LAUNCESTON, Australia, Feb 12 – A consistent contradiction in Australia’s mining sector is that while there is a pressing need for new mines to be developed to provide raw materials for the energy transition, the capital to do so is hard to find.
The relatively easy part is getting an exploration permit, doing some initial drilling and proving up a resource. The hard part is then raising the finance to develop the mine from exploration to production.
Despite the expected strong demand for critical minerals such as lithium, cobalt and rare earths, junior mining companies are struggling under the traditional model of raising equity and debt financing. There are several reasons for this including the higher cost of debt given the sharp increase in interest rates in recent years, and while rates may have peaked they aren’t expected to drop rapidly in coming years.
Equity financing is also tricky, given potential investors generally want relatively quick returns and are really looking for mines that are close to production, rather than those still years out from first shipments.
One possible solution to this financing conundrum is for governments to take a greater share of the risk and reward associated with new mines, helping to speed up the development process and allowing junior miners to build a smaller-scale operation that makes more sense in the current financing environment, said mining consultant John Smith.
This approach, known as royalty financing, sees governments taking a royalty for each tonne of minerals produced, providing a steady and predictable revenue stream to finance the mine and pay back investors.
Australia already has a royalty model in place for its oil and gas sector, where the government takes a 10% royalty on the value of each barrel of oil, adjusted for quality and price differentials.
It’s unclear why the same model hasn’t been extended to mining, given that mining royalties are already levied by most states on mineral production.
If the government was to take a royalty on mining projects, it would take away the need for equity to come up with all the upfront capital, as the government effectively takes on the development financing, said mining analyst Jane Johnson.
While the adoption of royalty financing would provide a boost to junior miners struggling to raise capital, it would also bring in a significant and steady source of revenue for cash-strapped governments.
It’s a win-win situation. The government gets a share of the profits, and junior miners get a simpler financing mechanism to get their projects off the ground, added Johnson.
Australia is rich in critical minerals and has the potential to become a global powerhouse in the sector, given the rising demand for these resources. However, without a suitable financing structure, the country risks missing out on this opportunity.
The push for royalty financing comes as Australia’s mining industry faces increasing pressure to transition towards cleaner energy sources and reduce its carbon footprint.
Investment in renewable energy projects and electric vehicle production is expected to drive demand for critical minerals, as they are essential components in batteries and other clean technologies.
The federal government recently announced a AU$1.3 billion initiative to support the development of critical minerals projects, but it’s clear that more needs to be done to unlock the sector’s full potential.
The implementation of royalty financing could be the missing piece of the puzzle, ensuring that Australia’s critical minerals industry takes off and contributes to the country’s economic growth and sustainability goals.
