Mining’s Decarbonisation Opportunity

Sascha: [00:00:02] Welcome to The Dive, the podcast that asks Who said business news needs to be more business? His big number for you, 15 to $20 trillion. That's the amount of money. Ken Hoffman, the head of the battery minerals team at McKinsey, estimates that decarbonising the modern world will make the mining industry. If we play a little bit of word association. When I say mining, most of us think dirty pollution or unsustainable, but that is going to change. Put simply, the mining industry is going to become the world's most important industry to achieve net zero. Now, that statement might surprise you, might fill you with rage, but bear with us as we unpack it. It's Monday, the 24th of July. And today, I want to know just how big is mining's decarbonisation opportunity to talk about this today? I'm joined by the co-founder and my colleague here at Equity Mates. It's Alec Renehan. Alec, welcome to The Dive. 

Alec: [00:01:02] Sascha, Good to be here. 

Sascha: [00:01:03] I know that this has been an article or this all stemmed from an article that you've been sharing wide and far for the last week. 

Alec: [00:01:11] It has, yeah. It's the best summation of the absolute scale of this challenge, but also the opportunity that I guess miners around the world have. 

Sascha: [00:01:23] So to be clear, how much money changed hands, how much has big mining paid us to produce this episode today?

Alec: [00:01:31] Big mining hasn't paid us anything, but based on the amount of money they're going to make in the coming decades, they certainly could pony up a few dollars for some dive sponsorships here and there. 

Sascha: [00:01:41] Okay, well, our inbox is open. 

Alec: [00:01:43] And if people want to read the article, head over to our Facebook discussion group where I shared it.

Sascha: [00:01:49] Excellent. Put the link in the show notes. Alec, let's look back before we look forward. The 20 tens were pretty tough for mining. 

Alec: [00:01:56] Yeah, the 20 tens were a really tough decade for the mining industry. There were mass layoffs across the industry. The price of gold, silver and copper all bottomed out in 2014 and 2015. And the story about coal was a really tough decade. As the world woke up to climate change and started the transition away from fossil fuels. So mining was in a pretty tough spot and the world kind of grew to hate the mining industry, particularly around that climate denialism in Australia. I guess my political awakening was as an 18 year old, watching the mining industry pour money into some pretty misogynist attacks on Julia Gillard, the sitting Prime Minister, all in the aim of stopping the, you know, the mining super profits tax and the carbon trading scheme which then became the carbon tax. Yeah, the mining industry were a bit of a pariah in the world.

Audio Clip: [00:02:55] I will not be lectured about sexism and misogyny by this man. I will not. Be lectured about sexism and. Misogyny by this man. Not now. Not ever. 

Sascha: [00:03:09] But from climate deniers to climate warriors. They've done a bit of an about face.

Alec: [00:03:15] Yes. Actually, there's a saying there's none so zealous as the recently converted. And that applies to the mining industry now, because over the past few years, the mining industry has realised there's a lot more money to be made in embracing the world's decarbonisation push rather than trying to convince us that it's not needed at all.

Sascha: [00:03:35] And that's what we're going to explore today. Why is mining so important for the decarbonisation of our world? 

Alec: [00:03:42] So the article that you referenced earlier from the magazine, The Drift. They sum it up in a sentence: Metal miners stand on the verge of a planet spanning multi-decade mineral boom driven by the demands of an electrifying world. That sentence really sums up, I guess, the scale of what we're about to embark on. The world has slowly started to embark on coal. Oil and gas still account for more than 60% of humanity's total electricity generation. And this basically needs to be phased out immediately. Today's existing and planned fossil fuel projects are almost certain to push the globe past two degrees Celsius of warming.

Audio Clip: [00:04:28] Without a drastic shift to alternative sources. The catastrophic effects of climate change will be felt everywhere. 

Alec: [00:04:36] So we need to change. We need to change now. But at the same time, overlay on that. Global electricity demand is surging, especially as countries emerge in Africa and parts of Asia. Global electricity demand is expected to double at a minimum in the coming decades. So we need to transition our sources of power and we need to double the amount of power that we're generating.

Sascha: [00:05:01] And to rewire the world. The world needs metal, right? 

