Column: Can royalties help Australia's critical minerals lift off?: Russell

Iluka Resources

12/02/2024 13:00

(Repeats column published earlier, no change to text)
    By Clyde Russell
       LAUNCESTON, Australia, Feb 12 (Reuters) - 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.
    A further issue is that both debt and equity investors
generally require some sort of certainty of a return, and this
means having some idea of the future price of the commodities
involved.
    The problem is there often isn't viable futures pricing for
certain speciality metals, and what prices that do exist are
largely beholden to developments in China, the world's largest
commodity buyer and processor.
    Australian government data goes some way to illustrate the
problem, with the Resource and Energy Major Projects Report,
released in December by the Department of Industry, Science and
Resources, showing a decline in the value of committed and
completed projects in 2023.
    The value 86 committed projects underway in 2023 fell to
A$77 billion ($50.3 billion), with the bulk of the money being
invested in oil and gas, with critical minerals accounting for
11 projects valued at A$5 billion.
    While the 2023 figure is down slightly from 2022, it's also
well below the more than A$200 billion that was invested at the
peak of Australia's resources boom in 2015, a time when major
iron ore mines and liquefied natural gas ventures were being
built. 
    Australia is the world's largest exporter of iron ore, ranks
second in LNG and is also the biggest shipper of metallurgical
coal and lithium.
    The question is how does a budding miner with a great
resource for an in-demand mineral get the money to build and
operate a mine?
    While government incentives may help, it's unlikely that
this source of support will be enough.
    
    ROYALTIES TO THE RESCUE?
    It may be that royalties, or streaming, a form of financing
that has been successful in North America can be transplanted to
Australia.
    This allows a miner to access capital up front in return for
granting the provider a royalty of a certain percentage of the
revenue from sales once production commences.
    The royalty also typically lasts for the life of the mine
and can also be applied to any expansion of the resource.
    There are several companies that provide this type of
financing based in North America, with Franco Nevada  FNV.TO 
being among the best known.
    However, much of the royalty financing has been in the gold
mining space, and not in critical minerals or other metals.
    Australia's Deterra Royalties  DRR.AX  is trying to change
this by looking to invest in critical and other minerals.
    The Perth-based company was spun out of Iluka Resources
 ILK.AX  in 2020 with its main asset being a royalty over a
major iron ore resource in Western Australia, operated by BHP
Group  BHP.AX .
    This provides Deterra with a solid revenue stream and
capital to invest, the problem is getting the Australian market
to embrace streaming.
    Chief Executive Julian Andrews told the Melbourne Mining
Club at an event last week that his company's business model
isn't well understood in Australia, but the assets are, while in
North America they get the model but don't understand the
assets.
    "We have a mandate to provide funds to mines to develop new
projects," Andrews said.
    Getting junior mining executives to understand royalties is
the main challenge for Deterra, as well as getting investors in
the company to understand that royalties are more than just
receiving strong dividend payments.
    What may work for companies like Deterra is that they are
less focused on things like whether a debt loan can be repaid,
or whether the share price of a miner will rally.
    They are focused on the life of the mine and the expected
production, given that the royalty is from the revenue and other
factors such as operating costs are less important.
    Andrews is clear that royalty investing isn't the panacea to
the worries of Australia's junior mining sector, rather it's
part of the solution.
    It just may be with higher for longer interest rates and
nervous equity investors, the time is ripe for royalties.
      
The opinions expressed here are those of the author, a columnist
for Reuters.

 (Editing by Stephen Coates)
 ((clyde.russell@thomsonreuters.com)(+61 437 622 448)(Reuters
Messaging: clyde.russell.thomsonreuters.com@reuters.net))