Critical Minerals' Role in the Energy Transition

This transcript is from a CSIS podcast published on February 20, 2024. Listen to the podcast here.

Adam Johnson: One of the biggest concerns in my mind is not whether we're going to have the minerals for the F -35 or whether we can get the batteries in electric vehicles, but it's what is our innovation ecosystem lacking by not having access to these materials at scale.

Lisa Hyland: Welcome back to Energy 360, the podcast from the Energy Security and Climate Change Program at CSIS. I'm your host, Lisa Hyland. This week, Adam Johnson joins us to share his insights on critical minerals role in the energy transition. Adam is a critical minerals and private equity expert who really understands the pressing need that the mining sector can play in shaping a more sustainable energy future. He joins my colleague Gracelin Baskaran to discuss his journey into the mining sector and where he sees the industry's future opportunities lie at this transformative time to lead this timely conversation.

Gracelin Baskaran: I wanted to get started. Mining is not a sector that people necessarily dream of when they're five years old, like being a teacher or a scientist or an astronaut. How did you end up in the mining sector?

Adam Johnson: I was actually really lucky. I met the current CEO of MP Materials, Jim Litinsky at Kellogg, so we both got our MBAs from Northwestern, and he came in, actually gave a talk on this incredible project that he was doing at Mountain Pass and was ultimately just incredibly inspirational. I think that at the moment it was really compelling, the idea of being involved in a project that had such important geopolitical implications as well as was at the forefront of what I saw and I think ultimately a lot of people are now seeing as this multi-decade long transition to a new energy paradigm and at the time we had significant capital that was looking for places to be put to work and I felt with myself that there was this opportunity to get involved in sort of a contrarian business that not a lot of people were looking at that had a fixed asset that was well led by the team at Mountain Pass with JHL Capital and Jim. So, I think that ultimately it was really sort of serendipitous, but I reached out to him and said, hey, I would love to be involved in whatever way and ultimately convinced him to let me join the team.

Gracelin Baskaran: It's fascinating how many opportunities in life are meeting the right person at the right time and I think it's particularly interesting given how much government support is now going to MP Materials as we've prioritized rare earth. That takes me to my next question is, Adam, can you elaborate on how current U.S. government policies are impacting private investments in critical minerals and processing, particularly in the last three years when we've really accelerated government support?

Adam Johnson: Absolutely. MP materials has received capital from the U.S. government, I think deservedly so it's an incredibly important project and there are a lot of important projects right now. I think that ultimately the entire space is deemed critical for a really important reason. I think that this is foundational to so many of our core technologies that we use every day and I think government understanding of the space as well as support for the space has evolved so much in the timeframe that I've been involved in the mining and rarer sector. So when I was first introduced to Rare Earth professionally, there wasn't that much involvement actually that I saw from government and there was a lot of education that was being done and so that was really more of the mode of government in my experience over the beginning of the time that I was involved and that's a big effort in and of itself because the U.S. government is large and ultimately over the last few years I think there has been this momentous shift where there is now a lot of programs that are being stood up at different agencies and under different legislative priorities that are really there to do a lot of different things such to the point that I think one of the biggest challenges now when it comes to government involvement and stimulus is related to coordination and understanding for private companies on who to talk to, where to talk to, how to prioritize and how to position yourselves without running ourselves silly, trying to figure out what's the best approach.

So, I think that actually there is a lot of opportunity to work with government hand in hand on this and the level of knowledge and opportunity has grown significantly.

Gracelin Baskaran: Adam, we talk a lot about a capital drought in mining. We know that mining activity from the private sector is at a three year low in terms of drilling activity, exploration, financing available for junior mining companies. What would you say in terms of what is the availability of mine financing at this point? Both for mining majors as we like our big guys, but as well as for junior mining companies?

Adam Johnson: So ultimately there's not enough plain and simple. It's been difficult I think to convert existing mining investors who have historically done gold or other into critical mineral investment. It's a very different industry. There's lack of downstream integration and so who your customers are going to be is complicated. There's very serious price volatility. We're seeing that nickel is a great example of this. It went from $27,000 a ton to a hundred thousand dollars a ton and now is at its $16,000 a ton and major nickel mines are closing in Australia and being put in care and maintenance. So, we're starting to see really difficult environments for early-stage miners, big and small to coalesce or create an investment case for commitments of capital.

