Regional partners are critical to critical minerals boom
But securing the billions in debt and equity needed to develop small graphite, lithium, magnesium, nickel and rare earths companies and create a value-add manufacturing sector in critical minerals is the big issue.
What is clear from Friday’s Summit, co-presented by PwC, is that “friend-shoring” with Japan. South Korea and Taiwan will be itself critical. “I need to talk about geopolitics,” said the head of POSCO’s Australian business, Ben Kim.
South Korea’s POSCO is the world’s fourth-largest steelmaker and Australia’s single largest corporate customer, and promises to be a big player in critical minerals.
Kim’s description of how like-minded economies could secure supply chains in the vital commodities for batteries and renewable energy and retain balance in the region contained an important message.
“China on the left hand side is blocked by the Himalayas. On the eastern side there is a sea opening but Korea, Japan and Taiwan are blocking it, stopping its dominance of the ocean. And you see down under Australia is backing up those countries in terms of raw materials. I see Australia as very, very important,” said Kim.
Over four years POSCO has invested $5bn in Australia and paid royalties of $7.5bn. It is now investing in nickel, graphite and other critical minerals.
To do more, however, Kim issued a challenge. He said Australia, while attractive geo-strategically, was far from the only critical mineral investment option. “When I was back in Seoul office, I was working on international affairs, meeting delegations coming from all over the world, proposing incentive packages asking us to invest. Australia is lacking in some areas,” he said.
Kim pointed to Hyundai’s recent $5.5bn investment to build an EV manufacturing plant in Georgia in the US. That involved a state government guarantee of $1.3bn in a form of tax concession.
Kim is calling for green economic zones in Australia.
“I’m a player. If you like soccer, I’m running in the field and trying to score the goal, not sitting on the fence. We want to do more here, not just going to buy the raw materials from Australia, more processing, more manufacturing.”
But Kim also lamented the hollowing out of Australian manufacturing and the huge task to rebuild it.
Joining Kim to discuss funding was Luke Smith, the top portfolio manager of critical minerals at AustralianSuper, with $260bn under management.
Smith was an investment pioneer in the sector a decade ago.
His interest piqued when first a Chinese company, then an American investor jumped into Australia’s only lithium mine, Greenbushes.
Among AussieSuper’s investments is lithium business Pilbara Minerals. Investing in a down cycle in 2020, the lithium miner is now a $14bn giant in the ASX top 20. Another investment is Syrah, a graphite project in Mozambique that struggled to get funding from commercial banks in the early days.
Unlike traditional miners of iron ore and copper, critical minerals companies find it hard to get debt financing, Smith says.
“It comes back to the volatility of the underlying commodities, and in particular lithium and graphite, cobalt as well,” he said. The bank concern is that operating expenditure stays below the commodity price.
Asked why more super funds were not backing critical minerals, Smith said AussieSuper had been quick to internalise its equity team and its sheer scale allowed the fund to be comfortable with an exposure up to $2bn of the $260bn under management in the more volatile sector. “It will come and as they get larger they will be able to put more money there,” he said.
Investment veteran Fiona Reynolds, chief executive of Conexus Financial, raised the strict performance benchmark in the Your Super, Your Future legislation. “No one in the superannuation industry argues there shouldn’t be a performance test. But leaning more into what we need to be doing in transition creates a huge tracking error. The performance test does not allow you to create tracking error.
“Fail it twice and you cannot accept any more funds – you are out of business.”
This mismatch is likely to be hotly debated over the coming year, as will the extent of new government incentives to match the US Inflation Reduction Act.
At present the government has Export Finance Australia, which manages its $2bn Critical Minerals Facility and also helps provide market gap financing. It put $125m into Pilbara Minerals and offered a $1.25bn facility to the Iluka project.
EFA chief executive John Hopkins said this was part of government strategy to move up the value chain. “The Iluka project is creating a rare earths refinery. The government saw an opportunity for an agency like ourselves to step in and take a higher risk than the commercial market might be able to withstand.”
Support for the sector is building. Luke Smith said there was now strong retail backing for lithium. And on value-add, Pilbara Minerals has partnered with Calix, with plans for lithium refining. Hopkins said other companies had ambitious plans to value-add beyond refining.
Export Finance Australia does not do grants, however – it seeks a return on investment. The American IRA poses new competition for capital.
Smith points to $4bn in grants handed out by US President Joe Biden in October, three of which were to ASX listed companies operating in the US.
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Voices from the highest level of government at The Australian’s Critical Minerals Summit have signalled a dramatic step-up to turbocharge the next resource boom that will underpin energy transition.