Mining Investment Environment
Venturing out of the comfort zone
Mining is a risky business. In the short term, the current environment suggests mining executives and investors will continue to prioritize advanced-stage projects and operations with the lowest levels of risk amid rising interest rates and fears of an economic slowdown. But looking at the months ahead, new capital is needed in underfunded exploration assets to meet net-zero goals. Few jurisdictions offer the clarity and stability that Nevada does, suggesting the state appears ideally placed as a haven able to prompt a virtuous cycle of investment in 2023. Despite a harsh financial year, where 50-70% drawdowns were the norm for junior miners, Nevada’s lithium explorers are still managing to access much-needed financing, albeit in a slightly different form than what the industry is accustomed to, often involving off-take agreements with end-users, such as automobile makers.
For mining firms in Nevada and worldwide, the latter half of 2022 felt like a hangover. A lot of the commodity prices that reached all-time highs in 2020-2021 (such as gold’s $2,076/oz in August 2020) decreased in 2022. Even miners of the commodities needed for the energy transition, such as lithium, which soared to its highest level at US$84,000/t in November 2022, have not been spared. With the commodity being up 20 times in 24 months, field experts forecast a correction. The market capitalization of main mining players decreased year-on-year since 2021: Albemarle lost 9%, Lithium Americas 30%, and ioneer 14% on a one-year basis. Christopher King, senior vice president at OTC Markets Group, the largest trading platform in the US for brokers and investors trading foreign-listed securities, recalled: “Trading volumes have come way down from those record levels that we saw in 2021. That year marked a record number of companies that joined our market across multiple industries, with the highest trading volumes that we had seen in a long time. Today, valuations and volumes for many of those companies have come down.”
How to explain those valuation decreases? Having seen at least 180 new mining firms join the OTC trading platform in 2022, Christopher King recognized the difficulties for players to access capital in H2 2022 when rising interest rates and geopolitical concerns have dampened the overall market.
This might, however, be a short-term phenomenon. “I do not think this is reflective of what we think the next five to 10 years for the industry will be. I think this is a temporary pullback for our sector”, explained James McClements, co-founder, and managing partner at Resource Capital Funds.
"Longer-term, there will be a need for sustainability and diversification–through accessing new revenue streams from mining companies repurposing new and historical mine waste."
Christopher King, Senior Vice President, OTC Markets Group
Nevada dreaming
New regulations aiming at reducing GHG emissions will hardly be achievable without a massive flow of capital and collaboration between investors and miners. As California hopes to realize its dream of 100% in-state sales of EVs by 2035, neighboring Nevada possesses the resources that, if fructified by investment, could make the path to net zero a success. Massive capital investment will be needed ahead, and it will not come entirely from the traditional market: Common equity and debt raised in mining have decreased from close to US$180 billion raised in 2012 to US$57 billion in 2021, and only around US$20 billion as of September 2022, according to data from Bloomberg and Resource Capital Funds.
As new sources of capital stream into the industry, private investors will likely grow their appetite toward early-stage mining assets with higher risks but potentially greater returns. The number one bottleneck in lithium presently is that many projects are at the exploration or early development level. This means investment in projects that have the potential to come online quickly (within 5 years) should be a priority. "You can have all the refineries in the world but if there is no feed the capital invested at the midstream level will be "stuck”, commented a Trafigura executive at the FT Commodities Mining Summit in October.
In that sense, firms that can demonstrate good governance and ESG stewardship in the face of scrutiny from stakeholders such as downstream EV manufacturers will have a head start in the race for funding. Christopher King emphasized investors’ focus on ESG practices when looking at environmentally friendly technologies being leveraged by lithium developers in Nevada, such as DLE: “ESG is no longer just a statement of intent. Companies need to show that they can produce large volumes of metals required for a low-carbon future. But they need to be able to demonstrate to investors that they are committed to both societal and environmental needs.”
Raising early-stage exploration dollars is analogous to the riskiest forms of venture capital. Yet, CEOs in the lithium scene in Nevada are witnessing new types of investment that could lead to changing dynamics in early fundraising. Off-take agreements between Ford and ioneer, who holds the late-stage Rhyolite Ridge in Esmeralda County, are expected for the carmaker to secure its supply of lithium for future EV production from 2025. Steve Hanson, CEO of ACME Lithium, observed: “I have never seen end-users step into the marketplace to secure supply to the aggressive degree that we have seen in the past couple of years.”
Signs of further off-take agreements and increased interest from carmakers in early-stage lithium projects (Nevada being home to at least forty of these) is only half of the picture. Large banks, strategic partners and end users are also open to assisting in financing early stage projects to secure long-term, stable supply. Stephen Rentschler, CEO of Nevada Lithium Resources, forecasted: “I have never seen so much interest in early-stage companies by strategic investors and metal users of all types. I think this interest will translate into market enthusiasm as soon as a few more strategic investments are made in the sector”.
Venturing in 2023
The generalist investor is key for a virtuous market to take off, particularly as most US juniors are reliant on retail investors. A sense of urgency and public understanding of the role of mining must play if 2030 net-zero targets are to be met will likely draw investors back to the industry. “Despite crypto and speculative tech investment, I think mainstream awareness of the role mining plays in the energy transition will bring a lot more generalist capital back to the industry over the next few years”, forecasted McClements.
For Nevada and other key producing states in the US, the high cost that comes with battery recycling, the lack of upstream expertise and the difficulties in getting social licenses to operate at the mineral extraction stage will provide serious challenges. Meanwhile, minerals being extracted and processed in regions with low environmental standards and poor regard for human rights, are creating artificially low prices and inhibiting regions with higher standards from competing. Public policy can help redress the imbalance.
Image courtesy of Cirano via Unsplash