Battery Metals Investment Needed, ESG Driving Decisions
ESG issues remain at the forefront for investors focused on battery metals.
Lithium prices have been holding at high levels for the past year, with battery costs rising for the first time in a decade, in part due to costs related to raw materials.
As demand from the electric vehicle industry continues to increase, the need for battery metals such as lithium will only soar, with industry participants emphasizing that the pipeline doesn't have enough supply to meet expected demand.
“The only way you can get oversupply into this market is if you have an overinvestment upstream, and we've yet to see it,” Rodney Hooper of RK Equity said during a panel discussion at this year’s Benchmark Week in Los Angeles.
“From a junior perspective, you could argue (whether) incumbents have enough brownfield expansion within their own portfolios to meet demand,” he continued. "The answer is no. This is an industry that this year will see demand growing over 40 percent. It's unprecedented, so they don't have that capacity."
Speaking with the Investing News Network on the sidelines of the show, Simon Moores, CEO of Benchmark Mineral Intelligence, said funding for battery metals supply is not happening at the rate needed.
“Funding has happened, but it's not happening still at a rate that anyone needs. Institutional money is still not as aggressive as it should be,” Moores said. “A lot of deals have been done with sort of development-stage junior mining, but a lot of them are very weak deals … the reality is these companies, these developers, need hard cash to get things up and running.”
For Arash Nazhad, managing director at Citi, the issue from a funding perspective is that, at least prior to the last 18 months, there was no forward curve or real offtake contracts.
“If you look at some of the big names in the space, you were functioning largely on the spot prices. What's happening, I think, outside of equity, is that there's a lot of strategic capital coming into this space … that capital is at lower costs, and able to understand technical risk and able to help fund the development of some of these assets,” he said at Benchmark Week.
When it comes to lithium supply in particular, buyers can't just secure supply or secure prices, they need both. For Hooper, locking in prices now means that there is a need to negotiate longer-term deals.
“I've always been a proponent of these streaming deals, which are effectively a version of pre-funding, where you can lock in a much better rate and get the money upfront. But obviously you need to take a leap of faith into the project,” he said.
Another trend seen in the sector in recent years has been increasing interest in lithium from major miners, including integrated oil and gas companies and large chemical companies that traditionally didn't have assets in the battery metals space.
“From my perspective, one challenge they all face is how do they price lithium … one thing we're seeing as a substitute for that is these prepayment contracts or offtake agreements that are being signed at the outset. Adding some transparency around that is actually helping people,” Nazhad explained during a panel.
ESG at the forefront of investment decisions
Focus on environmental, social and governance (ESG) issues in the battery metals space continues to increase, and has been building for the past five years at least, said Elizabeth Tate, founder of Greene Tate Strategies.
“And it's really been a big jump in the last two years,” she said during a panel at Benchmark Week. “I think this is driven by an increased appreciation for the risk management value of ESG and the understanding that these ‘issues’ are predictive of future growth and future values.”
Anthony Tse, who is an operating partner at investment firm Franklin Templeton, said that alongside its investment framework, his firm now has the same level of discipline, rigor and robustness around impact framework.
“So really, they do sit side by side as opposed to kind of being a subset of work that needs to be done,” he said.
For Tem Tumurbat, managing partner at Nomadic Venture Partners, ESG commitments need to start early.
“When we make investments, we really look for alignment and we actually get a good commitment. It's a pledge that you're going to build this company on the premise that all the ESG issues are considered,” he said.
When it comes to social issues, measuring the impact becomes more complex than other aspects of ESG.
“I think we're seeing this paradigm shift where issues are not just an E or an S or a G, but need to be looked at from an E, S and G perspective,” Tate said. “Water is critically an environmental issue, but also how you're affecting the water resources in a given area in the region, your access to water — it's also a social issue.”
While lots of these resources are available, Tumurbat thinks it's going to be very challenging to bring many stakeholders on board to get their consent. “The world is not ready to build 300 new mines by 2035 … ESG is so important; nothing new is probably as important, because many great projects tend to get stuck if they don't have community support,” he said.
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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constitute investment advice. All readers are encouraged to perform their own due diligence.
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