By Jo Clarke

November 9, 2022 - Underinvestment in mining in the current volatile inflationary environment could sow the seeds of a commodity price super cycle driven by the energy transition that pushes coal prices over $1,000/t, delegates were told at the International Mining and Resources Conference (Imarc) conference in Sydney, Australia.

Mining firms find it much harder to secure financing for new developments today than 20 years ago, leading them to seek out novel and often more expensive ways to raise capital including niche fund managers, high wealth individuals, royalties and crowd funding. Inflation and supply chain issues are also forcing developers to raise costs expectations on projects that were considered eminently bankable two years ago, making it even harder to secure enough finance.

The darlings of the commodity complex, such as lithium, can still raise money, one infamously on nothing more than soil anomalies showing a potential deposit. But lithium alone will not sustain the energy transition and requires significantly more copper, nickel, cobalt, chromium, zinc, rare earths, manganese and silicon to be mined, as the IEA's 2021 Role of Critical Minerals in Clean Energy Transitions report showed.

Investment is particularly difficult for fossil fuels that could be used in the energy transition, such as metallurgical coal in steel production and gas in processing critical minerals. Technology to remove these fossil fuels from the supply chain is not yet commercially available and without them the wider energy transition will be slowed, argued several speakers at Imarc.

"If you look at global stockpiles of commodities they are very low, which combined with underinvestment, is a great basis for commodity prices to rise in a super cycle the likes of which we have never seen…. Coal could break through $1,000/t in the next couple of years," said Pure Resources Fund portfolio manager Daniel Porter.

"Fossil fuel firms don't want to invest in their own businesses, and are turning to solar and wind farms, so we may well see $1,000/t coal," said Lowell Resources Fund chief investment officer John Forwood.

Underinvestment is made more pronounced by limited understanding of the mining sector by financial markets, with resource and energy analyst teams at banks and ratings agencies cut over the past 20 years as equity markets have turned increasingly to the technology sector. This space is being filled by an array of funding alternatives. But many of them are small by comparison to the raising power of the big banks and public offerings on stock exchanges.

Royalty Option

One option is royalty funds that provide project financing in return for a royalty paid on the revenue from production. Regal Partners, for example, which has royalties over gas and tungsten projects in Australia, has a mandate to invest in mining, gas and renewables.

"The energy transition will see increased demand for metals of all types, given that we expect global electricity consumption to double by 2050," said Regal Partners portfolio manager James Morrison.

Royalty funds give investors exposure to the upside in commodity prices without the operating or cost inflation risks associated with investing directly in the mining firm, although they have limited control over project management. Mining firms are increasingly turning to royalty funds to provide the last pieces of finance required to get into production.

This is also the space that private equity funds look to invest in, with several including EMR Capital and Resource Capital Funds telling Imarc that they currently looking to deploy capital for projects that are low cost, run by the right people and have upside potential.

Independent investment funds are still trying to digest the risks of investing in transition or critical minerals that have opaque markets, pricing or captive supply chains, such as rare earths or bauxite. Governments funds, such as Australia's Carbon Energy Finance Corporation, and consumers that can see supply issues coming down the track are stepping in here, although current market volatility is slowing this somewhat.

Beyond niche fund managers, royalty funds, governments and consumers, mining projects are turning to Asian debt markets and in some cases crowd funding to secure financing. Equity markets and traditional debt models are seen out of reach for small- to mid-size enterprises that are hoping to supply the resources required to build the infrastructure and batteries of the energy transition.