Alec: [00:05:05] Yes, it needs a lot more metal to generate electricity than it does now. To give you some examples, a coal fired power plant requires 1 to 1 and a half tons of copper for every megawatt of electricity it produces. By contrast, a solar array requires 2.8 tons. An offshore wind farm requires eight tons. So just, you know, copper is going to be a lot more in demand. Take electric cars. According to the International Energy Agency, an electric vehicle requires six times the amount of mineral resources as a gas powered cars. Just looking at copper, a conventional car requires 22 kilograms of copper. An electric car. 53 kilograms. In a nutshell, Sascha, the global decarbonisation push will require enormous amounts of graphite, lithium, manganese, nickel and cobalt. But above all, it's going to require copper. Without copper, we can't build solar panels, wind turbines, electric cars, or the batteries that charge them.

Sascha: [00:06:13] So like you've listed quite a few minerals there and quite a few really impressive numbers. The demand for these metals then is going to shoot up massively. Just how massively is that a question that I can ask? 

Alec: [00:06:29] Yeah, it is like the amount of demand that is coming online is pretty incredible. Let's start with copper. S&P Global expects demand for copper to double by 2035. So what, 12 years from now?

Audio Clip: [00:06:42] The fundamental story for copper is a long term, very positive one.

Alec: [00:06:48] Lithium obviously has gone through a boom here in Australia, but even from current levels, the Biden White House has put out estimates that demand could swell by some 4,000% in the coming decades if we act. 

Audio Clip: [00:07:02] To save the planet. We can also come out of it better. We can create millions of good paying jobs that generate significant economic growth and opportunity to raise the standard of people not only here but around the world. 

Alec: [00:07:14] The International Energy Agency put out a estimate in 2021 that if the Paris Agreement targets were to be met, then demand from clean energy technology for these green metals would quadruple by 2040. And then if the world was to reach its more ambitious net zero by 2050 climate targets, then demand for these green metals would increase sixfold over the period. So yeah, there's a lot of demand coming online. 

Sascha: [00:07:46] And with demand, supply has to be mentioned. On the other hand, we're not expecting supply to be keeping up. 

Alec: [00:07:53] Yeah, it not only has to be mentioned, it's the more important part of the story. The world is demanding a lot of metals and we simply don't have them. At the moment, the International Energy Agency has estimated that the world will only have half the lithium and cobalt it needs to hit 2030 climate goals. A report by the Carnegie Endowment for International Peace, I guess put it in more dire terms by 2030. Lithium, cobalt and graphite demand may outpace production for the U.S. and its allies ten fold, 30 fold and 80 fold respectively. An S&P global, I guess, put it in the starkest terms in a 2022 report. Quote In the 21st century, copper scarcity may emerge as a key destabilising threat to international security. Sascha if the 20th century had wars fought over oil, then the 21st century may have wars fought over copper.

Sascha: [00:08:57] It's a shame that podcasting isn't a visual medium because I think my face, what you were saying, stark and dire, was just kind of expressing everything. I think anyone needs to feel after hearing those kind of statistics, because this scarcity is causing companies to go to extreme lengths to secure their supplies. And it's also shifting global economic power in ways that may be as profound as when Saudi Arabia first discovered oil in 1938. Let's unpack that after the break. 

Audio Clip: [00:09:35] Lithium is one of the most coveted materials in the world. 60 or 65% of the world's lithium comes from quarries, essentially, mostly in Australia. Copper is fluctuating today after reaching as. Demand is skyrocketing as energy companies. 

Sascha: [00:09:47] Welcome back to The Dive. Today we're unpacking mining's decarbonisation opportunity Copper, lithium, cobalt, graphite. The world is going to need so much more of these minerals, far more than we're projected to produce, meaning companies are going to extreme lengths to secure their supplies. 

Alec: [00:10:08] Yeah, that's right. We could look at almost any industry that needs these green metals and talk about the lengths they're going to secure them. But let's focus on car makers, because I think electric vehicles are really a visible and well known commodity, I guess, for want of a better term. So carmakers are freaking out about supplies, particularly lithium supplies and freaking out. Yes. Is the technical term here.

Sascha: [00:10:34] I know. I thought it's just an image of a teenage girl as a car maker, but there you go.

Alec: [00:10:40] Yeah. So Tesla, obviously the most well-known electric vehicle maker. They've inked agreements with Australia's LionTown resources and also Piedmont Lithium to secure their supplies. They were reportedly also looking at buying Canada's Sigma lithium and actually just vertically integrating so they had access to lithium. I think Elon's also tweeted about doing something similar in the past, but he tweets a lot. 

