Critical minerals – Deals activity robust but challenges remain

Deal activity in the critical minerals sector is likely to remain high in the short and medium term as interest rates ease throughout 2024 and 2025 and rapidly growing demand for critical minerals for clean energy technologies – expected to double by 2030 based on existing policy commitments¹– is expected to lead to a recovery in price levels. Against this backdrop, investors should be mindful of the following challenges which are likely to persist in critical minerals transactions.

Price volatility

High volatility in the prices of key critical minerals over the past 18 months has led to an acute divergence between acquirers' and vendors' valuations of specific assets, creating a complex environment where reconciling short-term price fluctuations with the enduring sentiment of strong demand in the medium and long term remains challenging.

Such pricing and valuation discrepancies are likely to continue to be a key commercial point in transactions until the market and demand for critical minerals become more established.

In order to limit risk while capturing projected upside, we are likely to see more joint ventures (and, in some cases, investors taking minority stakes) in both producing and early-stage projects combined with call options to increase the stake over time if market conditions improve, as well as other consideration structures (eg, production-linked or price-linked deferred consideration or royalties).

Decarbonisation and sustainability

Decarbonisation and sustainability-related considerations will play an increasingly prominent role in critical minerals transactions as mandatory due diligence requirements and disclosure standards enter into force in key jurisdictions (most notably the EU²).

Acquirers are conducting increasingly rigorous due diligence on target companies' supply chains and sustainability factors required to be reported under relevant reporting frameworks, including greenhouse gas emissions, water use, impact on biodiversity and local communities.

Consequently, parties will be required to negotiate more complex and extensive packages of representations, warranties and indemnities in respect of issues arising out of due diligence. In joint venture transactions, there will be greater scrutiny on how key sustainability and ESG policies are set and agreed.

The accuracy and reliability of sustainability-related data in particular is an increasingly contentious issue, as acquirers seek to adjust their climate strategies to incorporate their acquisitions, and to mitigate greenwashing risks associated with reporting on sustainability-related data predating their period of ownership. 

Geopolitical considerations

The geographical concentration of critical minerals mining operations is set to remain high over the near and medium term, with 70 – 75% of projected supply growth for refined lithium, nickel, cobalt and rare earth elements set to come from the current top three producing countries.³ As a result, national governments continue to adopt policies focused on ensuring a stable and secure supply of critical minerals.⁴

Therefore, critical mineral transactions are likely to be subject to ever-greater geopolitical and regulatory risks. Investors will have to carefully consider how to cater for requisite regulatory clearances and make contingency plans in case of adverse decisions.

Resource nationalism

In line with the trend of heightened geopolitical risk, mineral-rich developing countries continue to employ a combination of incentives and pressure exertion to capitalise on growing demand for their natural resources. Commonly adopted measures range from changes to fiscal policies, such as the introduction of higher royalties payable to governments and windfall profit taxes, to local content thresholds, free carried interest requirements and beneficiation obligations.

Effective government engagement strategies, coupled with investment structuring to maximise the available investment protections, will therefore continue to be priority issues for investors making cross-border investments in emerging markets.

Future outlook

We expect to see very high levels of M&A activity in the critical minerals sector in the near and medium term. The rate and nature of investment, however, is likely to evolve in response to rapidly changing conditions. While this is likely to create attractive investment opportunities, investors will need to carefully manage the expectations placed on them by key stakeholders and host governments in order to safely realise the value of their investments.