedland created Ivanhoe Capital Acquisition (ICA) with $240 million targeting the battery space. ICA announced a combination with lithium battery supplier SES Holdings in July for its hybrid Li-metal battery and two prototyping facilities in the US and China with a pro forma implied equity value of about $3.6 billion. This transaction was supported by automakers General Motors, Hyundai Motor and Kia.SPACs are even following mineral exploitation into uncharted territory with DeepGreen Metals, a SPAC seeking to source battery metals via seafloor mining which raised $300 million in 2020. In June, shareholders approved a business combination with Sustainable Opportunities Acquisition, with the resulting company to be helpfully renamed The Metals Company, boosting the valuation to $2.9 billion.With investment funds increasingly investing in line with ESG principles, RK Equity's Klein believes pension funds and endowments will ultimately increase sources of funding to battery metals companies. "The largest asset allocators of the world are allocating huge amounts to strategies that focus on sustainability, so there's a bigger pool of money feeding this theme and they're telling existing companies that produce dirty things that they need to invest in cleaner things," he said. Outcropping lithium boron mineralisation at Ioneer's Rhyolite Ridge in Nevada, USABig minersWith demand for battery metals set to go ballistic there is chatter about bigger mining players moving into niche battery metals. In July, South Africa's Sibanye-Stillwater acquired a 12,000 tonne per year nickel processing plant in Le Havre in northern France for €65 million from French mining group Eramet as it builds out a battery metals strategy, following an investment in the Keliber lithium hydroxide project in Finland in February. But Sibanye didn't stop there with CEO Neal Froneman having a clear vision about the future direction of the company. In September, it agreed to establish a joint venture with ioneer to develop the Rhyolite Ridge lithium-boron project in Nevada, USA and contribute $490 million for a 50% interest and in October it spent $1 billion to acquire producing nickel and copper mines in Brazil from Appian Capital Advisory.Large diversified miner BHP is getting into nickel, which according to Australia-based specialist funds management and corporate advisory firm Eden Partners is a sign of things to come."Given the lack of quality nickel sulphide production for battery use, we expect to see future consolidation within the nickel sector as larger players move to secure quality assets and add mine life to their portfolios," said the firm in an August nickel update.Another diversified, Rio Tinto, wants to invest $2.4 billion in its Jadar lithium project in Serbia.Deployment into battery metals by the diversifieds is still unusual, said Klein, as materials like lithium and nickel are outside their comfort zone. "These markets are small relative to their other businesses like copper and iron but the fact that they're starting a bidding war for Noront, which is not a big deal at all, means they recognise these industries are a growth area, they are needed, they are sustainable and they are where the future is," said RK Klein."These markets won't be small forever. The prices of lithium and nickel have gone up a lot so the prospect of them making good profits from entering these businesses is good. A lot of junior companies are not well capitalised so that's an opportunity for the majors to bring their skills, their balance sheets and their credibility as auto and battery companies would rather deal with bigger, more established players," he added.Matt Fernley, editor of Battery Materials Review and research head of Westbeck Capital's Volta Energy Transition fund agrees. "Up till now, apart from nickel, none of these sectors is big enough for the big guys. If big mining is going to make an acquisition, it has to make a difference to the bottom line as well as the top line, which means realistically, you're looking at a company that's going to have revenues of over a billion dollars to make a difference to these guys," he told Mining Journal "It's only been with the growth in nickel and lithium prices that the big guys are starting to pay attention to the sector. As the big guys start to get their head around the battery material space, which really hasn't been a focus for any of them, there's an understanding that there's a lack of a lack of high-quality material. I genuinely think that the prices have now gone up to a level where it's now justified to invest in new M&A. So for instance, the bidding war for Noront is not only for a high-grade asset but one that is also a scalable asset, which is absolutely key to the to the majors. It has to be something that could have a 30+-year mine life," he said. Noront Resources's Ring of Fire project in Ontario, Canada AsiaFor Martin Turenne at FPX Nickel, the deals by BHP and Rio Tinto are the exception rather than the rule, standing-out due to their relative scarcity. He noted the majority of battery metals transactions have involved downstream companies from Asia even though the financial scale of the industries they belong to dwarfs the mining sector. "They are on the front lines of the raw materials procurement challenges. They know that in order to have a business, they're going to need these raw materials; it's existential to their business to have a secure supply of the metal units, and that is leading them to have the urgency to try to think about how they secure those metal units. Mining companies haven't yet displayed that same urgency. Developing a stable supply of North American nickel for the EV battery industry is an existential issue for the EV battery industry. It's not an existential issue for the mining companies," Turenne told Mining Journal.Unlike the philanthropic