Mind the gap - the investable projects gap, that is. New PwC analysis1 shows Australia’s current critical minerals investable universe2 is less than a fifth of our total critical minerals3 projects. Not only does the nation’s pipeline lack depth, but many projects lack scale, with our research showing that few projects in Australia’s investable universe have a net present value (NPV) greater than $500m.
Yet Australia has every advantage when it comes to critical minerals. With our first-class natural endowment, our proximity to markets, and our proven track-record, there’s every reason we can be world leaders in critical minerals and other energy transition minerals.
In this article we ask: when it comes to critical minerals, what can Australia learn from its bulk commodities success? We analyse the current pipeline of critical minerals projects and we look at how to accelerate critical minerals industry development to meet global demand. In other words, we explain how Australia might bridge the investable projects gap.
Australia’s bulk commodities success is indisputable, and we’ve prospered as a nation because of it. Following the supersized success of Australia’s bulk commodities export earnings in recent years—including coking coal, thermal coal and iron ore from a minerals perspective, and LNG and grains more broadly—surely Australia can hit ‘copy and paste’ for critical minerals? Actually, it’s more complicated than that.
Critical minerals and rare earth elements are a different ballgame to bulk commodities, with different rules and different players. For example, many bulk commodity markets were established with ‘fixed price’ term contracts that provided a more manageable risk profile for early capital providers. Many of these markets shifted to floating, or spot, pricing as they evolved.
Two critical challenges must be addressed.
Australia currently has only 121 critical minerals projects in its investable universe from a total 696 critical minerals projects across the mining lifecycle. Of those 121 projects, only 26 have proven and probable reserves.
When projects were viewed through the lens of their respective primary commodities, the pipeline represents just seventeen of the thirty critical minerals and six strategic minerals on the Federal Government’s list.
Our pipeline lacks depth and diversity.
Source: PwC analysis
Note: The 36 minerals were drawn from the update to Australia's critical minerals list from Dec 2023 at https://www.industry.gov.au/news/updates-australias-critical-minerals-list
Australia successfully scaled up its bulk commodities output to meet Chinese demand unleashed by the twin forces of industrialisation and urbanisation. GDP per capita and commodity index data highlights the impact on Australia was accentuated following China’s entry into the World Trade Organization in 2001. For the next two decades, Australia benefited from global mining companies operating large-scale, world class mines. These behemoths developed and expanded mining basins that incorporated the requisite logistics to support the mass movement of material and achieve economies of scale. This became the foundation of Australia’s comparative advantage.
But the sheer scale of operations is missing from critical minerals. Our research found that, of the 121 projects in Australia’s investable universe, only a handful have a NPV above $500m. The remaining projects are relatively small.
Similarly, we found only five investable projects that have both an NPV exceeding $1bn and a NPV to Capex ratio greater than 2.
The challenge, therefore, is not only the (small) number of critical minerals projects, but the (small) size of the projects. This reality is challenging inbound investors that have invested in large-scale, world-class mines run by Tier 1 operators in the past.
While acknowledging that critical minerals differ from bulk commodities, it’s still valuable to ask: how might Australia’s success in bulk commodities translate to critical minerals?
The answer is two-fold. We need to catalyse private capital by adopting mechanisms that address price volatility and volume risk; and we need to find ways to aggregate reserves and resources to achieve economies of scale.
Collaboration will be key to achieving these two outcomes. This includes public private collaboration. Unlike the growth path for bulk commodities, there is merit in exploring government market intervention in the critical minerals industry. It is encouraging to see the government’s support in the 2024 Federal Budget (which built on earlier commitments, such as the establishment of the Critical Minerals Facility) and the subsequent introduction of the Future Made in Australia Bill 2024. There are also specific measures at the State government level. While there is a value adding focus to many of these iniatives, it is important that the development of downstream facilities is undertaken hand in hand with the continued expansion of our upstream production volumes.
So, what can we replicate from Australia’s bulk commodities playbook?
