Critical measures for critical minerals: The 2023-24 Federal Budget and beyond

May 22, 2023

The recent 2023-24 Federal Budget announcement has attracted mixed reactions from across the mining sector, with new funding initiatives for critical minerals and decarbonisation largely welcomed, but some questioning whether the measures go far enough, particularly in light of challenging policy settings. In this article we break down the key budget measures affecting the mining industry, the implications for sector players, and what we’ll be looking for in the coming months.

Setting the stage

Critical minerals are the key to net zero

Mining supports decarbonisation, electrification and the uptake of renewables by providing the natural resources on which these will rely. Critical minerals like copper, lithium, nickel, cobalt and rare earths are crucial components of low-emission technologies such as batteries, electric vehicles and solar panels – in the words of Resources Minister, Madeleine King, “The road to net zero runs through the resources sector”.

With demand for critical minerals – of which Australia has vast reserves – set to skyrocket in the coming years, and governments around the world scrambling to secure their supply chains, expectations were high coming into the 2023-24 Federal Budget.

Overall sector investment outlook

The Federal Government has delivered its first budget surplus in 15 years, with key industry bodies like the Minerals Council of Australia (MCA) and Queensland Resources Council attributing this largely to the record c. $40 billion in tax paid by Australian mineral companies in 2021-22 (up from $26 billion in 2020-21).

However, total business investment in the mining sector is forecast to remain flat in 2022-23 before growing modestly, by 2% in 2023-24, and 1.5% in 2024-25.

The MCA argues that more needs to be done at a federal level to foster investment in the mining sector, or Australia risks becoming more vulnerable to competition from other resource-rich economies. So – what’s on offer in the budget, and what opportunities and challenges does it present for mining?

Budget breakdown

Critical Minerals

The Government has committed to investing:

  • $57.1 million – over four years – to further develop the Critical Minerals International Partnerships Program, to secure strategic and commercial partnerships with like-minded partners. This investment builds on the $2 billion Critical Minerals Facility and $1 billion targeted to value-adding in resources, under the National Reconstruction Fund (NRF). It remains to be seen how these partnerships will function in practice, and whether there will be any eligibility requirements or other limitations;
  • $21.2 million to ensure the ongoing operations of the Critical Minerals Office, responsible for policies, programs and international engagement; and
  • $2.2 million to the Treasury, to establish data analysis capabilities to track foreign investment patterns and compliance in the critical minerals sector.

Questions remain around how far the hotly anticipated 2023 Critical Minerals Strategy will go to bolster these commitments, open up new economic opportunities, and set the stage for positioning Australia as a leader in critical minerals.

Decarbonisation

In an effort to achieve Australia’s net zero emission goals, the Budget has also introduced a number of initiatives to decarbonise the resources industry, including:

  • $6.7 million towards developing a Future Gas Strategy. This strategy will support the energy sector in reaching 82% renewables by 2030, and becoming cleaner, cheaper and more reliable, while maintaining its international reputation as a trusted energy supplier to the region;
  • $320.4 million towards a responsible and sustainable approach for the long-term management and permanent disposal of Commonwealth radioactive waste;
  • In partnership with the Queensland Government, $14.3 million to supporting research and development into reducing emissions in the energy resources sector;
  • $4.5 million to developing a plan for establishing an Australian decommissioning industry; and
  • $12 million towards a review of the environmental management regime for offshore petroleum and greenhouse gas storage activities.

Approximately $60 billion of offshore petroleum decommissioning activity will occur over the next 30 to 50 years. The proposed plan for a decommissioning industry will identify ways Australia can benefit from the $60 billion projected expenditure, any repurposing, recycling and waste disposal pathways for decommissioned infrastructure, and opportunities to re-skill oil and gas workers for an emerging decommissioning industry.

The Federal Government will also legislate a national Net Zero Authority, which will help investors and companies to engage with net zero transformation opportunities. Further, the authority will examine opportunities for regulatory and administrative certainty and efficiency for carbon capture and storage projects.

Powering the future of the resources sector
  • The $2 billion investment into Hydrogen Headstart, a new program to support hydrogen production, is set to drive innovation in this area and position Australia as a world leader in hydrogen production. Further, this initiative will provide revenue support for investment in renewable hydrogen production through competitive production contracts and will cover the commercial gap between the cost of hydrogen production from renewables and its current market price.
  • The Government will provide $38.2 million to establish a Guarantee of Origin scheme to underpin markets for green energy, including hydrogen and other low emissions products.
  • The Government has committed $15 billion towards the NRF, a manufacturing initiative with the aim to assist in the transition to net zero. Through loans, guarantees and equity investments, the NRF will partner with the private sector to invest in priority areas that leverage Australia’s natural and competitive strengths in renewables and low emissions technologies, amongst other areas.
  • Additionally, $14.8 million has been committed to establish the Powering Australia Industry Growth Centre, which will support Australian businesses looking to manufacture, commercialise and adopt renewable technologies. This is in addition to the up to $3 billion allocated to investment in low emissions technologies including green metals under the NRF.
Tax implications

The Budget extends the instant asset write-off scheme, allowing business to immediately deduct the full cost of eligible depreciable assets that are installed and ready for use until 30 June 2023.

