In recent times, the mining and exploration sector has been challenged by a combination of low and / or volatile commodity prices, poor returns to investors, environmental disasters, and increasingly negative sentiment around sustainability and social issues. As a result, the sector has struggled to attract and grow the investment required to make discoveries and bring new mines into production. The strong interest in cannabis and cryptocurrency investments, that redirected a lot of speculative money throughout from the junior exploration and mining sector over the last few years, seems to have waned. Money is slowly coming back into the sector with much growth in minerals related to the green economy/green energy sector.
The Lure of Gold is Strong
However, gold and base metals continue to dominate in terms of exploration and mining activity and therefore they attract the most funding. This is focused mainly on mine site exploration and advanced project studies, with greenfields projects capturing the smallest part of the pie. This is not surprising considering the investor’s appetite for lower risk exploration, and the sheer number of advanced exploration projects (from the last peak in exploration almost a decade ago) being touted for funding.
Higher precious metal prices are likely to be sustained whilst there are ongoing concerns about the global economy, trade wars, other political tensions or uncertainty e.g. potential pandemics. The sustained higher prices will likely attract increasing investment into exploration and luckily Africa is well endowed with precious metals (and most mineral commodities).
West Africa is the region that is likely to benefit the most from the increased interest in precious metals due to its excellent prospectivity and relative investment attractiveness (so long as security issues are reigned in). Other regions e.g. parts of East Africa, Northern Africa and the SADC e.g. Zimbabwe are also attractive destinations geologically, however concerns around sovereign risk or safety keep many investors away.
Last year saw a contraction in exploration budgets with the global spend dropping by 3% but with a contraction of 12% in Africa (S&P Global Market Intelligence). This may be due to the perceived higher risk of investing in Africa nations compared to safe harbour destinations like Canada and Australia.
Despite this budget contraction, Tanzania, Namibia and Angola saw budget increases of >30%, with Angola’s doubling from US$18 million in 2018 to $36 million last year. This is most likely related to the huge interest in diamond exploration, which, for the first time since 2013, saw an increase of 44% from 2018 to $85 million.
Although green energy minerals make up a small part of the global exploration budget, particularly in Africa, commodities like cobalt, rare earth elements (REE), tin, lithium, tantalum, graphite, nickel and vanadium have been in the spotlight the last couple of years. This is unlikely to change with the momentum behind the decarbonisation of the energy and transport sectors. The EV story is currently dominated by Chinese demand, but once India and the rest of the world start playing catch-up, things are bound to get interesting.
Supply deficits for palladium and rhodium used in catalytic converters are currently pushing prices higher, but fuel cells also require platinum and palladium. The large platinum producers based in South Africa and Zimbabwe are investing in the technology as are the large auto manufacturers like Toyota, Daimler and Hyundai. However, it remains to be seen how the supply-demand dynamics play out once EVs replace internal combustion engines (ICEs) and thus the need for catalytic convertors.
With about a third of the world’s electricity forecast to come from renewables by 2024 (according to a recent BDO report), the shift away from reliance on hydrocarbons for energy generation, centralised energy generation and the ICE is well underway and will drive demand for these commodities. This is being bolstered by government policy changes and regulations to reduce CO2 emissions and the recognition by big business of the need to achieve the same.
Currently, the leading technologies driving demand for these commodities are lithium-ion batteries, hydrogen-fuel cells, wind turbines, solar (photovoltaic and concentrated solar) and Vanadium Redox Flow Batteries (VRFB). These are likely to dominate the non-hydrocarbon based renewable energy sector for the next 10-15 years and are mineral intensive.
The recent drop in lithium and cobalt prices from the highs of 2018 have put a damper on investor appetite for these projects; but little has changed in terms of the positive fundaments and outlook for these commodities.
Notwithstanding, this will negatively impact coal and oil producer nations like Nigeria have started funding exploration through the Nationwide Integrated Mineral Exploration Programme (NIMEP), intended to promote non-oil minerals to reduce its reliance on oil.
The geopolitics around rare earth elements and China’s control of the market has benefited projects like Peak Resources’ Ngualla project (which includes their Teeside Rare Earth processing hub), which is likely to be Africa’s first REE producer. Other REE projects also continue to attract interest.