Sascha: [00:11:07] Yeah, let's not pay attention to the story. 

Alec: [00:11:10] But it's not just, you know, the new electric vehicle makers. Ford is working really hard to secure their lithium supplies. They've signed deals with Chinese battery maker Seattle, also with Australian mining giant Rio Tinto to secure lithium supplies. General Motors, one of the bigger car companies in the world, invested $650 million in lithium Americas to help them develop what will likely be America's largest lithium mine again to secure their access to this mineral. GM wasn't done there, though. They also then invested in a lithium extraction. START-UP These car makers. And that's just three examples of, you know, you could pull stories from every carmaker about what they're doing to secure lithium because it is going to become the most important thing in getting their electric vehicles on the road. 

Sascha: [00:12:02] Well, we're on a tight timeline, so let's not pull on that piece of string. But this supply demand mismatch gives those countries with these metals a lot of power in the new global economy.

Alec: [00:12:14] Yeah. Now, before the break, you said that we could see some geopolitical shifts that rival Saudi Arabia's discovery of oil. And it is really shaping up to be that profound. And what we're seeing is a conflict between Western financial interests and an empowered global South and an empowered emerging economies that are blessed with these minerals and really have the power to shape how this green metals boom plays out. So in the interest of time, I've just pulled out three examples that I think really illustrate the point. Let's look at lithium, nickel and cobalt. Okay, so starting with lithium, more than half of the world's lithium reserves are concentrated in South America's lithium triangle, which is Chile, Bolivia and Argentina. And what we're seeing in South America is tension between a number of elected left wing governments who want to nationalise these resources. And a lot of, I guess, Western economic interests that want to get as much of the resources as they can. But we're also seeing global powers come to Chile, Bolivia and Argentina to really try and secure their supplies. Recently, the German chancellor, Olav Schulz, visited Chile, hoping to divert some of its lithium, which predominantly now goes to China because he was trying to secure it for his country's automakers. The German car makers are literally recruiting their leader to help them secure lithium supplies. And according to Bloomberg, Shultz pledged to invest in Chilean processing of raw lithium so they wouldn't have to export it. But we are literally saying major powers come to these South American countries and put a lot of money on the table to try and secure their supplies. So that's one that's lithium. 

Sascha: [00:14:08] What about nickel, then? 

Alec: [00:14:09] So Indonesia is currently the world's largest nickel producer, and the International Energy Agency expects Indonesia to make two thirds of the world's need for the metal in time. Now, Indonesia is flexing its muscles. They have banned nickel exports. They've basically said if you want to use our mineral, you have to invest in our. Country and build manufacturing and refining capabilities in our country. And the world has come to Indonesia. It's helped them establish a battery industry and now they are trying to organise an OPEC like consortium for metals processing. So Sascha, again, the parallels with Saudi Arabia and oil can't really be missed in stories like this.

Sascha: [00:15:00] And finally, what about cobalt? 

Alec: [00:15:02] Cobalt is the most interesting story, I think. I mean, they're all interesting, but I think it really shows the power that some of these emerging economies have. So 70% of the world's cobalt comes from the Democratic Republic of the Congo. And China has been in the country for over a decade trying to, I guess, secure their supplies and extract as much as possible. But recently, we've seen the power that the Congolese government has over China. China had agreed to deliver $3 billion in aid for infrastructure improvements. And reports were that they had delivered less than a third, so less than $1,000,000,000. And the Congolese government took the Chinese to task. According to Reuters, they managed to negotiate an additional $17 billion out of China and a larger stake for the Democratic Republic of the Congo state run mining company in the cobalt profits, basically because China didn't deliver. 

Sascha: [00:16:09] Yeah, that's a huge leverage. 

Alec: [00:16:11] Yeah, you're wondering where that leverage comes from. It's also because the U.S. have come to play ball with the Congo. This past January, the U.S. signed a memorandum of understanding with the DRC and Zambia to create a battery supply chain. So the DRC is in this position where they supply the world with 70% of this crucial metal for all of our electronics and more and more all of our energy systems. And they're playing the U.S. and China off against each other. And yeah, they really hold a lot of power in that relationship. 

Sascha: [00:16:42] That's really kind of terrifying like that. That's all happening over just these minerals. These two superpowers are squaring off. So what then is being done to ensure that we're going to have enough of what we need?