This is a significant development for the mining sector, as companies can receive an immediate tax deduction for investments into new equipment and technology. Not only does this reduce the tax burden faced by companies, but it also reduces the cost of investment. Further, this initiative will encourage investment into the sector, and promote economic growth. Extending the asset write-off scheme will also make it easier for companies to invest in new projects and expand their operations. Additionally, reducing the cost of investment will allow mining companies to improve their profitability, and create new job opportunities within the sector. The extension of the instant-asset will also benefit the manufacturing sector, incentivising mining companies to invest in locally procured equipment and technology.

The Government has also proposed measures aimed at preventing multinational companies (MNCs) from avoiding taxes in Australia. Specifically, proposed changes include the implementation of a 15% global minimum tax rate for large MNCs, and a 15% global domestic tax. Each of these taxes would come into effect on 1 January 2024. The global minimum tax rules would allow Australia to apply a top-up tax on a resident multinational parent or subsidiary company, where the group’s income is taxed below 15% overseas. In instances where a large MNCs’ effective tax rate falls below 15%, the domestic minimum tax applies so that Australia collects the revenue that would otherwise have been collected by another country’s global minimum tax. These propositions are not yet law.

But wait, there’s more

On 18 May 2023, the Australian Government announced the approval of c. $50m in grants to accelerate the development of critical minerals projects, which forms Tranche 2 of the Critical Minerals Development Program, designed for “Australian critical minerals industry entities and/or State or Territory government agencies who are undertaking projects that support Australia’s Critical Minerals Strategy and long term sustainable growth”.

The funding is spread across 13 projects in Western Australia, New South Wales and Queensland, and is expected to help diversify supply chains, build domestic downstream processing, and open up new jobs.

Industry response – good, but not enough

Industry pundits have expressed mixed reactions to the budget.

On the one hand, it demonstrates the Federal Government’s commitment to bolstering the mining and resources sector. The above measures have the potential to address the increasingly intense competition for global capital, stagnant productivity growth, and the increased costs and uncertainty flowing from cumulative impact of regulatory changes and persistent regulatory and administrative inefficiencies. The Hydrogen Headstart program has received widespread support, as some believe the program will catalyse Australia’s hydrogen industry and other clean energy industries, and help position Australia as a global hydrogen leader.

On the flip side, other commentary indicates the budget doesn’t go far enough to ensure Australia is competitive with the US and Europe in attracting critical minerals investment. Those adopting this stance fear that Australian projects may fail to attract the necessary capital without support from the Government and international partners. Further, going forward, Australia’s vulnerability to competition from resource-rich economies will only grow as they seek to seize the opportunity to supply the minerals and metals needed to achieve global net zero emissions.

Many seem to be withholding judgement until the new Critical Minerals Strategy is released later this year.

Where to from here?

The measures introduced in the 2023-24 budget, and in the weeks since, offer a promising start for Australia’s mining industry, but will not alone be enough to ensure a thriving, profitable sector positioned for long-term opportunities, particularly in the critical minerals space.

In the coming months, we will be watching for a refreshed, fit-for-purpose Critical Minerals Strategy that accurately reflects the scale of opportunity for Australia, supported by effective international partnerships and trade agreements.

High expectations for the 2023 Critical Minerals Strategy

In light of the limited support offered to critical minerals in this year’s budget, what can we expect in the upcoming 2023 Critical Minerals Strategy? What should we hope for?

A key hope within the sector is the simplification of approvals processes for critical minerals projects, akin to that contained in the US Inflation Reduction Act. Whilst fast-tracking the procedure is of great importance, it appears as though the industry is hoping for a more transparent, predictable, and defined federal permitting process.

The desire for this streamlined process is largely due to the states introducing indigenous cultural heritage legislation and reviewing federal environment protection and biodiversity laws. It is a commonly held view throughout the industry, that these state initiatives risk adding extra layers to obtaining approval.

Resources Minister Madeleine King has indicated that the strategy will have an increased focus on the domestic processing of Australian minerals and a desire for foreign investment, so long as foreign investors are “like-minded”. The Prime Minister also shares this view, recently expressing a desire for Australia to retain more of its critical minerals and make batteries and other renewable technologies domestically. Evidently, ensuring foreign investment from “like-minded” investors, is of great importance to the Government. However, it is important to strike a balance between this and encouraging general foreign investment.