There is no shortage of creditworthy bulk commodity miners with sizable balance sheets and access to substantial capital. These are not characteristics currently in abundance in the critical minerals sector; yet the consolidation that is occurring through mergers and acquisitions in the lithium sector may be the first signs of change.
Major deterrents to private sector investment in critical minerals includes the extreme price volatility (price risk) and the uncertainty about which underlying technologies will drive future demand for a range of critical minerals (volume risk). Government intervention might just be the answer to mitigating this, at least in part. Specifically, government could:
Government financial support via loans, grants and production tax credits is welcomed, yet these mechanisms don’t adequately address the key concerns for private capital around price and volume risk. Other mechanisms should be explored, including:
These mechanisms would introduce the creditworthiness to our critical minerals industry that was a feature of our bulk commodities success. This cannot be a ‘one-size-fits-all’ policy approach. Financial mechanisms must be matched to each critical mineral market because the relative maturity and fundamentals of each market differ.
Thought should also be given to structures that are evolving to finance the energy transition, such as blended finance models. These might rewrite the possibilities when it comes to public private collaboration. Depending on how risk is allocated to each pool of capital, these models could incentivise the investment of private capital alongside public funds on a scale we have not yet experienced. These models could also be conduits for the proposed ‘NATO of critical minerals’4 to fund critical minerals developments at scale, another feature of our bulk commodities success. More on that below.
The critical minerals industry could take a page out of the bulk commodities playbook when it comes to basins. The major bulk commodities players treat regions of high mineralisation (such as the Pilbara) as basins, where the quality and scale of the reserves incentivises a long-term capital commitment and infrastructure development to secure economies of scale.
True, critical mineral deposits tend to be significantly smaller. Still, an approach based on project clusters (where the focus would be on the development of a cluster of projects rather than standalone projects) might succeed in regions where there’s a high number of early-stage projects for the same mineral in (relatively) close geographic proximity. Also, in areas with existing infrastructure, or proposed investments in port, road, rail and utilities.
The Pilbara Energy Transition Plan5 in WA and the Queensland Resources Common User Facility6 are examples of the 'art of possible' when it comes to effective collaboration between government and industry in the pursuit of aggregation and scale.
There’s the potential for a silicon cluster in Queensland, where there are nine lump quartz mines and a proposed polysilicon facility, plus existing port infrastructure and renewable energy zones. Plus, there’s the potential for a rare earths cluster in south-eastern Australia, stretching from the Eyre Peninsula to central New South Wales, and covering ten rare earth projects, three scandium projects and three mineral sands projects. Then, there’s the possibility of a vanadium cluster. In Queensland, there are upwards of five substantial vanadium deposits within a (relatively) small geographic area.
There are key questions to be addressed - the extent of homogeneity between projects (which would impact on the ability to develop common processing facilities) is one. How a share of the benefits of clustering would flow to the Australian public if more government funding was deployed to support cluster development is another. We would also need to consider how clusters might support delivery of better project economics and productivity improvements and address the high-cost base of operating in Australia – these matters are high on the agenda of those responsible for allocating capital to the Australian resources industry right now.
Pending requisite feasibility studies, clusters like the three we’ve identified could create value via shared infrastructure; co-operative research and shared technology deployment; joint community engagement; collaborative planning for cluster-wide approvals and permits; pooled capital; and product certification and marketing, and more. A shared vision and ambition, and trust amongst cluster participants, would be essential to achieve the degree of collaboration required.
Australia must set about closing the gap between its critical minerals endowment and the pipeline of investable projects to accelerate development of the industry. Given these minerals are essential to the production and performance of the low carbon technologies on which the energy transition relies, we are ‘on the clock’ to do so. Leveraging the bulk commodities playbook by (1) mitigating risk to catalyse private capital and (2) collaborating on the development of project clusters that could support aggregation and economies of scale would be a good start. Higher levels of public private partnering will need to be a feature of both efforts.
Lachy Haynes
Partner, Advisory, Energy Utilities & Resources, PwC Australia
Tel: +61 499 039 476
Marc Upcroft
Partner, Assurance, Australian Mining Leader, PwC Australia
Tel: +61 419 629 803