venture capital in the West, Asian investors, China in particular, have no difficulty investing in mining and are in the process of cornering lithium supply. Contemporary Amperex Technology (CATL), the world's largest maker of EV batteries, thought it was buying Millennial Lithium for its Pastos Grandes lithium development project in Salta, Argentina for C$377 million after coming over the top of a C$3.60 per share July bid from China's Ganfeng Lithium until Lithium Americas came in with a US$400 million stock and cash deal. Millennial aims to produce 24,000tpy of lithium carbonate equivalent (LCE) for 40-years from a project costing about $450 million, according to a 2019 feasibility study.Similarly, Ganfeng agreed to acquire the remaining shares of Bacanora Lithium it did not already own at a 50% premium. Bacanora's Sonora project in Sonora, Mexico is expected to produce 17,500-35,000tpy of LCE with Ganfeng having a 50% off-take for the stage development and 75% for the second stage. Most recently, China's Zijin Mining bid C$960 million for Neo Lithium to get the Tres Quebradas or 3Q project in Catamarca, Argentina, which is due to produce an initial 20,000tpy LCE for more than 30 years. "China understands the criticality of this [battery metals] sector and they've gone all around the world, to secure supply. America could be at a potentially a competitive disadvantage," said Klein.For Turenne, the fact that battery metals are existential to automakers provides mining companies with an opportunity to shift the balance of power and ask them to share in the exploration and development capital risk of bringing new sources of supply into production.Vertical integrationIn September, Ford announced a JV with South Korea's SK Innovation to invest $4.32 billion to build battery production facilities in Tennessee and Kentucky in the USA. Toyota Motor followed this in October by announcing it will build a $3.4 billion US battery plant through 2030 with production due to start in 2025 with batteries for hybrid electric vehicles. It expects EVs to account for nearly 70% of its US sales by 2030 from almost 25% currently. "That's an example of Ford saying, ‘we want to electrify our fleet but we don't have the capacity, the ability, the history of producing batteries,'" said Klein.Despite the M&A headlines, capital is trickling into the battery metals sector, leaving many industry participants to lament the plodding 12-bar blues pace of deployment when they believe the task at hand requires a more frenetic and up-tempo release of the purse strings. While the opportunities decarbonisation and the growth of electrification provide the minerals sector are significant, some question how realistic the sector's ability to service the projected growth of EVs and other decarbonisation applications is. A perceived lack of understanding of the time required to bring new deposits into production by downstream actors means funding exploration and development is a very real bottleneck."Anyone who looks at the demand implications from the current EV penetration forecasts will pretty rapidly come to the conclusion that the bottleneck is the fundamental supply of the raw materials and not just the refined materials, but the actual concentrates and other feedstocks that go into the refineries to produce the cathode materials for the batteries," said Turenne.Listening to an automotive company conference call can be like entering into a parallel universe. Auto execs talk of a two-year time period to build a new battery plant as excessive and believe such plants merit their attention before minerals supply is considered, giving one the impression that they believe that at the appropriate time, they expect to write a check and receive the minerals they need, clearly failing to grasp the five to 15 years it takes to bring a mineral deposit on stream.Klein attributes this to carmakers listening to the wrong sources of (inexpert) research. "There's a lot of misinformation. if you're at GM or Ford, you may be a recipient of a research report written by a blue-chip investment bank that says lithium is not rare, there's plenty of it so you don't have to worry. An automaker is not used to thinking it needs to invest in mining and so it is not clear to them whose responsibility it is to make sure the battery metals supply comes on stream," he said.Another factor tripping people up is that battery metals are not bulk commodities, rather they are speciality chemicals. "There's a big misunderstanding in the market about battery grade manganese. The industry assumes that because there's loads of manganese for steel production there's going to be loads of manganese for battery production, but it's not the case. High purity manganese, which is used in batteries, is in very short supply. …I can name three early-stage primary mining projects under development which may be suitable for battery grade material but beyond that, there's nothing.," said Fernley.Turenne said the next evolution was for battery makers and automakers working in collaboration to partner with mining companies who are specialised in finding, developing and ultimately operating mineral deposits."Automakers and battery makers would prefer not to be beholden to commodity price volatility, because that will fundamentally hinder their ability to plan their business and to determine the sticker price for their vehicles…. The only way to secure price is either to enter into fixed price offtake, which it would not be in the mining industry's interest to do, streams where they provide upfront capital to buy a certain amount of metal at a fixed price, or they have asset level ownership," said Turenne.Michael Scherb, founder and CEO of Appian Capital Advisory believes the penny is dropping if the recent US$1 billion sale of Appian's Santa Rita and Serrote nickel and copper assets in Brazil