As such, sector participants have suggested the Government retain a portion of offtake from any critical minerals developed domestically. In doing this, Australia is both accepting foreign investment from countries that aren’t “like-minded”, whilst retaining the right to first access of the mineral. Therefore, we may expect to see a structure akin to this appear in the Critical Minerals Strategy.

Australia-US Climate, Critical Minerals and Clean Energy Transformation Compact (the Compact)

Announced on 20 May 2023, the Compact is described as a “central pillar of the Australia-United States Alliance” and aims to “advance ambitious climate and clean energy action this decade” by coordinating policies and investment.

A key focus of the Compact is expanding and diversifying responsible clean energy and critical minerals supply chains – and of particular significance to the mining sector is that it positions Australia as a “partner of choice” in the battery minerals supply chain and technology investment. Australian suppliers of both critical minerals and renewable energy would be treated as domestic suppliers under the US Defence Production Act, potentially opening up access for these companies to a pool of US$1 billion under the US Inflation Reduction Act.

The Australia-India Economic Cooperation and Trade Agreement (ECTA)

The Australia-India ECTA will support further growth and investment in Australia’s critical minerals and resources sectors by eliminating and reducing customs duties on key products, improving access to a growing and diversified market for the Australian critical minerals sector. ETCA will assist in realising the potential of the Australia-India economic relationship and provide certainty in the supply of high quality and competitively priced critical minerals. Further, ECTA will build on existing partnerships and investment streams that already exist between Australia and India in critical minerals and will support India’s ambition to take a major role in global advanced manufacturing. ECTA will also strengthen our supply chain resilience and trade diversification and address supply chain risks. Having diverse, competitive and resilient clean energy supply chains, underpinned by stable markets, will be critical to meeting future demand for clean energy and for the region’s economic prosperity and security. Australia has reserves of at least 21 of the 49 critical minerals identified by the Indian Government and can play an integral role in strengthening India’s supply chains. The recently signed Australia-India Critical Minerals Investment Partnership will support further Indian investment in Australian critical minerals projects.

Australia’s Collaborative Critical Minerals Projects

In recent months, we have seen an increase in international partnerships to support the development of Australia’s critical minerals sector and broader decarbonisation efforts, including:

  • On 6 April 2023, Australia announced a Joint Declaration of Intent with Germany, aiming to create new critical minerals opportunities to support Australia and Germany in reaching their net zero commitments. The study will assess how raw and processed critical minerals can contribute to clean energy technology, the expansion of Australia’s critical minerals extraction, refinement, and recycling capability, and the application of high environment, social and governance standards. Overall, this study will help Australia develop elements of its critical minerals industry, such as extraction, refinement, and recycling. As for Germany, this study will secure reliable supplies of critical minerals, to support its own manufacturing and recycling industries.
  • On 4 April 2023, Australia entered into a similar arrangement with the United Kingdom, signing a Statement of Intent to support the critical minerals sector. The statement will help both nations to increase and diversify critical minerals supply chains, build downstream processing and manufacturing capabilities, and create skilled and high-paying jobs in regional communities. Australia and the UK intend to identify and promote investment opportunities in clean energy technologies and upstream extraction, promote high environmental, social and governance standards in critical minerals processing, and encourage the exchange of skills and expertise between Australian and UK firms. The statement is coordinated by the Australia-United Kingdom Joint Working Group on Critical Minerals, who will identify an initial set of priorities for collaboration.
  • On 15 March 2023, the Western Australian government announced a Memorandum of Understanding (MoU) with a South Korean government-backed research group to exchange specific and technical knowledge around the development of critical minerals. This is the second agreement between the nations focused on the net zero commitments. Earlier this year, the State government entered into a deal with South Korea’s trade industry to look at joint development opportunities in energy transition industries. This MoU will allow for cooperation on research and the exchange of information with our Korean trading partners, to build capability and reaffirm the importance of Western Australia in the global supply of critical minerals.
  • In October 2022, Australia and Japan entered into a partnership on critical minerals to help build secure supply chains for critical minerals, which are crucial elements of clean energy technologies needed to help both countries meet net-zero commitments. The partnership will establish a framework for building secure critical minerals supply chains between Australia and Japan, and promote opportunities for information sharing and collaboration, including research, investment and commercial arrangements between Japan and Australian projects. As such, this arrangement will support the development of Australia’s critical minerals sector, whilst ensuring Japan has the supply of critical minerals required for its advanced manufacturing sector.

It’s too early to assess the effectiveness of these partnerships, however we’ll continue to watch this space closely. Subscribe to HSF Mining Notes to receive updates direct to your inbox.

