Ever since God made man from the dust of the ground, man has turned the ground to dust. Extraction – that most deafening, muck-stained and smog-filled of labours – has never carried a healthy image. Mining blows apart, rips off and piles up, scarring the land, water and sky. But while the industry would prefer we did not stare at its open pits, it knows it owes us no apology. After all, these are just the sores and bruises left by our endless collective global consumption.
Silently and smoothly, the electric vehicle (EV) revolution enters stage left. For the resources industry, a once-in-a-lifetime marketing opportunity has neatly reared into view. Forget its history of coal and oil, any miner of lithium, cobalt, manganese, nickel and copper can now paint itself as part of the solution in the transition to a cleaner energy future.
Aside from the obvious paradox – that a wholesale switch to less carbon-intensive sources of transportation will require gargantuan resources, especially if we maintain the individual vehicle ownership model – each of the big miners has jumped at the opening presented in 2017.
In August, BHP Billiton (BLT) announced plans to become a leading supplier of nickel sulphate, a key component in the lithium-ion batteries that power EVs. By 2022, the diversified group expects to sell 90 per cent of its nickel into the battery market, compared with 10 per cent today. A month earlier, Rio Tinto (RIO) moved its Jadar lithium deposit in Serbia to the top of its list of growth projects, and exited the year amid speculation it would make an audacious multi-billion dollar bid for a 32 per cent stake in Chilean lithium giant SQM (US:SQM).
However, the sector-wide role of EV evangelist-in-chief goes to Glencore (GLEN). In a presentation to investors on 12 December, the Swiss-headquartered commodities group anointed itself the “best placed large-cap company for [the] electric vehicle revolution”, and bucked the trend with plans to increase industrial capital expenditure to $4.8bn (£3.6bn) in 2018. Most of its expansionary capital budget – that is, cash to develop or buy new assets – is being directed to copper, nickel and cobalt. By 2020, expect Glencore’s output of each of these metals to have grown 25, 23 and 133 per cent, respectively.
Rebranding aside – and given all three miners still count thermal coal production within their asset portfolios, none can expect a Greenpeace award just yet – tapping in to the EV boom is both a challenge and a significant financial opportunity. For one, the minerals required for the batteries that will power the EV revolution – lithium, nickel and cobalt – are all scarce. In the case of cobalt and lithium – where UBS expects a 20- and 30-fold increase in demand to accommodate a “100 per cent EV world” – there are questions over supply.
And if 2017 was the year the mining industry jumped on to the EV bandwagon, 2018 is set to be the year where serious capital is allocated. One particularly interesting example of this is Bacanora Minerals (BCN), an Alternative Investment Market (Aim)-traded lithium explorer that has just published a defined feasibility study (DFS) for its flagship project in Sonora, Mexico.
The headline numbers are enticing. Although Bacanora’s market capitalisation sits at £150m, Sonora has a net present value of $1.25bn, an internal rate of return of 26.1 per cent and life-of-mine operating costs of $3,910 per tonne, putting the project in the lowest quartile of the industry cost curve. As any early-stage mining investor knows, the key question now concerns how much equity must be given up – and at what price – to fund initial capital costs of $420m.
On that front, the early indications are very good: two days after the DFS was published, Chinese technology fund NextView Capital agreed to pay £31.2m for a 19.9 per cent stake in the group, by way of a non-dilutive placement of 33m shares at 94.5p a pop. In return, NextView gets a seat on the board and a guaranteed initial offtake of 5,000 tonnes of lithium carbonate per year. This strategic agreement follows the April sale of a 10 per cent stake, again at market price, to Japanese trading house Hanwa.
