07 July 2017
Advances in consumer and industrial technology are creating a new demand for minerals such as lithium, cobalt and graphite and make mining itself more efficient and profitable.
Though global demand for minerals has declined in recent years, not least because of China’s slowing fiscal growth and transition to a consumer and services-led economy, there are signs of vigour in the mining industry.
Rechargeable batteries for portable electronic devices, electric cars and other products, as well as a mounting interest in energy storage, has created a worldwide demand for lithium and other key minerals, such as cobalt and graphite. The market for these minerals is expected to balloon in the coming years as the world increases its focus on harnessing new sources of renewable energy – and energy storage becomes a priority.
At the same time, technology is transforming the mining industry, making it more efficient, more productive and ultimately more profitable.
This technological transformation is providing welcome relief to an industry that has been on its knees in the last few years. Many of the mining majors are still going through divestment and redundancy programmes, though the share prices of big players such as Rio Tinto, BHP Billiton, Anglo American and Glencore have climbed steadily over the last year. This comes after a period of some four years when share prices fell sharply.
China mining slowdown
Much blame has been attached to China’s slowing economic growth. A decade ago, when China was experiencing annual growth rates of around 10%, miners were naturally expanding operations and opening new mines to satisfy demand. As mines increased capacity, demand dwindled, leading to a classic instance of oversupply. China itself has contributed to the oversupply situation with its own extensive mining operations and this has pushed prices down further.
Mining companies are also facing higher regulatory, compliance and environmental costs, which are impacting their profitability. This, along with low mineral prices, has led to some projects being mothballed. Last year, it was reported that BHP Billiton was considering curtailing its $2.6-billion Jansen potash project in the Canadian province of Saskatchewan if prices remained weak.
Stuart Olley, a Calgary-based partner and co-head of the Natural Resources Group at Gowling WLG, says that times are and have been particularly tough: “Costs often escalate way beyond what is originally anticipated. You can see in Canada that there are very high environmental and regulatory costs.”
The mining sector’s health is notoriously cyclical and recent signs suggest that the industry is overcoming its bout of malaise. Many minerals gained in price during 2016 and mining company valuations have also risen accordingly. Even coal, a mineral expected to lose its attractiveness with mounting interest in renewable energy, has seen its price increase as China has reined in production.
“Times have been tough, but it seems that the industry is getting back on its feet,” comments Charles Bond, a London partner and Co-Head of Natural Resources at Gowling WLG.
The new technology-driven economy is creating a wave of buoyancy in the mining sector. The wider energy environment is changing rapidly, with increasing demand for renewables, nuclear and energy storage.
The price for lithium tripled in the 12 months to the middle of 2016 as Tesla, the electric car manufacturer, began building its huge lithium-ion vehicle battery plan in Nevada . It is expected to start shifting finished battery packs by 2020.
Dyson, the British technology company, bought US solid-state battery startup Sakti3 in 2015 and is expected to build a battery factory in the US and pioneer in the field of battery innovation. In January, it emerged that Australia’s Birimian was looking to sell a 100% interest in the Bougouni Lithium Project in Mali, a deal which subsequently fell through.
Cobalt, another key mineral used in lithium-ion batteries, is also facing growing demand – and with over 50% of the world’s cobalt coming from the Democratic Republic of Congo (DRC), there is a growing need to shore-up reserves and identify other potential extraction sites. China’s State Reserves Bureau (SRB) has made regular purchases of cobalt in the last few years as it seeks to boost reserves of a mineral that it has precious little of within its own terrain.
Graphite, another key mineral, is used as anode material in lithium-ion batteries and Benchmark Mineral Intelligence predicted last year that graphite demand would increase by more than 200% over the next four years.
The risk though for mining companies is that the future direction of innovation, such as in battery technology, is completely unknown. Mining operations take time to be commercialised and profitable and by this point innovation could have taken a different course. Lithium, for instance, could completely fall out of fashion.
Mining operations boosted by technology changes
While the development of new technologies is altering and boosting demand for certain minerals, technological advancement has materially affected the fortunes of the world’s leading mining companies.
Olley says that new mining techniques are having a profound effect: “A lot of hard rock mining exploration now uses directional drilling adapted from the oil and gas industry, which has significantly reduced the cost of deep sampling. You also have new sorting technologies that can sort ores more effectively and enable companies to reduce the size of their mineral processing mills or have more raw materials passing through the mills.”
Olley also points to the use of electric vehicles and devices in underground mines in making mining operations even more profitable, not least because they do not require expensive ventilation systems to operate. This makes it even more economic to produce key minerals for products such as batteries.
Further still, underground seismic reading has become incredibly sophisticated and accurate. “It enables you to understand deposits that historically would have been inconceivable. It now gives a degree of certainty with mining projects and also lowers the costs,” Olley says.
Lithium mining closer to home
Costs are always an important factor in driving mining trends and lately there is an increasing emphasis on mining in developed economies where the distance to the customer or manufacturer is shorter. Lithium deposits and mining operations are relatively plentiful in Australia, South America and Africa, but currently there is a move to mine more lithium in Europe to satisfy European manufacturers. Portugal is now the sixth largest producer of lithium.
Market forces dictate and there is growing acknowledgement that mining in the developing world no longer provides the cost savings that were once so attractive. Mining companies are much more attuned to the additional political and corruption risks that are associated with emerging economies and recognise that the developed world provides more in the way of infrastructure and power.
“Ports, access roads and warehousing are more readily available in more developed parts of the world,” Olley highlights. “It is much easier to get your commodity to market.”
Corruption is not only more prevalent at government level, but mining companies could also be at the mercy of criminal organisations in emerging economies. In 2015, a McEwen Mining-owned mine in western Mexico was targeted by armed robbers who stole some 7,000 ounces of gold, valued at $8.5 million at the time.
Olley believes that mining in remote locations no longer has the same appeal as it did previously: “Of course in the developed world the labour costs tend to be higher and on the face of it you would think that compliance costs may be higher, but one thing that has happened is that many global accords now impose international standards irrespective of jurisdiction.
“Even if you are developing a mine in Africa, you still have to adhere to international standards, so there are not the same cost savings as there once were. If you set up mining operations in a more benevolent jurisdiction, you get more certainty, predictability and you are more likely to access decent funding.”
Bond adds that the political risks in the developing world can be off-putting as “governments can change quite quickly” and can look to exploit any increase in commodity prices. “As commodities increase in value, governments can then seek a bigger piece of the pie and you see tax rules starting to change. You can get a creeping expropriation of assets and that uncertainty does put majors off,” he explains.
Mining outlook good
The mounting demand for minerals such as lithium and cobalt is providing a welcome fillip to a mining industry that has come under enormous pressure in recent years. With new technologies that are more effective in identifying mineral deposits, in getting them out of the ground and in processing them, the mining industry can be optimistic about its prospects. Its future may well be in developed economies as mining in the developing world no longer has the same allure as it once did, not least because the cost-savings are no longer as apparent.
As with most industries, innovation is becoming integral to the mining industry’s fortunes, both in the way that it operates and the sectors that it supports. Change isn’t always good, but in this instance it is pushing the mining industry to a brighter future.