To learn more, or to discuss how you might be affected by the above, please contact:

Jay Leary
Jay Leary
Partner and Global Head of Mining, Perth
+61 8 9211 7877

Using Collaborative Contracting Structures for Critical Minerals Exploration Opportunities in Australia

November 25, 2022
By Jay Leary and Jaya Prasad
Summary
  • Global investment in the clean energy transition has placed increased demand pressures on critical minerals supply chain
  • Australia is already a key player in the critical minerals market but there is further opportunity to expand Australia’s offering to the global market
  • Key risks include geological scarcity, sovereign and geopolitical risk, trade policy obstacles, and difficulties with extraction and processing of outputs
  • Australian companies can seek to benefit from the increased critical minerals demand while managing the risks associated with critical minerals investment by entering into collaborative partnerships
  • Collaborative contracting structures allow supply chain proponents to negotiate bespoke commercial arrangements that dictate each party’s contribution and risk allocation

Critical minerals have been vital to the global economy for decades, supporting industries including, energy, transport, healthcare, telecommunications and defence.

Critical minerals are now recognised as vital to the energy transition and green revolution, as they are key inputs in the clean technologies and energy transition projects.

As global investment in green technologies grows (including EV and battery storage), the growth in global demand for critical minerals has placed increased pressures on existing supply chains.

This growing demand provides an opportunity for Australia, with significant reserves of a range of critical minerals, to explore critical mineral extraction and processing operations.

What are critical minerals?

A critical mineral is any mineral resource that is:

(a)  essential for the functioning of modern technologies and economies; and

(b)  at risk of supply chain disruptions.

The Australian government considers 26 mineral resources to be critical minerals, selected based on Australia’s geological endowment and potential global technology demands, including:

  • lithium
  • rare earth elements
  • vanadium
  • tungsten
  • cobalt

A full list of all critical minerals published by Geoscience Australia can be accessed here.

Key risks to the critical minerals supply chain include geological scarcity, sovereign and geopolitical risk, trade policy obstacles, and difficulties with extraction and processing of outputs, which contribute to market volatility and immaturity and lowers incentives to investment.

Critical minerals in Australia

Australia is already a key player in the critical minerals market as the world’s top producer of lithium and rutile, the second largest producer of zircon and ranks in the top 5 for production of cobalt, manganese ore, tungsten and vanadium. Australia produces commercial quantities of 10 of the 26 critical minerals identified by the Australian Government and has demonstrated resources for another five.[1]

The Australian Government released an updated Critical Minerals Strategy in March this year (Strategy)[2] to incentivise and support investment in critical minerals supply chain. The Strategy sets out Australia’s long-term plan to leverage growing global demand for critical minerals and increase Australia’s contribution to the sector.

The key objectives of the Strategy are:

  • establishing stable and secure supply chains
  • expand skills and capabilities in downstream processing of critical minerals to add greater value to Australia’s contribution in the international market
  • creation of additional regional jobs and economic growth for regional communities

Australia has since leveraged existing trade relationships with America, India and Japan (formalised under the recently signed Critical Minerals Partnership),[3] establishing commitments towards building secure critical minerals supply chains between Australia and each relevant economy. Using these partnerships, Australia can garner investment in collaborative ventures in the critical minerals industry, from research and development and pilot studies through to commercial projects. These international agreements help Australia to solidify trade pathways for critical minerals demand and its reputation as a reliable supplier of resources to the world.

Opportunities

The growing global demand for critical minerals, coupled with Australia’s significant demonstrated reserves and commitment from the Australian Government places Australian mining companies in a position to benefit from investing in critical mineral exploration.

In addition to the opportunities available in greenfield critical minerals exploration, there are commercial opportunities available to repurpose existing exploration and mining operations to take advantage of existing infrastructure and supply chains, including:

  • co-production of critical minerals occurring at existing sites (eg cobalt and tellurium occurring with copper)
  • establishing new processing and extraction facilities on existing sites
  • post-production extraction of metals, such as deriving metals from mine waste (tailings extraction)
  • mine closure and rehabilitation planning

To ensure that any benefits earned from critical minerals exploration and processing activities are not offset by the material geological, political, trade and investment risks associated with critical minerals, sharing of risk allocation can be achieved by utilising collaborative contracting structures.

Contracting structures

With mining exploration being highly speculative, and mineral commodities influenced by cyclical movements, the use of collaborative contracting structures in the mining industry allow multiple proponents in the supply chain (e.g. the project owner, contractors, infrastructure providers and service providers) to add value and share risk while working towards a mutual advantage.

Collaborative structures can also be used as a means to mitigate the heightened geological, political and extraction and processing risks associated with critical minerals Collaborative contracting allow parties to negotiate creative commercial arrangements that play to their strengths and expertise, while sharing risk allocation and liability.

