The Hidden Investment Opportunity in the Energy Transition
Despite rapid technological developments supporting greener energy generation, energy storage, and electric-powered transportation, we can only move to a low-carbon economy if we have the
supply of raw materials necessary to fuel this transition.
By Richard Crookes, Managing Partner of Lionhead Resources
As a revolution in the way we fuel our transport and energy needs unfolds at an unprecedented pace, new technologies are demanding the production of mined materials on an extraordinary scale. This transition presents a unique set of challenges, and opportunities, to the metals and mining sector and investors in the space.
Consider, for example, the rapid rise of Tesla. With a market cap greater than all other major automakers combined, the company intends to produce 20 million electric vehicles a year by 2030 as part of an estimated 300 million to 500 million EVs which are expected to be on our roads by 2040. While this represents a staggering increase from the half a million EVs sold annually less than a decade ago, this rapid rise in demand has brought supply challenges into sharp focus.
To illustrate this, one needs look no further than the demand for battery metals, a sub-set of what we refer to as Future Critical Minerals, whose demand is predicted to increase 7 to 12 times the current levels of use by 2030. In order to power EVs, it is estimated that the world will need to produce 93.1GwH of energy from lithium-ion batteries by 2030, a 21.7% annual growth rate from current production. Along with copper, EV batteries rely on varying quantities of lithium, cobalt, nickel, manganese and graphite.
Despite the strong estimated growth in demand, something looms in our future: a large and growing supply gap. It is well documented that several major Western economies risk a supply deficit for key battery materials by as early as 2023. The consequences of which are comparable to the automotive industry’s current ongoing chip shortage - causing cuts to production and, in the worst cases, a complete shutdown.
The situation feels ominous, with large OEMs going as far as telling us they are in a “war for raw materials", only worsened by the overwhelming concentration of the current Future Critical Minerals supply chain - where, as an example, China has a near-monopoly on global magnesium production, providing 95% of Europe’s supply, while holding 80% of the world’s refining capacity for battery metals, having invested more than any other country into securing supply from the world’s mines.
Tesla, for one, to secure these raw materials, is putting its money where its mouth is, having committed to invest in a new US facility, where they plan to process graphite mined in Africa; partnered with a nickel mine in New Caledonia; and announced plans to invest US $1 billion annually in Australian nickel, cobalt and lithium mining projects. While this bodes well for a cleaner future for transportation and other decarbonization initiatives - in renewable energy generation and hydrogen production - it will require an even greater scaling up of raw material supply and a transition away from a reliance on fossil fuels.
Given that mining is a long lead time industry, this represents a potential windfall for mining companies for decades to come. However, as mineral extraction is an environmentally sensitive exercise and because many of the minerals necessary to power the energy transition are found in developing nations, a sustainable approach to the production of these Future Critical Minerals is key to supporting the speed at which we move toward our climate change goals. To support long-term sustainability, the Lionhead team takes a truly ESG-focused approach to investing, having a superb track record of integrating ESG criteria through all stages of the investment process and in building and operating mines. This is to ensure that we are not only able to extract and supply Future Critical Minerals in a sustainable manner, but that we also leave a long-lasting positive legacy in the countries and communities in which we operate.
Against this backdrop, investors in the metals and mining sector are poised to play a critical role in securing the production of Future Critical Minerals and, in turn, the integrity of the global shift to net zero.
A step-up in commitments to finance the sustainable mineral production in the metals and mining sector from the global financial markets is a necessary first step to halting climate change. But in order facilitate this transition, any such commitments will need to be deployed by teams who not only appreciate the challenges that Tesla and its counterparts face in the EV and renewable energy generation industries, but also have a deep understanding of the complexity of the mining process and the environmental, social and governance challenges that come with it.
For those investors with the necessary skills and experience in the sector, the next several decades look to be a historic opportunity to do well by doing good.
Richard Crookes is Managing Partner at Lionhead Resources, an investor of long term, strategic capital in the mining sector, focused on the production of Future Critical Minerals.