Financing the mining transition: Unlocking capital for Australia’s critical minerals future

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As the world races toward a net-zero future, the mining industry stands at a pivotal crossroads. Demand for critical minerals, such as lithium, copper, nickel, and rare earth elements, is soaring, driven by the global shift to renewable energy, electric vehicles (EV), and battery storage. Despite this surge, the mining sector faces a significant challenge - a persistent underinvestment that threatens to stall progress when it is needed most, with $2.1 trillion of new investments required by 2050 to meet global net zero emissions targets.

BDO UK has published a report on Financing the Mining Transition, focusing on various financing options for mining companies including equity, debt, and alternative financing, to support their operations and ensure capital availability in a volatile climate.

For Australia, a global powerhouse in mineral resources, this period of underinvestment presents both a challenge and an opportunity. The country is rich in the materials the world needs, but unlocking their potential requires innovative, flexible, and sustainable financing strategies.

The investment gap: A global and local concern

BDO’s Explorer Quarterly Cash Updates show that for ASX-listed explorers, there was a period of underinvestment between 2014 and 2020. Since 2020, exploration expenditure increased substantially, but we have seen a further decrease in recent quarters as a result of commodity prices and geopolitical uncertainties.

This has led to weakened supply chains and a slowdown in exploration. Despite a rebound in commodity prices in recent years, exploration budgets remain subdued.

In Australia, exploration companies and those who are in the development stage are often at the forefront of critical mineral discoveries and are particularly vulnerable. These companies rely heavily on external funding, yet face increasing difficulty in accessing capital due to:

• Tighter monetary policy and rising interest rates
• ESG-related investment constraints
• Investor preference for faster-return sectors.

Financing models for the future

To bridge the funding gap, mining companies must explore a broader range of financing options. The report outlines several models, each with unique benefits and challenges. For Australian mining companies, the following financing models are most common:

1. Project financing: Project finance is a well-established model in Australia, particularly for large-scale infrastructure and mining developments. It involves creating a special purpose vehicle (SPV) to isolate project risk, with repayment tied to the project’s cash flows.
   This model can be ideal for large lithium or rare earth projects in Western Australia or the Northern Territory, where long-term offtake agreements can support cash flow projections.
2. Streaming and royalty agreements: These alternative financing models are popular in Australia. They involve upfront payments in exchange for a share of future production or revenue. Streaming and royalty agreements offer benefits such as mitigating equity dilution, requirement of payment only when the mine is producing, as well as flexibility and scalability.
3. Reserve-based lending (RBL): Traditionally used in oil and gas, RBL is emerging in mining. It allows companies to borrow against the projected cash flow from proven reserves.
   RBL can be adapted for gold, copper, or base metal projects with strong geological data, and requires independent reserve reports and robust IFRS-compliant accounting.
4. Offtake agreements with strategic partners: Australian miners are increasingly securing funding through long-term offtake deals with EV manufacturers, battery producers, and even governments.

In addition to traditional offtake partners, a key development for Australian companies is the Australian Government’s proposal to establish a Critical Strategic Minerals Reserve with an initial investment of around $1.2 billion. This will see the government enter into voluntary national offtake agreements as well as selectively stockpiling strategically important minerals.

Navigating the challenges

Despite the opportunities, the report details several persistent funding challenges to navigate. For Australia, these are most notably:

• ESG compliance: Investors are increasingly scrutinising environmental and social practices, especially around Indigenous land rights.
• Accounting complexity: Alternative financing models like streaming and RBL, which require careful treatment under IFRS standards.
• Market volatility: Characterised by commodity price swings and geopolitical tensions, which can impact investor sentiment.

BDO recommendations

To enhance access to capital amidst these industry challenges, Australian mining companies should consider the following strategies:

• Diversify capital sources: This can involve combining equity, debt, and alternative financing to reduce reliance on any single channel.
• Engage strategic partners early on: Secure offtake and investment agreements to de-risk projects and attract further funding.
• Strengthen ESG credentials: A focus on transparent reporting and proactive community engagement can improve access to capital. Learn more about transparent reporting in attracting capital in our Sustainability Trends Report.
• Leverage government programs: Where possible, tap into concessional loans and grants to support mine infrastructure and development.

The global energy transition is creating unprecedented demand for the minerals that Australia is rich in. However, meeting that demand requires more than just resources - it requires capital, creativity, and collaboration. By embracing a broader range of financing models and aligning with strategic partners, Australian mining companies can lead the charge in powering a cleaner, more sustainable future.

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BDO’s natural resources & energy experts can advise on strategies to secure capital tailored to your organisation. Contact us to find out how we can support you.