Examples of collaborative contracting arrangements include:

  • unincorporated joint venture agreements
  • incorporated joint ventures
  • partnerships
  • strategic alliance contracts
  • joint ventures for broader ranges of the supply chain
Unincorporated joint venture

Remaining the most popular structure for two (or more) parties to engage in mining projects, unincorporated joint ventures involve the parties entering into a contract setting out each party’s rights and obligations. As exploration is a capital intensive process with delayed returns, an unincorporated joint venture agreement will also consider financing obligations and revenue structures. Property is owned and disposed of between the joint venture participants as tenants in common, in proportion to each party’s participating interest. Unlike an incorporated joint venture (see further detail below), as no separate legal entity is created, the parties commercially negotiate risk allocation and liability for specific risks.

Incorporated joint venture

An incorporated joint venture creates a special purpose vehicle, owned by the joint venture participants in shares proportionate to the party’s participating interest. This structure is a separate legal entity, and each party’s participating interest typically dictates its proportion of investment, expenses and returns. The corporate entity created is able to own, deal with and dispose of assets in its own right, sue and be sued, and enter into legal arrangements itself, and is subject to corporations regulation. Risk and loss in an incorporated joint venture is borne by the entity, shielding its shareholders (the joint venture participants) directly from loss. Shareholders will only be liable up to their respective contributed capital.

The establishment of an incorporated joint venture will require the parties to enter into a shareholders’ agreement to regulate the entity’s operation, as well as compliance with a company constitution.

Partnerships

Parties that enter into partnership arrangements are able to negotiate commercial terms regarding capital investment and revenue entitlements, but will also be bound by the relevant jurisdiction’s partnership legislation. Similar to an incorporated join venture, the partnership owns the assets, however the partners’ ability to gain return from those assets is derived from any surplus proceeds available after the partnership’s assets and liabilities are recognised on dissolution. Risk is shared jointly across all partners, and the extent of this liability is unlimited, regardless of each partner’s contribution of capital (limited partnership structures are available). Each partner owes a fiduciary obligation to all other partners.

Strategic alliance contracts

Used predominantly early stage exploration projects, alliance contracts are a flexible means of beginning a new relationship where neither party is willing to commit too heavily. Alliance contracts are also useful where results are highly speculative and the parties wish to quickly commence work. Alliance agreements present a good starting point, but generally are not suitable as a primary project execution vehicle. Alliance agreements are also useful where parties with different skills wish to pool their resources in a new region, industry or technology.

Summary of contracting structures
  Unincorporated joint venture Incorporated joint venture Partnerships Alliancing
Separate legal entity created? No Yes No No
Liability Dependent on contract terms. Generally several liability, not joint, and limited to extent of participating interest. Separate legal entity responsible for liabilities. Limited to shareholding, which is dictated by participating interest. Unlimited, joint and several liability for all liabilities for all partners in the partnership.

 

Note: Limited liability partnership arrangement available where agreed under contract, where liability is limited to total capital contribution.

 Dependent on contract terms.
Statutory obligations No specific legislation applies. Corporations legislation applies to separate legal entity. Partnership legislation applies. Fiduciary obligations as between partners. No specific legislation applies.
Capital contribution Dependent on contract terms, typically proportionate to participating interest. Proportionate to shareholding, which is dictated by participating interest. Proportionate to partnership interest. Dependent on contract terms.
Ownership Dependent on contract terms. Typically, assets owned in proportion of participating interest. Assets owned by separate legal entity. Assets owned by partnership.

 

 Dependent on contract terms.
Disposal Proceeds distributed directly to parties dependent on contract terms. Disposal by separate legal entity, with profits retained by entity or distributed as dividends proportionate to shareholdings. Disposal by partnership, with profits retained or distributed dependent on partnership agreement or otherwise in equal shares. Proceeds distributed directly to parties dependent on contract terms.
Instrument Joint venture agreement Shareholders’ agreement, company constitution Partnership agreement Alliance contract

 

Key considerations

When deciding which collaborating contracting structure to use for exploration activities, parties should consider:

  • Majority interest: Who will be the project ‘owner’ – one party will hold a majority interest and will be expected to assume responsibility for key risks
  • Operator: Who will be the project ‘operator’ – which party is responsible for operational tasks such as obtaining approvals, consents and third party negotiations? Will this party have a sole control over these decisions or be the ‘face’ only?
  • Capital: The extent to which each party is responsible to contribute capital, and the structure and timing of such investment obligations – will significant security or third party financing be required?
  • Returns: How will profit or return be measured under the arrangement? What are the thresholds or incentives to those returns? Is the allocation of profit proportionate to each party’s proportion of capital contribution?
  • Risk allocation: Is risk shared between the participants, or clearly delineated to a single participant? Is the allocation of risk consistent with each participant’s interest in the project?
  • Intellectual property: Which party will own intellectual property developed or generated by the project? How will licensing of intellectual property be managed?

[1] https://www.ga.gov.au/scientific-topics/minerals/critical-minerals.

