Australia’s Paydirt, Issue 327
I feel like after three successive editorials waxing on critical minerals, I should move onto something else, but with every gold miner simply enjoying sky-high prices and iron ore in a flat, uncontroversial period, there is little choice.
The Federal Budget was the biggest talking point in Australia. The industry has grown accustomed to watching most Labor Government budgets with fingers over its eyes. Whether carbon prices or resources super profit taxes, there is always a foreboding about where the Government would slug the country’s biggest contributor.
This year’s mood, however, was one of hopeful expectation surrounding incentives. Prime Minister Anthony Albanese had already flagged the Government’s intentions in April when announcing its Future Made in Australia and then a new $566 million geoscience programme to fund critical minerals exploration programmes. On Budget night, the critical minerals sector got exactly what it was looking for – a 10% production tax credit to companies undertaking downstream processing of the 31 minerals on the Government’s critical minerals list. There was also an additional $10.2 million investment in pre-feasibility studies to develop critical mineral common-user processing facilities around the country.
It marks a major change in the Government’s approach towards industry from market-based consensus of the last 40 years.
In his profile of Treasurer Jim Chalmers in the Australian Financial Review on May 13, John Kehoe highlighted just how far Chalmers has departed from the received wisdom going back to the Hawke-Keating years of market liberalisation. This Government is increasingly more interventionist, nowhere more so than in the critical minerals space.
I share Kehoe’s trepidation when he writes: “[Paul] Keating knew politicians and bureaucrats allocating money to pet projects would misallocate resources and risk taxpayer funds.” However, the then-Treasurer was reacting to global developments on which Australia’s more constricted economy was losing ground.
Back then, the unleashing of Wall Street and the City of London was fuelling a new era of prosperity. In the 2020s, there has come a realisation that traditional market economics are not enough to maintain the West’s economic security in the face of different economic models.
It is no longer a level playing field and the US and EU recognise market forces alone won’t allow them to compete with China, which is using a completely different set approach. It is like the Victorian footballers of Harrow or Eton trying to play to the rules in a game against Rugby School, while all the time William Webb Ellis is picking up the ball and running with it.
The Federal Government had to act, but as I said last month, it is not going to be able to commit $1 trillion like US President Joe Biden did. Kehoe is correct in suggesting governments picking winners and losers is problematic, but this is not the UK Labour Government of the 1970s propping up British Leyland.
The production tax credit goes some way to redressing the imbalance, equalising a similar credit in the US.
There is more on the line than the independence of capital markets. The current system has shown itself incapable of moving quick enough to finance critical minerals projects which meet expectations around supply chain resilience.
There’s been two glaring examples of the inability of markets to bridge the gap to long-term economic and security in the last few months.
Last month, ASX-listed Leo Lithium Ltd announced it would be selling its position in the world-class Goulamina lithium project in Mali to JV partner Ganfeng Lithium after more than a year of negotiations with the Malian Government over investment terms.
That decision follows AVZ Minerals Ltd’s delisting from the bourse after two years fighting the DRC Government and Chinese JV partners over rights to the even bigger Manono lithium project in the Central African country.
In both circumstances, the Australian companies took on Chinese JV partners because of an acute lack of support from western government and private enterprise.
That they were eventually bullied out of their assets should be hardly surprising. They were woefully undervalued in comparison to domestic-focused peers because of the perceived sovereign risk and couldn’t find sufficient capital support from traditional sources.
The obvious response is that the outcomes only proved that risk was well modelled, but if AVZ and Leo had received greater support from western sources in the first place, if the US and EU had shown a greater interest in Africa earlier and encouraged private investors to support critical minerals projects on the continent to secure supply, just as the Chinese Government has done, the two companies could have found alternative finance. Linked to ESG and more rules-based investment treaties.
As it was, there were no alternatives, especially when you consider Ganfeng is the largest lithium producer in the world. It had the maturity and might to recognise and take advantage of Goulamina’s obvious class. No western group is anywhere near being able to make that kind of commitment on its own, so need support from government to negotiate the dual risk hurdles of commodity and jurisdiction.
Without it, the West will be locked out of the African critical minerals boom completely.