Will big bets on critical minerals pay off?

I’ve just started Ed Conway’s book on the resources sector, Material World, which drives home the point that despite — or, in fact, largely because of — the inexorable march of advanced technology, we “citizens of the ethereal world” are consuming far more raw materials than ever before.

Nowhere is this more conspicuous than in the market for the “critical minerals” needed for the transition to low-carbon energy. Forecasts from the International Energy Agency and others have made plain the vast profits that stand to be made in the next few decades from metals such as lithium and cobalt.

Yet this has been an extraordinarily treacherous year for that area of the commodities market. How can investors navigate the turmoil to emerge on top — and is it worth the risk? Read on for the perspective of one of the leading investors in the space.

InvestING strategies

TechMet bets on riding a choppy wave to $1bn

Ireland-based investment company TechMet grabbed attention this summer when it announced a $200mn investment round that it said put it “on track to exceed a billion-dollar valuation in the next few months” — without disclosing what its current valuation was.

That might be fairly described as typical start-up braggadocio. But not every start-up counts the US government among its shareholders, with a former chairman of the Joint Chiefs of Staff helming its advisory board.

The interest from Washington, according to TechMet founder and chief executive Brian Menell, reflects the geostrategic importance of the company’s mission: investing in the world’s output of “critical minerals” to power the energy transition — and mitigate a dangerous reliance on China.

“The world needs 50 TechMets, yesterday,” Menell told me at his office in London’s Mayfair district. Few other investment firms, however, have the same focus on critical minerals — making TechMet an interesting case study for investors looking to bet on this space.

Menell, a South Africa-born mining veteran, set up TechMet in 2017 to profit from a gathering shift in the world’s natural resources market. Surging global investment in low-carbon energy was set to turbo-charge demand for the minerals required — from battery metals such as lithium, nickel and cobalt, to the rare earth metals used in permanent magnets for wind turbines and electric car motors.

But the leading global mining companies were proving slow to rise to the challenge — leaving China to acquire a dominant role in the supply chain for several of the most important critical minerals.

Menell’s concern about critical mineral supply has since become mainstream among western governments. The US International Development Finance Corporation in 2020 made an equity investment in TechMet, with retired admiral Mike Mullen agreeing to lead the company’s advisory board. In TechMet’s August funding round, the DFC was joined by London-based hedge fund manager Lansdowne Partners and S2G Ventures, backed by Walmart heir Lukas Walton.

TechMet’s 10 portfolio companies include the UK’s Cornish Lithium and its fellow lithium miner EnergySource Minerals of California; rare earth producers such as South Africa’s Rainbow Rare Earths; and Brazilian Nickel, which plans to mine nickel in Brazil’s north-eastern Piauí state.

Menell argues that projects such as this will be vital if developed nations are to meet their clean energy goals while addressing their dependence on Chinese suppliers.

According to the International Energy Agency, China accounts for about 90 per cent of global refining for rare earth metals, and about two-thirds for lithium and cobalt. The IEA predicted in July that, under the climate pledges announced by governments so far, demand for critical minerals will more than double from current levels by 2030.

But companies in this space have been taking a bruising of late. The lithium price, which had quadrupled in the 12 months to September 2022, has since given up nearly all those gains, with comparably sharp falls seen for other critical minerals such as cobalt and nickel. Analysts have pointed to a waning of earlier “irrational exuberance” in the market, coupled with a slowdown in Chinese electric car sales and a surge in mining output.

Menell insisted that his long-term growth expectations remained intact. “There’s no model, no scenario,” Menell told me, “where these metals do not have to go up in price much, much further and stay up in price much, much longer to incentivise the growth in supply that will eventually . . . balance with the growth in demand.”

Investors who agree with Menell and want to emulate his strategy will need strong stomachs, after the battering that shares of listed companies in this space have taken this year, as higher interest rates worsened the impact of lower mineral prices.

While neither TechMet nor its current portfolio companies are listed, there are options for risk-hungry investors who view this as an opportunity to buy into the energy transition on the cheap.

Battery recycler Li-Cycle, an early TechMet investment that has since gone public, has lost 63 per cent of its market value so far this year. The world’s two biggest lithium producers, Albemarle of the US and SQM of Chile, have slipped by more than two-fifths. Toronto-listed Canada Nickel and Australian nickel producer IGO are down 44 per cent and 27 per cent respectively.

“I’m not in any moment worried,” Menell said, “that the basic macro driver of our investment thesis — which is ongoing structural short supply of critical minerals — can in any way not occur.”

The question for investors such as TechMet, and for the companies they bet on, is whether they can ride out the ongoing turbulence to secure a serious piece of the long-term spoils. (Simon Mundy)

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