to Sibanye Stillwater is any measure. "Nearly all the major mining houses were involved in this bid process. The bidders were a range of groups from all geographies, including China, North South America, UK, listed African players, all sizes, all backgrounds, so you had trading houses, you had major mining companies, you even had non-mining players, financial investors and car companies," he told Mining Journal. Appian's Snta Rita nickel mine in Bahia, BrazilCapital formationThe world needs about five to seven times more copper supply, and 20 to 40 times more nickel supply to meet the wall of demand coming to transition fully by 2040 or 2050. Even if actors from multiple sectors break out their chequebooks, is the task achievable? Wood Mackenzie estimates a five-fold increase in base metal supply is required to hit the 1.5° C target, requiring some $2 trillion in investment. Mining sector folk lament that there isn't enough funding around to do the job, particularly given the time lag nature of mining which means any new discoveries will be a mine in 10-years' time and so too late to solve current supply-demand issues. And even if the cheques do come, many observers believe there simply aren't enough commodities around to do the jobJunior explorers with battery metals projects face a significant challenge to fund developments. The capex of FPX Nickel's Baptise nickel project in British Columbia in Canada, for example, is some $1.6 billion, a stretch for a junior whose current market capitalisation is C$102 million. Bringing new production on stream presupposes that junior explorers can obtain finance to explore and develop in the first place. CPM Group managing partner Jeffrey Christian sees capital formation as a constraining factor, with investors still wary of putting money into the sector due to its track record of destroying value. "Yet without risk capital, new deposits will not be found and developed," he said. Investor confidence was not eased by what Fernley calls the "false dawn" in 2017. "Supply got tight, and prices went up but the demand wasn't really there so they then came straight back down again," he said.Scherb said capital moving in the mining space "continues to be more beta focused"."Short term investors hedge funds, focusing on the short term, supply demand squeeze, which is what we're currently experiencing, but there still isn't even close to enough long-term supportive capital, such as private equity, in the metals, mining space targeting energy transition, and there certainly aren't enough exploration dollars going in the ground," said Scherb.Trent Mell, president and CEO of First Cobalt said he echoed Scherb's frustrations."You raise money by the billions at the bottom of the downstream part of our supply chain, but at the very top you're raising it by the millions and often it's single digit. It's a real struggle to raise money to take these raw materials out of the ground. Canadian and US agencies are very happy to help move this new EV supply chain along, but their strong preference is to start once it's been extracted so there's still hesitation to get involved in resource extraction and yet we know that's going to be the choke point for the next few years," Mell told Mining Journal.People see EVs as a recent phenomenon even though more than 100 years ago EVs outsold internal combustion engine vehicles. While Jeff Christian at CPM has not been researching the sector for that long, he began observing EVs in the 1970 as evidenced by the World guide to battery powered road transportation he published in 1980. For Christian, the batteries, motors and other components are lacking, especially considering the forecast ramp-up in EV uptake. "Going from making 4-6 million EVs a year to 50 or 100 million EVs is going to take a lot longer than the politicians and people at the top of the industry say. The CEO of an auto company talks about having 50% of its cars as EVs by 2030 or 2035, but then you talk to his procurement people and they say there's no way we can move that fast," he said."I think it is a lack of strategic understanding of the space because automotive companies are used to dealing with mature upstream industries, like the steel industry.Fernley agreed. " They haven't bothered to go all the way upstream in terms of their strategic assessment of the sector and they think that going upstream is buying battery makers. They don't understand that upstream from battery makers is potentially a very substantial supply-demand deficit that's going to potentially have impacts on their market as well. A number of OEMs have locked-up offtake agreements, but offtake agreements don't really mean anything unless you're looking at injecting capital directly into projects.," he said. Jeffrey Christian's EVs "World guide to battery powered road transportation" published in 1980 Decades observing the EV space means Christian looks beyond the current forecast demand explosion euphoria at practical aspects which continue to exert their influence on automotive development, and which he believes explain why battery minerals investment is not flooding-in rapidly. "When we talk about new energy vehicles, electric vehicles are winning right now, but they may not be the winners in the long run. Electric vehicles might turn out to be an interim technology between petroleum-based engines and something down the road that people aren't looking at. The useful life of a given battery technology is about 20 years during which it is developed, commercialised, grows and plateaus before you have a new battery technology. Lithium-ion batteries came into creation and very rapid market commercialisation in the 1980s and have been the dominant battery for 40 years. But within that 40 years, you see a continual evolution of lithium-ion technologies and that's part of the problem with capital formation