Demand for critical minerals is up since they are essential to many renewable energy sources. Can EU regulators make the process for mining these important minerals easier, and boost exploration?
The EU’s switch from fossil fuels to renewable energy sources requires increasing amounts of critical minerals such as lithium, cobalt and graphite. However, the region is also experiencing a shortage of these elements, which are essential to wind farms and electric vehicles.
Since 2010, the average amount of minerals needed for a new unit of power generation capacity has increased by 50 per cent as the share of renewables in new investment has risen. According to the International Energy Agency, a typical electric car requires six times the mineral inputs of a conventional car, while an onshore wind plant requires nine times more mineral resources than a gas-fired plant.
However, a European Parliament report published last year reveals that the EU currently provides only 1 per cent of the raw materials for wind energy, less than 1 per cent of lithium batteries, less than 1 per cent of fuel cells and only 1 per cent of silicon-based photovoltaic assemblies.
How can the EU reduce its reliance on other regions for these key materials, while streamlining the development process for mines and incentivising new projects in Europe? Though EU regulators are looking at the issue, some in the industry remain sceptical about just how effective they can be.
Mark Smith, manager of the strategic metals fund at Amati Global Investors, points to issues with the supply of batteries for electric vehicles. Governments in Europe have “bold public sector initiatives to develop domestic battery supply chains”, he says, but most of the supply chain is likely to remain in China. According to the International Energy Agency, China currently produces three-quarters of all lithium-ion batteries and is expected to be responsible for 70 per cent of the global battery production capacity until 2030 because of its high lithium reserves, domestic demand and the country’s established presence in global supply chains.
Smith says Europe’s mining industry is also undercapitalised, as well as being “restrained by bureaucracy and permitting red tape”. Additionally, he says, the rise in political risk has potentially divided global trade interests, and resource nationalism has become a focus of all governments and trading blocs. “Onshoring of mineral and metal supply is the new lexicon in corridors of power, but EU bureaucrats are not miners – there lies the problem,” he says.
EU’s Critical Raw Materials strategy
Last year, the European Parliament voted to adopt the Critical Raw Materials report, which seeks to boost strategic autonomy and resilience in the supply of critical raw materials. The plan looks at the challenges of the industry, and proposes action to reduce Europe’s dependency on other regions, improve resource efficiency and circularity, and promote responsible sourcing worldwide.
Member states are expected to play a vital role in the implementation of the report, particularly in speeding up permitting procedures while guaranteeing environmental and social standards.
As part of the action plan, the European Raw Materials Alliance was formed in 2020. This aims to secure access to critical and strategic raw materials, advanced materials, and processing know-how for EU industrial ecosystems. The alliance’s stakeholders include miners, processors and other industrial actors along the value chain; member states and regions; trade unions; research and technology organisations; investors and non-governmental organisations.
Amati’s Smith says besides working on regulatory bottlenecks and stakeholder engagement, ERMA’s focus is to catalyse investment for projects. To this end it has set up an investment channel for raw materials projects, which aims to be an agile and fast process, enabling projects to be reviewed and approved to secure the most suitable financing options.
Geopolitical factors
Ben Davis, European mining analyst at investment banking firm Liberum, says the EU proposal follows a general global trend where geographical regions are trying to secure supply chains, prioritise domestic industrial growth and bring stability when there are tumultuous geopolitical events such as the China-US trade war or Russia’s invasion of Ukraine.
He says: “It would be great if what the EU is proposing can actually help streamline and make the permitting process more effective. But it is amazing how difficult it is to hurry things along when there’s local stakeholders involved. They’ve got their work cut out.”
Smith at Amati says: “The lead time from resource discovery to production has to drastically shorten, and governments must leverage private investment in sustainable mining and ensure clear and rapid permitting procedures to avoid potential supply bottlenecks.”
Permitting issues
He explains that after an extractable resource is identified through exploration, it can take anywhere from five to 15 years for a mine to begin commercial production. This period of resource development needs to be financed and the nearer the deposit gets to being mined the more capital is required, as the mine moves into a construction phase.
He says that the managers of his fund have the financial ability to conduct technical due diligence on the mineral deposit and generate an investment-risk return at each stage of the asset’s development. However, Smith says that for investors it is sometimes hard to assess the risk of the permitting process. This type of uncertainty can only generate a binary outcome: the mine gets a permit to operate or it does not. “A mine with no prospect of permitting or prolonged delays has little value to invest in,” he says.
Alternatively, a mining asset might be at the engineering stage, where long lead times are often required to secure financing and the necessary permits. Up to this point, the company has financed the exploration and development with private equity investment. Smith says securing permits can take anywhere from one to 10 years due to some countries requiring multiple permits, or due to permitting delays caused by bureaucracy, inter-agency disagreements or public resistance.
“At this stage, the potential of the mine getting developed in a timely fashion within our investment return window is low and we would look to exit our investment. This general market reaction depresses the company’s valuation, making it harder to raise future capital for mine construction and the death spiral continues,” he says.
Differences between countries
While there are mining project opportunities in Europe, Smith says global resource investors have an opportunity cost of investing in a company that gets delayed in development. He says: “The EU has to coordinate the development and permitting of mineral projects in a systematic and strategic fashion, rather than being driven by the domestic agenda of the country hosting the resource.”
Liberum’s Davis says new mining jurisdictions that have historically not had any mining activity will struggle to get their mines running. This is because areas that had previously unfavourable taxation policies or mines that contain minerals that were previously not popular but now are, “do not have the administrative capability to run through the permitting processes and get it done in a timely fashion”.
For example, Portugal’s lithium mining industry has taken many years to take off. Davis says this is due to two key factors: there is a less accommodative local stakeholder base and there is no civil service capability to do the administrative work.
Additionally, he says: “There’s no one size fits all when it comes to mining permitting processes – I wish there was, but every country has different priorities.” Each country will have its own perspective on issues such as how mines should be dewatered, or their impact on the environment and local communities.
Exploration versus mining
Wilson Robb, chief technical officer of mining company Technology Minerals, welcomes any proposals that can strengthen Europe’s competitiveness internationally, stimulate investment, and help the region create a stable source of the critical minerals that are essential for the decarbonisation of the economy.
However, he stresses the EU urgently needs to incentivise exploration, which is the first step to creating a pipeline of mining projects. He says it is very rare for exploration projects to evolve into actual mines: only one in 10,000 exploration projects become a mine. “Exploration and mining are currently treated as almost the same thing despite being two entirely different disciplines,” he says.
According to Robb, exploration efforts face the same environmental, water and planning restrictions as mining, though they are minimally invasive and only have limited environmental impact. This causes delays in licences, drilling, surveys and higher costs for the various stages of exploration.
He says there remains an “unnecessarily elevated risk perception of exploration projects for investors”, adding: “If the EU is serious about ramping up its domestic supply of raw materials, it would be prudent to encourage a more enabling approach that can incentivise exploration of critical minerals like copper, nickel, rare earths, lithium and cobalt.”
Technology Minerals has a mining asset in Spain that was previously dormant, and the company is now working with the local government to bring it back into production. Robb says it can take up to three years to issue exploration licences in Spain, but this length of time can discourage junior exploration groups that eventually can attract major mining companies to develop the mine.
He says: “Countries that make it easier for exploration companies to obtain permits will be in a much better position to gain visibility of and exploit those natural resources. Those that are dogmatic and fail to delineate exploration from mining risk falling behind.”