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Mining Majors Are Treading Carefully As Battery Metals Boom

Editor OilPrice.com, Oil Price

Feb. 5, 2022, 12:00 PM

A World Bank report recently forecasted that we would need more than 3 billion tons of metals and minerals to limit the rise in global temperatures by 2 degrees by 2050. That's more than 3 billion tons in raw materials for solar, wind, and battery storage.

The World Bank is not the only one. The International Monetary Fund reported in December that the future demand for metals and minerals may well top the current global supply. The IMF also said that "The needed ramp-up in mining investment and operations could be challenging."

The forecast surge in demand is certainly great news for the mining industry, which has been a pariah for ages due to its massive environmental impact. Now, somewhat ironically, it is about to turn into the one indispensable industry for the energy transition.

Still, big miners are treading cautiously.

Battery metals such as nickel, cobalt, and, of course, lithium, are in the spotlight when there's any kind of discussion about the energy transition. As the IMF notes, a typical EV battery pack contains some 8 kilograms of lithium, 35 kilograms of nickel, 20 kilograms of manganese, and 14 kilograms of cobalt.

These metals, then, should be a magnet for big mining companies—and they are. Rio Tinto recently planned to open one of the world's biggest lithium mines in Serbia. Local opposition to the project, however, led to the revocation of Rio's license for the mine that would have provided a quite comfortable lithium supply source for ambitious European carmakers who are marching towards an all-EV age.

Reuters reported this week that big mining majors were making joint venture deals with junior miners active in battery metals exploration and production instead of outright buying them. For Big Mining, the report said, expansion into battery metals was a fine balancing act between getting on the bandwagon of the energy transition and keeping shareholders happy.

Very much like Big Oil shareholders, the owners of Big Mining seem to have grown tired of the boom-bust cycle so typical of commodity industries and would rather have stable returns. Yet, at the same time, investors have also become more aware of the change in trends: ESG is all the rage now, and battery metals fit perfectly with ESG investing principles.

So, why is Big Mining not diving right in? Because it doesn't want to shoulder all the risks on its own. Mining is a risky business by nature, again very much like oil and gas. First, you can never be certain that exploration will be successful. Even if it is, as in Serbia, you may encounter local opposition strong enough to pull the plug on the project. Or the project may be in a politically unstable country such as the Democratic Republic of the Congo, which produces two-thirds of the world's cobalt. Miners are allergic to politically unstable jurisdictions even if they are forced to do business there.

Then there are the extensive lead times for a new mine: going from successful exploration results to actual mining could take a decade or even more. In the current environment, with all the forecasts pointing to a fast and strong surge in demand for metals and minerals used in batteries, it is faster to team up with a junior already exploring for, say, nickel, in Tanzania than start from scratch. At the same time, it appears safer to team up with this junior rather than buy it outright.

This is what BHP Group, formerly BHP Billiton, is doing with junior miner Kabanga Nickel. The major joined the junior as partner in its exploration work in Tanzania with a $50-million investment in the project. First production from the Kabanga mine is expected in 2025, and besides nickel, it will also include copper and cobalt.

According to energy consultancy Wood Mackenzie, the trend will intensify in the future: "We expect the diversified miners to enter new geographies in 2022 through the acquisition of early-stage projects," said research director James Whiteside, as quoted by Reuters.

The amount of money big miners are willing to spend on this expansion, however, may remain limited because of rising commodity prices. It may sound counterintuitive, what with all the bullish forecasts, but with their experience in reckless spending and the consequences of it, miners appear to have learned a valuable lesson and are unwilling to risk too much, even with the bullish forecasts. After all, forecasts are very far from set in stone.

These same forecasts, in fact, could pull the brakes on the energy transition. The transition to a large extent hinges on wind, solar, and storage becoming cheaper than fossil fuels, because if low-carbon energy is unaffordable, then it's not really a viable alternative for most people. Granted, those in Germany and the UK, for instance, who are already paying more for low-carbon energy are used to it, but if prices continue rising, this may well change.

But with the raw materials needed to produce the solar panels for farms and the windmills for parks getting increasingly expensive, developers are already complaining their profits are under threat. The same trend is evident in battery metals: the great electrification rush among carmakers might stumble when the end-price for their EVs becomes too high, even with government incentives because the battery metals and copper used in them double or tremble in price because of supply constraints.

Mining is a risky business. It can also be an extremely lucrative business in environments that stimulate demand for metals and minerals, such as the energy transition. Still, that's no reason to go all-in when you can spread the risk more evenly in case things don't pan out as go-green governments plan them.

By Irina Slav for Oilprice.com