Investors look for green ways to cash in on battery metals boom

By Kenza Bryan and Harry Dempsey; financialpost.com

Published January 9, 2023

Tainted by decades of environmental disasters, shattered communities and ravenous water consumption, mining companies — including those that dig up battery metals — are not traditional darlings of the environmental, social and corporate governance (ESG) crowd.

Veteran mining executive Sir Mick Davis — who led the resources company Xstrata PLC until its merger with Glencore PLC in 2013 — knows this all too well. Now running Vision Blue Resources Ltd., a fund focused on clean-energy-related mineral and metal companies, he’s looking to ride a new wave in the sector as it seeks to up its game on sustainability while meeting huge demand for battery metals.

For decades, Davis said miners had sought a “social licence to operate” by cultivating relationships with communities and governments. Now, he said, they need to address customer and investor concerns about responsible practices in order to obtain a “social licence to market.”

Davis’s words reflect a wider shift in the resources sector, as investors seek to profit from demand for commodities used in the clean-tech sector, while minimizing exposure to environmental or human rights problems.

Rethinking natural resource sustainability

So far, the pressure on this front has come largely from electric carmakers led by Tesla Inc. They’ve been demanding evermore supply chain traceability to root out cobalt linked to child labour in the Democratic Republic of Congo, lithium linked to droughts in Chile or nickel extracted at the expense of Indonesia’s tropical forests.

Institutional investors have perked up to these issues, too. In recent months, S&P Global Ratings has fielded “increasing interest” from natural resource investors in sustainability-focused risk analysis of mining companies, Lynn Maxwell, who leads its commercial operations in Europe, the Middle East and Africa, said.

Mining-sector executives often complain that climate campaigners tend to lump them in the same bucket as oil and gas companies. Jamie Strauss, chief executive of London-based Digbee Ltd., a specialized ESG disclosure platform for the mining sector, said this sentiment seeped into the investment community too.

“It’s a re-education frankly. I think the world has become disconnected from where a lot of these products come from,” he said. “We’re not going to get these battery metals if we don’t have mining.”

Digbee’s reports help private-equity groups such as Tembo Capital Management Ltd., Arch Emerging Markets Partners Ltd. and Orion Resource Partners (USA) LP decide whether to invest, he said. So far, it has assessed 25 individual mining projects and plans to have covered 40 by the end of March using dozens of industry disclosure standards for gold, copper, graphite, magnesium, nickel and even metallurgical coal.

The company provides recommendations that managers can use to improve a mine’s sustainability credentials, and gives what it says is a more forward-looking view of each project than the algorithms used by major ESG rating agencies to look at companies as a whole.

The world has become disconnected from where a lot of these products come from

JAMIE STRAUSS

Still, Strauss said, high-profile disasters have been a “blemish” on an industry now focused on causing “zero harm” (many in the industry say “minimizing harm” is a more realistic goal).

Globally, at least 28 thematic funds focus exclusively on battery technologies and metals, including 13 created in the past year, according to Morningstar Inc. data. Sustainability-focused equity funds are already a way of gaining exposure to the sector (in Europe more than 100 of these have at least five-per-cent exposure to the mining and metals sector).

Investors are trying to gain exposure to battery metal prices without the risk attached to individual mining projects. Element ETFs LLC, a natural resources-focused asset manager, launched an exchange-traded fund ETF with US$5 million seed funding tied to futures contracts for copper, lithium, nickel and cobalt in December.

But the nascent battery metal markets remain too illiquid for most big fund managers. And if they prove leery of the mining companies themselves, that could spell trouble for a sector that needs to spend hundreds of billions to boost the supply of copper, nickel and lithium.

Each of the battery metals presents unique sustainability challenges.

For example, a large proportion of the world’s lithium comes from mineral-rich brines in South America. Over decades, freshwater flows from the Andes into basins beneath salt flats, leaching lithium from surrounding rocks. Mining companies evaporate the brines to extract lithium, something that has been depleting local water supplies, according to some communities in Chile’s Atacama region.

Chilean mining leader Sociedad Quimica y Minera de Chile has contested those claims, but it has been rushing to strengthen its sustainability credentials. Last year, it promised a US$1.5-billion overhaul of its practices, which would enable it to halve its extraction of brine by 2030 while still boosting output.

But the controversy over water has added to the incentives to invest in production in the U.S., which could lead to more localized processes and lower transport-related emissions. In June, when President Joe Biden’s Inflation Reduction Act was still being debated, the world’s largest lithium producer by market capitalization, Albemarle Corp. said it planned to build a plant near its mine in North Carolina capable of processing 100,000 tonnes of lithium chemicals annually.

Similar initiatives in nickel, however, could be tricky. The pace of Chinese investment in Indonesian nickel reserves, which also rely on coal power for extraction and processing, is so overwhelming that projects with potentially lower emissions elsewhere could struggle to be economic, analysts said.

Across the industry, measures to reduce the carbon intensity of operations, and to make them safer and less water hungry, could ease tensions with local communities and activists, while signalling to investors that miners are starting to take ESG seriously.

But mining will remain a relatively polluting and carbon-intensive business for the foreseeable future. The rush to expand production of minerals for EVs and renewable energy plants means “increasing emissions in one sector to reduce emissions in another sector,” Seth Goldstein, chair of the electric vehicle committee at Morningstar, said. “It’s a net benefit but still a risk.”