[2] https://www.industry.gov.au/sites/default/files/2022-09/2022-critical-minerals-strategy_0.pdf.

[3] https://www.minister.industry.gov.au/ministers/king/media-releases/australia-japan-strengthen-critical-minerals-cooperation.

 

Jay Leary
Jay Leary
Partner and Head of Global Mining, Perth
+61 8 9211 7877
Jaya Prasad
Jaya Prasad
Solicitor, Brisbane
+61 7 3258 6355

Supreme Court of South Australia overturns exploration drilling approval reinforcing the significance of Aboriginal cultural heritage issues

September 16, 2022

By Melanie Debenham, Naomi Hutchings and Nigel Amigh

A recent decision of the Supreme Court of South Australia has reinforced the significance of Aboriginal cultural heritage issues in the process of obtaining approvals for mining and exploration activities. In Dare, Bilney & Ors v Kelaray Pty Ltd, Premier of South Australia [2022] SASC 91 (Dare v Kelaray), Chief Justice Kourakis set aside the authorisation granted by the Minister (former Premier Steven Marshall), pursuant to section 23 of the Aboriginal Heritage Act 1988 (SA) (the Act) which was a requirement for Kelaray Pty Ltd (Kelaray) to commence drilling at the Lake Torrens exploration site.   Continue reading →

True Fella Warden Decision

August 29, 2022

By Jay Leary, Geoff Kerrigan and Annabel Beech

The recent decision coming out of the Warden’s Court of Western Australia – True Fella Pty Ltd v Pantoro South Pty Ltd [2022] WAMW 19 (True Fella) – has attracted attention across the WA mining sector. Continue reading →

Chile’s Copper Royalty Reform

July 14, 2022

By Jay Leary

The Chilean government have announced the introduction of a tax reform bill that will introduce a new royalty system payable by copper miners. This bill contains a variable royalty rate, dependent on the quantity of copper sold. Rates could increase to as high as 32% depending on the price of copper. Given Chile is the world’s largest copper producer, the amendment of the royalty rates will have an outsized impact on copper supply and prices worldwide.

Continue reading →

Queensland State Coal Royalties: Out of step with all other jurisdictions

June 23, 2022

By Jay Leary

To the great surprise of all within the industry, the Queensland government has announced significant changes to the royalty regime for coal. The changes end what has otherwise been a stable period of royalty policy nationally. The royalty changes proposed are well out of step with other jurisdictions and display a deep lack of appreciation of the sector and the investment challenges which the coal industry faces. Continue reading →

The future of mining – The green revolution’s sharp end

May 10, 2022

By Jay Leary

Mining is a significant driver in the advancement of communities. As the world begins its slow transition to decarbonisation, the production of green technology needs to significantly increase and mining plays a central role in this revolution.

To produce the items needed to transition, the world needs to supercharge the production of minerals such as:

  • copper (used in almost every technological device),
  • nickel (used in batteries, phones, computers),
  • cobalt (used in advanced tools and lithium-ion storage batteries)
  • and rare earth minerals (used in a range of green technologies such as wind turbines and solar panels, as well as in electronic equipment).

Click here to read more

For more information, please contact Jay Leary.

Jay Leary
Jay Leary
Partner, Perth
+61 8 9211 7877

Deep sea mining: Opportunities, obstacles, and why a strong regulatory framework will make all the difference

April 21, 2022

Authors: Jay Leary, Partner and Global Head of Mining; Hannah Whitton, Solicitor

In recent years, interest in deep sea mining (DSM) has grown as the industry grapples with how to meet the demand for critical minerals. We’re seeing exploration licenses granted, backing from governments, and trial mining operations getting underway.

However, in the face of still-unknown environmental impacts and community objections, exacerbated by ongoing regulatory uncertainty, DSM still has a long way to go.

In this article, we look at the current state of play for DSM, what’s on the horizon, and provide our assessment of what’s needed to make it a viable, sustainable option.

Quick DSM facts: What it is, where it might occur, and why its supporters are on board

DSM refers to the processes and technologies in collecting resources from the deep seafloor (below depths of 200 metres).1 DSM can involve collecting nodules from the seafloor or extracting deposits from underwater geological features.2 Remote operated vehicles collect or mine the deposits.3

Based on the exploration contracts granted to date4, the region garnering the most interest is the Clarion-Clipperton Fracture Zone (stretching between Hawaii and Mexico), although there is also interest in the Peru Basin, Central Indian Ocean Basin, Western Pacific Ocean, Southwest Indian Ridge, Central Indian Ridge and Mid-Atlantic Ridge.