constraints," said Christian.Christian's point is that the evolution of battery technology and battery chemistry presents investors with a moving target with a very real risk of backing an approach which may be redundant tomorrow. Cobalt appears to be an example of this. "You saw hoopla about cobalt and five years ago we thought that if there's a cobalt mining company producing and selling cobalt now, it would be a good investment. But by 2022, you shouldn't be hyper on cobalt or exploration companies starting to look for cobalt because there will be a pivot away from its use in autos due to the supply and cost. Five years ago batteries had 30% cobalt content. Now, they are 20% cobalt content and they're going to 10%, with some people talking about cobalt-free batteries. Much of the capital pouring into cobalt over the last five-10 years is never going to see a good return," said Christian.This is the crux of the capital formation issue: who is going to take risk when obsolescence may be around the corner? In similar situations in the past, the materials industry has attempted to load the risk onto the automotive companies. Christian cites the example of PGMs for auto catalytic convertors in the 1970s and 1980s when Soviet sources were unavailable for geopolitical reasons, which meant the sector was forced to rely on supply from South Africa. For South Africa's mines to raise the capital to produce PGMs, they demanded and obtained 10-year offtake contracts from automotive companies with fixed price floors. Today, however, with auto companies seeing battery technology evolving rapidly, they are not prepared to repeat this. "Today, a battery metals guy says he needs an offtake agreement and the auto industry says ‘no'. In fact, it says, ‘I need you to spend tens or hundreds of millions of dollars to build factories to build these motors but we won't give you an offtake because we may not need them as we may decide to use different types of motors. So you build your factory so you can change your technology very quickly. There's technological uncertainty limiting capital formation," said Christian.For Fernley, this is only partially true. "You are going to need lithium and graphite in any battery that you've got. Nickel, cobalt and manganese are all cathode ingredients and if cobalt is being engineered out that just means you need more nickel and manganese. I can see the changes in battery chemistry putting off mining companies for investing because they need to find a project that's got a 20- to 30-year lifespan so I can see why mining companies would be put off, but as an automaker, you can effectively control the chemistry and say that for the next 20 years I want to be using NCM batteries so I can't see chemistry putting off OEMs for investing," he said.The technology question is further complicated by battery minerals supply shortages causing price volatility and spikes. In October, Benchmark Mineral Intelligence said China lithium hydroxide was approaching $30,000 per tonne, well above the 2018 peak of $25,000/t and is up almost 253% year-to-date. Battery-grade lithium carbonate China is up 322% year-to-date at $28,675/t. "The biggest danger to the miners, explorers and developers of these commodities is that the price goes up too high, too quickly. It would make for a fun time for the underlying equities for a period of time but it leads to fundamental changes in battery chemistry or otherwise derails ambitions to see the electrification of the vehicle fleet and possible negative longer-term consequences," said Turenne."The biggest risk in the sector is under investment in supply as underinvestment leads to higher prices and higher upstream prices leads to higher downstream prices, which then either leads to inflation, or if you can't pass the cost on to consumers, then your industry goes belly up. The cost of manufacturing batteries is still 50% of the cost of an of an EV so if battery material prices go up, then it's going to have a knock-on effect on the cost of EVs. It's difficult to see huge volumes going through unless EVs are mass market so automotive companies have to find some mechanism to make the EV into a mass market. I wonder if battery leasing may be the way to do it to back out the cost of the battery from the electric vehicle and effectively rent the battery to the owner," said Fernley.Klein also sees price risk potentially derailing EV rollout. "If you look at typical S-curves for development, whether it be cell phones, computers or whatever, the take up of electric vehicles may be poised to reach mass adoption over the next five, 10 or 15 years through government policy and consumer demand, but they're still not there yet on a on a price competitive basis. There's a lot of technology being applied to scale and make batteries cheaper and there's some risk that if commodity prices rise too high, battery costs won't come down as quickly, so that is a threat," he said.For Turenne, price stability will be a driver which sees downstream participants increasingly vertically integrate up the minerals supply chain, which Asian battery companies are already doing.Klein said the more months that pass without significant investments being made in battery metals operations, the more likely it is that automakers will have to purchase mines and build chemical plants to ensure that they control supply. "If the price skyrockets it will impact their input costs and their ability to make low-cost batteries. I see a scenario where you see the Fords of the world do what they did with Fordlandia in Brazil in the 1920s and 1930s to cultivate rubber. They will spend whatever capex is necessary and support the cost because they'll recognise it gives them a competitive advantage, because they'll have a lower input cost and security of supply," said Klein.

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