OEMs vertically integrating
A major impact on the lack of investment in the exploration and mining sector is that supply for commodities like lithium, cobalt and REE is unlikely to meet future demand and is forcing OEMs to integrate their supply chains vertically. An added incentive is the need to improve ESG practices in order to earn or maintain their social licence to operate while still delivering value to investors.
This is being led by OEMS like BMW, BASF, Apple, VW, Intel and Tesla. Cobalt is an excellent example of this. ~70% of the world’s cobalt comes from the DRC, but this supply chain is tainted by child labour and environmental issues.
Approximately 20% of this production comes from artisanal mining activity. As a result, BMW and BASF have teamed up to clean up and source cobalt from artisanal mining rather than abandon the communities that rely on the income for their survival. Similarly, there are also talks between Tesla and Glencore regarding cobalt supply from the DRC. Commodities like tin, tantalum and tungsten sourced from the DRC and surrounding regions have similar issues.
The pressure on companies to clean up supply chains will continue to increase from the public; with initiatives like IRMA (Initiative for Responsible Mining Assurance) and the London Metals Exchange (LME) requiring every producer and brand to prove conformance for any metal sold on the LME, irrespective of where or how it is sourced by January 2022. Full compliance is required by 2023.
With smaller exploration budgets, companies need to ensure they have experienced technical teams and technical partners able to deliver maximum value for their spend, and able to navigate through the increasingly complex ESG and reporting requirements. Similarly, mining companies are also under increasing pressure to be more efficient and deliver value to their stakeholders while also ensuring they remain sustainable.
In order to achieve this, we are seeing this vertical integration and much cross-over between industries with tech companies becoming vehicle manufacturers (Tesla), mining companies becoming energy producers (Bushveld Minerals using VRFB technology through Bushveld Energy) and rare-earth miners becoming magnet manufacturers. Oil companies like Shell and BP are also getting involved and investing in renewables, storage and EV charging technology.
We are also likely to see mining companies going off grid and potentially becoming the utilities suppliers to communities in remotes areas where mining takes place. Companies are also differentiating themselves with propriety technologies, such as lithium explorer Lepidico, whose technologies can deal with non-spodumene pegmatite sources like the lepidolite rich Rubicon-Helikon Project in Namibia.
Project owners and investors need to remember the projects that will deliver value need to be high quality and low-cost. However, the factors that constituted a high-quality project in the past do not necessarily apply today in a world where ESG is a high priority for investors, and the geopolitics around energy shapes decisions around finance and project development.
The fact remains that with the global population growing and nations industrialising, the need for commodities will continue to grow. Changes in the way the world generates and stores electricity, and travels are also afoot. As markets get used to the new normal and industries jockey for position, things are going to remain volatile for a while, and the boom-bust cycles and bubbles will continue.
With OEMs getting closer to the mine face and the entire supply chain held accountable for their actions, it can only bode well for the exploration and mining sector. However, in the short term, it may continue to be a bumpy ride as the various role players get used to a new way of doing things.
While Africa has its challenges, it remains incredibly geologically prospective, is underexplored and underdeveloped. Those countries with the right policies will attract investment, and the explorers and miners with strong technical teams which operate sustainably and responsibly are more likely to be successful. They will become the pioneers in a greener, sustainable mining and exploration industry that benefits Africa and the world.
ABOUT THE AUTHORS
Michael is a principal consultant – battery metals coordinator at CSA Global with 21 years’ experience in African geology and exploration across a variety of commodities and significant project management experience. He has a keen interest in the green energy sector and its impact on exploration and mining. Michael is a QP/CP in lithium, tin and columbotantalite and has a M.Sc. in Exploration Geology from Rhodes University with a dissertation reviewing the pegmatites in Northern Mozambique. He started his career at the Council for Geoscience in 1999 where he was involved in World Bank mapping and geochemical sampling projects in Mozambique and Madagascar. In 2006 he moved into geological consulting and joined CSA Global in mid-2019.
Donald has consulted widely for public, private and donor organisations across numerous sectors, with over 20 years’ experience in the mining sector. He helps firms improve their strategic and operational performance across the minerals value chain by developing leadership and organisational capabilities on sustainability management, articulating the business value of sustainability, integrating sustainability within core business practices, and providing assurance on a wide variety of topics and management processes such as integrated and sustainability reporting. Donald also supports firms (including industry and financial institutions) on mergers, acquisitions and divestitures involving both sell-side and buy-side due diligence, deal preparation and post-merger/acquisition integration.