Alec: [00:16:57] So the International Energy Agency has estimated that supply from existing mines, those in operation and also those under construction will provide, quote, only half of projected lithium and cobalt requirements and 80% of copper needs by 2030. 

Sascha: [00:17:15] Alec, that doesn't sound like a solution. That just sounds like we're still missing a massive gap. 

Alec: [00:17:21] Yeah. Yeah, I'm getting there. So the solution is we need more mining. Okay. Which, you know, environmentalists might say is counterintuitive. But the simple fact of the matter is these green metals are required to transition away from non-green metals or from fossil fuels, and we're going to need more mines. But, Sascha, there is a saying in markets that the cure for high prices is high prices, because if prices remain high, more and more projects will be viable projects that may not have been able to get up. If lithium was at $1,000, may get up if lithium was at $4,000. And then as that supply comes online, prices go back down. So the cure for high prices is high prices. And what we should expect to see is that more and more projects come online and we say over time, supply will catch up with projected demand. 

Sascha: [00:18:24] So in Australia, we do have some of the world's biggest miner, as you mentioned, several of them. But like Rio Tinto, BHP. Most of us are invested in them through our superannuation funds. How are they responding to this opportunity?

Alec: [00:18:38] So we have to start with just how blessed Australia is. I think it often gets lost about just what a good position we're in. We have obviously had a centuries long economic boom on the back of coal and then iron ore and natural gas. Don't expect Australia's reliance on mining to go anywhere because we're blessed with green metals, copper. We have the world's second largest reserves, cobalt, we have the world's second largest reserves nickel. We actually are equal first with Indonesia or a very close run second, depending on who you ask. Lithium We have the world's second largest reserves and we haven't spoken about them much today. But we also have the world's biggest reserves for uranium, for iron ore, for gold, for zinc. Australia is blessed with a lot of metal and that metal is going to be very valuable. So our big miners are sensing the opportunity. BHP have sold off their fossil fuel assets, they sold off their coal and they demerged their oil assets with Woodside and they pivoted and they've taken that money, they've bought potash, they've bought copper and they've bought nickel. Similarly, Rio Tinto, they got out of fossil fuels completely in 2018 by selling off that coal and since then they've bought into copper mines and lithium mines. So you can say that Australia's big miners are saying the writing on the wall, sensing the opportunity and much like the global mining industry, they've gone from pushing back against climate claims to fully embracing their role as climate warriors. 

Sascha: [00:20:25] Yeah, a real 180 there, sir. Alec, I know you've been in the weeds on this for a couple of days. What are your collating thoughts about it? 

Alec: [00:20:32] Two thoughts. First of all, the world cannot abandon fossil fuels without a good deal more lithium, copper and many more minerals. As counter-intuitive as it might sound, as much as people may not like it, it is just a fact that unless new technology comes in, we get new battery technology that can store energy without lithium. We're going to need more lithium now. Similarly, we're going to need more copper to build renewable energy infrastructure. It is just a fact of life. So whether we like it or not, we're going to have to become okay with it. But I think my big question is I leave this episode is there's going to be a lot of wealth created in the mining industry. The question is how is it distributed? And I think Australia needs to look at some of our European counterparts and think about where it goes. And Norway is the classic example. Blessed with oil resources, they taxes at a high level. The government was involved at different times as well and they have a sovereign wealth fund that is just stupidly big. I don't have the numbers, but I think if they sold it all off and split the money equally amongst their citizens, the citizens would be getting like tens of thousands of dollars or something like that. Australia has the opportunity to do something similar. We've tried to put a mining super profits tax on before and it's got lobbied away. It's probably something we need to think about now with the green metals boom that we're about to live through.

Sascha: [00:22:06] Well, Alec, we started by saying everyone's done a 180 on this. I feel like I've done a 180 in this episode. I've gone from being really dismayed about the future to suddenly seeing a massive opportunity in front of us. So I think this is a really fascinating story and one we're going to watch. 

Alec: [00:22:22] Yeah, definitely it will. It will be one of the defining stories of our lifetime.

Sascha: [00:22:26] Well, you heard it here first on The Dive from Alec Rehenan's mouth. Well, thanks so much for joining me today. If you want to get in touch with us, if you want to pitch us a story, if you want to, just say hi, how you doing? All our contact details in the show notes below. Thanks, Alec. 

Alec: [00:22:40] Thanks, Sascha.