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Analysis

Securing Minerals AMID Scarcity

Mon, 10/22/2018 - 11:23

The lack of new projects and a rise in demand for consumer goods fueled by a growing population are driving the need for a strategy that guarantees mineral supply. The UN estimates that by 2050, the global population will reach 9.8 billion, and this will further increase to 11.2 billion by 2100. This swelling population is expected to bring with it growing urbanization, development of new technologies and hunger for new infrastructure. This, in turn, demands raw materials in the form of metals.
One of the main issues standing in the way of a hungry consumer base is that the recent bear market created a steep drop in exploration investment in 2016 and operators are struggling to find high grade projects. According to S&P Global Market Intelligence report, World Exploration Trends (WET), global spending on exploration dropped 21 percent in comparison to 2015. “The potential to discover new ore bodies and acquire new mining projects is still strong in Mexico, but with rising costs and rising risks, new mining projects have to be higher and higher quality to be economical for development,” says Bradford Cooke, CEO of Endeavour Silver. “Silver supply has fallen due to the few mines built during the recent five-year bear market of low metal prices.” However, S&P’s 2018 report found a 14 percent rise in global exploration investment between 2016 and 2017, to US$7.95 billion from US$6.95 billion, for the first time in four consecutive years.
The problem with exploration having all but halted over the course of the five-year bear market is the time frames involved in bringing a mining project online. When considering a greenfields project, from the process of acquiring concessions, permitting, carrying out a drill program, creating feasibility reports, raising the funding and developing the mine, miners look at long waits before they can extract a single ounce of metals. “Lead times can range from a few years to decades, depending on the type of mineral, size and grade of the deposit, financing conditions, country factors and commodity prices,” according to a study by the World Bank.
According to PwC’s report Minerals and Metals Scarcity in Manufacturing: The Ticking Timebomb, policymakers around the world are starting to take matters into their own hands, securing new mineral streams and employing recycling, reuse and efficiency drives with the resources they already have. “Governments are trying to mitigate the risks of minerals and metals scarcity by using scarce minerals and metals more efficiently in applications, by recycling and by developing substitutes,” says the report. It also mentions that authorities are starting to promote trade policies that favor international and open markets for minerals and metals.
CONFLICT MINERALS
Along with the drop of supply, companies are worried about the global outrage that was sparked in 2016 when Amnesty International released a report that connected industry giants such as Apple and Samsung to operations in the Democratic Republic of Congo. The report included allegations of child labor and adults working under life-threatening situations. Technology companies reacted quickly and publicly announced their commitment to ethically source their materials. Apple became the first company to publish the names of its cobalt suppliers.
“The DRC has raised concerns about the way cobalt is extracted and its human costs,” says Tony Rovira, Managing Director of Azure Minerals, which is moving its Sara Alicia gold-cobalt project in Sonora into the development stage. “Having another source of high-grade cobalt is important, so we are really excited about the advantages of mining cobalt in Mexico.”
By far the lion’s share of the world’s cobalt reserves is held by the DRC. The country has 53.82 percent of the world’s cobalt, followed by Australia with 18.45 percent and Russia and Canada are tied with 3.84 percent. Given the fact that the majority of the world’s cobalt is located in a conflict zone, Rick Rule, President and CEO of Sprott US Holdings, expects the price to soar in the coming years.
“The supply of cobalt is constrained in many senses, but in particular politically. If Mexico is seen as a risky jurisdiction, the DRC is many times worse, and if a company is engaged in cobalt production, it will be located in the DRC,” he says. “That is a metal where there is so much fabrication utility that we have been told the price could double if miners were able to double supply because fabrication technologies are not being developed for cobalt due to a fear of restricted supply. This is unique.”
OFFTAKES, STREAMING DEALS, PARTNERSHIPS
Although the streaming model is now well-know in the industry, it was only introduced for Durango’s San Dimas mine in 2004 by Silver Wheaton, now Wheaton Precious Metals and one of the most successful silver streamers in the world. The concept is based on long-term supply agreements, which benefits both parties as the miners do not need to worry about finding a buyer for their product, and the streaming company can obtain the metals at a below-market value. Of course, there is also a great deal of risk involved for both parties given the price of metals can change drastically, but this also brings a great deal of reward.
Another way to secure long-term sources of supply is through offtake agreements, and now these are appearing more and more between miners and technology companies, cutting out the middle man: the metals trader. A successful example is the partnership between Avino Silver & Gold Mines and Samsung C&T. The agreement gives Samsung exclusive access to Avino mine concentrates until Dec. 31, 2021 and includes a US$10 million advanced prepayment for concentrates to Avino.
Azure Minerals is equally starting to catch the attention of the industry. The Sara Alicia project has the potential to become the highest-grade cobalt exploration project in the world. “It is especially appealing given the increased demand for cobalt, so a German investment bank and an investment fund from New York have invested in Azure because of this project,” states Tony Rovira. “We are convinced that cobalt is going to experience high demand over the next couple of years. The price rose from US$30,000/t in early 2017 to more than US$90,000/t in early 2018, an indicator of the expectations for this metal.”
The star metal of the moment is lithium, and Mexico holds potentially the world’s largest deposit. Although this project has taken many years to get off the ground, it is now in the development stage and companies are already scrambling to secure offtake agreements for the coveted metal. The Sonora Lithium mine, owned by Bacanora Lithium, already has agreements with Japanese company Hanwa and investment fund BlackRock. The Sovereign Wealth Fund of The Sultanate of Oman (SGRF) has also signed an offtake agreement for 13,000t/y of lithium carbonate, including a conditional commitment to invest US$65 million in the company.