DSM could potentially unlock vast amounts of copper, cobalt, nickel, zinc, manganese, rare earth elements, and other materials that will be crucial for the global green energy transition currently underway. Some supporters of DSM also point to its potential as a less-carbon intensive method of extraction for critical minerals.5

Current state of play

DSM is currently in exploration phase and awaits finalisation of the regulatory regime before exploitation commences. As exploration activity increases and some DSM players move towards exploitation, further development of and clarity regarding the regulatory framework is essential to make DSM a sustainable option.

Understanding the international regulatory framework

The United Nations Convention of the Law of the Sea (UNCLOS) provides the International Seabed Authority (ISA) with authority to regulate DSM in the seabed and ocean floor and subsoil beyond the limits of national jurisdiction (the Area).6 Australia has ratified UNCLOS and is a member State of the ISA.

The ISA underwater mining regulatory framework (collectively referred to as the Mining Code) regulates exploration for polymetallic nodules, polymetallic sulphides and cobalt-rich ferromanganese crusts and is supplemented by recommendations and other guidance documents. The ISA is in the process of developing rules that extend to commercial mining.

A discussion of the legal effect of the UNCLOS and the Mining Code is beyond the scope of this article. However, we note that the Mining Code will be extremely influential on the global approach to regulation of DSM, specifically the development of international customary law, which also binds non-parties to UNCLOS (notably the United States).

The ISA has a dual role in protecting the marine environment as well as governing the exploitation of deep sea minerals. That, of course, is not best practice. The exploration regulations of the Mining Code will include applications and approvals, environmental requirements and payments to ISA, which are to be shared according to an ‘equitable sharing criteria’ (among other matters).7

Developing the Mining Code requires significant stakeholder consultation. The dual role of the ISA, environmental concerns raised in relation to DSM, and other delays (including due to COVID-19) have led to delays in adopting the exploitation regulations.

In mid-2021, Nauru notified ISA of its intention to trigger the ‘two year rule’ under the UNCLOS, which requires the ISA to consider and provisionally approve plans of work for exploitation within two years of the request. This rule has not been considered judicially or by other authorities. The lack of precedent and other uncertainties means that it is unclear whether the ISA is bound to issue a licence within two years.8 This step by the Nauru Government has underscored the urgent need for regulatory certainty for investment purposes.

Recent developments in DSM

Despite current regulatory uncertainties, there has been increasing interest and activity in DSM.

  • At the date of this article, the ISA had granted 31 exploration contracts to 22 government and privately-owned entities9, allowing them to scour the seabed for minerals and collect baseline environmental data.10
  • On 24 February 2022, it was announced that the Cook Islands Investment Corporation had formed a joint venture with GSR (the deep-sea exploration division of Belgium’s DEME Group) to undertake exploration within the Cook Islands’ exclusive economic zone.11
  • On 21 March 2022, Canada-based The Metals Company and shareholder Allseas Group announced their advancement of a “world-first” commercial deep-sea nodules collection system, expecting “production readiness” by the end of 202412.
  • On 18 March 2022, defence and aerospace company Lockheed Martin (of which UK Seabed Resources is a subsidiary) sought to extend its two exploration licenses in the Clarion-Clipperton Zone. The licenses had previously been the subject of a 2015 Center for Biological Diversity lawsuit (now settled)13.
  • The Nauru Government is a strong supporter of DSM and has sponsored Nauru Ocean Resources Inc (NORI), a subsidiary of Canadian company, DeepGreen, who is seeking to commence DSM in Nauruan and surrounding waters.14
  • In September 2017, Japan Oil, Gas and Metals National Corporation (JOGMEC) successfully extracted zinc, gold and other minerals following a trial mining operation of a deep water seabed off the coast of Okinawa.15

Opposition to DSM and environmental considerations

Conservationist groups have raised objections to DSM on environmental grounds,16 with support from major corporations including BMW, Volvo, Google and Samsung SDI. In March 2021, these parties called for a moratorium on DSM, arguing that it should not proceed until the environmental impact is properly assessed and understood. Signatories underlined the need to explore “all alternatives to deep sea minerals… as a matter of urgency, with a focus on reducing demand for primary metals”17. More recently, in April 2021, a collective of Pacific leaders launched The Pacific Parliamentarians’ Alliance on Deep Sea Mining (PPADSM), advocating for the protection of the Pacific Ocean against exploitation.

Our take: No meaningful progress without regulatory certainty

In spite of DSM’s opposers and obstacles, the appetite for critical minerals is stronger than ever, thus interest in DSM continues to grow. However, we are unlikely to see significant developments unfold until an effective regulatory framework is in place.

The adoption of a robust regulatory framework which regulates exploitation activities, effectively manages environmental considerations and balances other concerns is key to resolving uncertainties regarding the 2-year rule and exploitation generally.

It is important that the regulatory framework is developed in a transparent manner and continues to allow stakeholders’ concerns to be heard. The regulatory framework should be clear in its operation and sufficiently flexible such that it can be further developed as necessary, to meet future needs.

