Exclusive: Lionhead Resources seeks $450M for mineral mining fund amid clean energy shift
By Madeline Shi, Senior PE Reporter, PitchBook
April 12, 2022
Amid a global push for greater access to crucial mineral resources, a new growth equity fund has appeared on the scene.
UK-based emerging manager Lionhead Resources is in the market to raise up to $450 million for its inaugural fund, which will take non-controlling stakes in companies that mine and process so-called future critical minerals such as copper, lithium, cobalt, nickel, manganese and graphite. These minerals are essential for the technology that will help with the transition to clean energy, from wind turbines and solar panels to batteries that power electric vehicles.
The fund's launch comes amid a frenzy to secure a strategic supply of these crucial minerals. The Biden Administration recently said it would invoke the Defense Production Act to boost domestic production of rare-earth and critical minerals and metals needed to produce EV motors and defense systems, in hopes of reducing its increasing reliance on foreign sources.
Canada last week unveiled a C$3.8 billion plan to enhance the production of lithium, copper and other strategic minerals, part of the country's latest efforts to become a key player in the global electric vehicle supply chain.
Global demand for critical minerals is expected to grow by 400% to 600% over the next several decades. Demand for certain minerals such as the lithium and graphite commonly used in EV batteries may increase by as much as 4,000% during that time, according to a White House fact sheet.
Lionhead Resources was launched in 2020 by veteran mining investors Richard Crookes and Paul Quirk in anticipation of the industry's supply shortage. Its new fund, dubbed Lionhead Resources Fund I, has a $400 million target and a $450 million hard cap.
The firm is on track to raise $125 million for the fund by mid-2022, with plans to wrap up fundraising by the end of this year. The vehicle is receiving commitments from endowments and institutional family offices in the US, Europe and Asia.
The fund will provide equity capital by taking a significant minority equity interest in companies. Its investments will sometimes come alongside project finance debt provided by banks and specialist mining debt funds.
The vehicle will make eight to 10 investments, writing equity checks of $30 million to $80 million per transaction. It will also target opportunities to make larger investments, supported by additional co-investment pledges.
Crookes, co-founder of the firm, spoke with PitchBook from his Australian home about the fund's strategy and the growing awareness of critical minerals' importance to the future economy. His responses have been edited for length and clarity.
PitchBook: Why is investing in critical minerals important?
Richard Crookes: The global push to reach net-zero carbon emissions has fueled the need to secure more mined commodities that haven't been put into mass production today. The mining industry has been quite slow to react [to the pent-up demand], leading to the looming supply shortfall in a number of critical minerals such as lithium, cobalt, nickel and graphite.
Post the global financial crisis, mining companies were incentivized to return capital to investors through dividend payments and share buybacks, rather than continuing to grow their assets by exploration or building more resource inventories through M&A. That partially created the supply shortage in certain commodities that we see today.
Meanwhile, mining projects can take a long lead time of up to 15 years, spanning various stages including exploration through drilling, resource definition studies, technical feasibility work, permitting, obtaining environment approvals, funding and then building.
Take lithium as an example. Most lithium that's been mined in the last few decades has gone into glass manufacturing or traditional applications. All of a sudden, a new industry—electric vehicles—emerged. The forecast demand for new lithium grows to nearly 10 times what the current production can deliver.
Historically, the lithium production averaged around 300,000 tons per annum, but has rapidly increased over the last few years. The forecast is that global demand for lithium will increase to over 3 million tonnes per annum by 2035, according to data from Wood Mackenzie.
The agency forecasts an increasing supply deficit, as expansion from existing producers cannot meet pent-up demand. By 2035, the gap is estimated to be 961,000 tons of lithium carbonate equivalent, or 24 average-size conversion plants [also per Wood Mackenzie].
That's why the price spiked in the last few months, because the battery manufacturers are scrambling to secure supply. Mining companies are now incentivized to bring in new production to meet that demand. You could say the same for cobalt, graphite, manganese and nickel.
Can you explain Lionhead Resources' investment strategy?
We look to invest in single-asset mining development companies, as opposed to large miners that own multiple projects and have multiple funding sources, such as BHP. Our target companies should have done the exploration, completed their feasibility studies on mining development, and received their permits. They have existing shareholders, including management, who have funded the exploration and advanced the company to the pre-production stage. What they need then is the growth capital to bring the new mine into production. This is what we call the "last-mile" equity, meaning that we provide the capital to support their projects through the construction phase.
We would come in as a cornerstone equity investor, taking 10% to 30% of the target company's ownership. We look for a partnership, a value-adding approach, rather than a buyout.
We would also provide technical support, sitting on the board or partaking in its technical or finance committee. We are not seeking control but would be happy to take control if we get there. But that's not essential for us.
How do you implement ESG policies?
Firstly, ESG for us is commodity selection. So we choose to invest in minerals required to help decarbonize the world, rather than coal or uranium projects, which have bad potential environmental outcomes. We're going to mine the commodities that support renewable energy generation, or the storage of renewable power. The second part of our ESG approaches is how we actually operate. That's what I was talking about, in terms of environmental management: using best efforts to use renewable power on the mine site, using electric trucks rather than diesel trucks, not burning more fossil fuels to generate the power on the mine site, managing your water usage and water storage on site, and minimizing emissions and waste. Those are best practices in terms of environmental and social interaction.
We can be quite influential as an investor to improve industry standards. We do monitor our portfolio companies, including quarterly dashboard reporting, public reporting, and annual audits of ESG criteria. The other thing is, if we invest in a high quality mining project that can displace another less environmentally sound mining operation, then we are creating positive benefits as we move toward the goal of net-zero carbon emissions.
5Capital serves as the placement agent and advisor to the fund manager. Please contact Andy Colombe at andy.colombe@5-capital.com for additional details.
Article originally published on Pitchbook linked here.
