Critical minerals supply and demand challenges | EY

Water management and license to operate

Copper and lithium mining is water-intensive, and mines in South America are exposed to high levels of climate and water stress with ~80% of copper output in Chile being produced in high water stress and arid areas. Further, high ground water consumption due to lithium mining in Chile, has raised concerns among surrounding communities and have stirred up protests. Companies need to invest in desalination capabilities to use seawater, which will likely increase production costs. Moreover, the Chilean Copper Commission (COCHILCO) estimates that desalination and the use of seawater is likely to grow at a steep 230%⁹ during 2018-29. It is expected 15 new desalination plants/seawater impulsion systems expected to come online by 2028. Companies, therefore, need to adopt find cleaner and sustainable solutions; however, even though many technologies have been developed, none are proven to be commercial at scale.

Lack of infrastructure limits access to some resource-rich areas. Further investment in transportation and energy infrastructure will be required to unlock the potential of remote battery mineral deposits. For example, Canada has large underground reserves of lithium but on a hard rock site which makes it difficult to mine. Additionally, remote project locations lacking infrastructure, proximity to end markets and weak lithium prices have been key obstacles for the lithium mining sector in Quebec, Canada.

Geopolitical issues

The mining industry in Chile and Peru is facing risks emerging from political instability in the regions. Peru’s political leader plans to review tax contracts with companies and plans to increase taxes on mining profits. As Gabriel Boric won the 2021 presidential election runoff vote election of in Chile, mining companies are wary of increased taxes on copper and lithium companies, as well as potential delays in project approvals. At the same time, the Chilean government is pledging to create a state-owned lithium company, potentially diverting strategic growth away from private-sector producers. These developments have stirred uncertainty around future investments in mining in these regions among investors. Moreover, in Peru, the Government’s decision to intensify mining operations is opposed by mine workers as they want a better representation of their rights and safety. At the same time, resistance around land rights, reinforcement against hazards from pollution, rationalized compensation and environmental concerns remain causes of friction between companies and local communities in the country.

Access to capital

Access to capital in the mining sector remains challenging even in what appears to be the start of a new commodity super-cycle. Investors are often deterred by price volatility, long project lead times, complex ESG factors and the smaller market size of some battery minerals. In addition, investors and shareholders are holding mining companies to increasingly higher standards of accountability, particularly in the environmental context. Human rights issues, child labour in artisanal mines, provenance from conflict-affected/high-risk countries, political insecurity (excluding China), poor community relations and poor occupational health are also key considerations for investors. These factors coupled with the cyclical nature of the industry means returns can fluctuate. An industry that has returned on average 7%-8% on capital on top of the commodity price cycle will need to find different and innovative sources of capital to fund these changes.