Moving forward, certainty as to the international regulatory framework is critical for the future of the DSM industry and the reputation of the mining industry as a whole.

References

  1. And to this extent, differs from seabed mining: The Ocean Foundation, Seabed Mining <https://oceanfdn.org/seabed-mining/>.
  2. The University of Queensland, Researchers call for cautious progress in deep sea mining (4 January 2021) <https://smi.uq.edu.au/article/2021/01/researchers-call-cautious-progress-deep-sea-mining>.
  3. The Atlantic, History’s largest mining operation is about to begin (January 2020) <https://www.theatlantic.com/magazine/archive/2020/01/20000-feet-under-the-sea/603040/>.
  4. SA, Exploration Contracts <https://www.isa.org.jm/exploration-contracts>
  5. GSR, DSM-Facts.com <https://dsm-facts.com/?gclid=EAIaIQobChMI6ozO6cmr9gIV75NmAh1RdwOrEAMYASAAEgIyZvD_BwE>.
  6. ISA, The Mining Code <https://www.isa.org.jm/mining-code>.
  7. Ibid.
  8. Catherine Blanchard, Nauru and Deep-Sea Minerals Exploitation: A Legal Exploration of the 2-Year Rule (17 September 2021) <Catherine Blanchard_170921_NCLOS blog>.
  9. ISA, Exploration Contracts <https://www.isa.org.jm/exploration-contracts>
  10. Hakai Magazine, A Mining Code for the Deep Sea (25 June 2021) <https://hakaimagazine.com/news/a-mining-code-for-the-deep-sea/>.
  11. GSR, Seabed Mineral Exploration Licence granted for the Cook Islands EEZ (24 February 2022) <https://deme-gsr.com/news/seabed-mineral-exploration-licence-granted-for-the-cook-islands-eez/>.
  12. Mining Magazine, TMC advances deep-sea nodules collection system (21 March 2022) <https://www.miningmagazine.com/exploration/news/1428875/tmc-advances-deep-sea-nodules-collection-system>
  13. Center for Biological Diversity, U.S. Company Seeks to Extend License for Deep-Sea Mining in Pacific (18 March 2022) <https://biologicaldiversity.org/w/news/press-releases/us-company-seeks-to-extend-license-for-deep-sea-mining-in-pacific-2022-03-18/>
  14. See generally, Mongabay, Deep-sea mining regulator’s latest meeting on rules only muddies the water (17 December 2021) <https://news.mongabay.com/2021/12/deep-sea-mining-regulators-latest-meeting-on-rules-only-muddies-the-water/>; Reuters, Pacific Island of Nauru sets two-year deadline for UN deep-sea mining rules (29 June 2021) <https://www.reuters.com/business/environment/pacific-island-nauru-sets-two-year-deadline-deep-sea-mining-rules-2021-06-29/>; Hakai Magazine, A Mining Code for the Deep Sea (25 June 2021) <https://hakaimagazine.com/news/a-mining-code-for-the-deep-sea/>; Hakai Magazine, Why Nauru Is Pushing the World Toward Deep-Sea Mining (14 July 2021) <https://hakaimagazine.com/news/why-nauru-is-pushing-the-world-toward-deep-sea-mining/>.
  15. Japan Times, Japan successfully undertakes large-scale deep-sea mineral extraction (26 September 2017) <https://www.japantimes.co.jp/news/2017/09/26/national/japan-successfully-undertakes-large-scale-deep-sea-mineral-extraction/#.Wcu8G3eGO9b>.
  16. Eg, Greenpeace, World Wildlife Fund, Fauna and Flora International and the International Union for Conservation of Nature. See further Reuters, Greenpeace stages Pacific Ocean protest against deep-sea mining (6 April 2021) <https://www.reuters.com/article/us-mining-deepsea-protests-idUSKBN2BT23K>; Reuters, Google, BMW, Volvo, and Samsung SDI sign up to WWF call for temporary ban on deep-sea mining (31 March 2021) <https://www.reuters.com/article/us-mining-deepsea-idUSKBN2BN0I6>; and Seas at Risk, European Commission announces plans to step-up deep-sea mining exploration on same day as IUCN adopts moratorium motion (16 September 2021) <https://seas-at-risk.org/general-news/european-commission-announces-plans-to-step-up-deep-sea-mining-exploration-on-same-day-as-iucn-adopts-moratorium-motion/>.
  17. MINING.COM, BMW, Volvo, Google and Samsung call for ban on deep-sea mining (31 March 2021) <https://www.mining.com/bmw-volvo-google-and-samsung-call-for-ban-on-deep-sea-mining/>.

For more information, please contact Jay Leary.

Jay Leary
Jay Leary
Partner, Perth
+61 8 9211 7877