Gracelin Baskaran: But there feels like a misalignment to me when I look at long-term demand forecasts for these critical minerals going forth 10, 15, 20 years and the availability of financing now. So, one of the key questions I have is the government can't meet the demand for all mine financing. What are the risks that we need to mitigate to unlock financing?

Adam Johnson: In my mind, you can sort of break down risks very simply, so you have, if you're talking about mine financing, I think that ultimately you have some of the issues that I just identified. Who are they going to be the downstream off takers? What does pricing look like ultimately, who are going to be the applications that are consuming these materials? We have concerns around western EV demand as an example, and so we're seeing a complex environment. If we're looking at the broader spectrum of the supply chain, which is also needed, we're seeing this chicken and egg problem of feed stock uncertainty if you want to invest further downstream in sort of the advanced material space or processing space. And so, I think that it's ultimately this cluster of issues. I tend to take a step back and look at it as a major existential risk that is ultimately driving a lot of this. When you look at the example I made around nickel and what's happening in Indonesia that is ultimately driven by significant Chinese investment to get the availability of material coming to processing in China. So, when you consider the backdrop of what's driving these issues, it's ultimately that we're dealing with a monopoly power in China that is regulatable in the form of monopolies that we've ever dealt with in the past.

Gracelin Baskaran: What are your thoughts then on the role of financial incentives like tax breaks or subsidies to encourage? Because the counter idea to that, at least as an economist is you can create market distortions and you can create perverse incentives. So, one of the examples we hear a lot of is if the government funds a rare earth processing facility in its entirety or even a large share of it, it reduces the incentive to ensure you have adequate feedstock for it from other countries or off-takers on the other end. How do you leverage these incentives while trying to minimize market distortions and create perverse incentive?

Adam Johnson: Yeah, I think that ultimately this is not going to be a perfect silver bullet environment. This is going to be messy and there will be companies that are successful and not successful when we think about what it takes to ultimately reduce the risks that we talked about earlier in the context of these risks being driven in a large part by this unregulatable monopoly that's exerting market influence. You really need to think about it from growing capacity and gaining market share because the only way you can beat a monopoly is with market share. And I think that ultimately that means that there will be situations where investments ultimately do not materialize successfully into returns. And so that's part of the reason why private capital is very apprehensive entering the space because when it becomes a capacity problem, a scale problem, that becomes a question of who's going to take that risk and the risk is ultimately being driven by geopolitics in this case and dealing with an un relatable monopoly, which means you really look oftentimes from a private capital standpoint to the government to provide solutions for that issue.

Gracelin Baskaran: I like to ask hard questions. You've probably discovered this about me by now, but who absorbs those losses? Is it the government? Should they be covering these losses? Is it banks who absorbs them?

Adam Johnson: Right. A lot of projects fail, in my view. This is something that ultimately the government will have to play a major role in. I think that to expect private capital to step up and invest into the current headwinds and ultimately make any meaningful progress is unrealistic. As I've been a part of multiple magnet projects for rare earth in the United States and those are very unique circumstances and we're talking about fractions of what China is planning to install in terms of capacity, and so even as we make progress, they make greater progress. So, they are growing their capacity far faster than we are and this is across critical minerals. This is not unique to rare earths or lithium or anything. This is across critical minerals. And so, we need to at some point think about not only where we are today relative to China, but where we want to be relative to their growth trajectory and say that we want to take that on and for private capital to take that on. I think we'll be waiting a very long time.

Gracelin Baskaran: One of the challenges I hear from our government counterparts is particularly in processing, there is a lack of bankable projects. What does it take in your experience to strengthen the pipeline of bankable projects for midstream processing?

Adam Johnson: In my view, there are bankable projects out there today that are either not receiving financing or not speaking to the right people about the financing they need. I think that the questions that they have in terms of bankability become what's the actual business case and when you evaluate that from a risk appetite standpoint, I think one of the themes that I would probably want to get across here is that the risk appetite needs to be much bigger probably from government. I think that the reality is that the definition of bankability, if they have a firm offtake and they have firm feedstock and they are proven at a certain scale and they have everything in place and then we'll come in and finance, I think that again, we'll be waiting a long time. I think that on some level there needs to be degrees and willingness to take risk, and I think that when you look at what China's doing again as an example, which is important to be benchmarking ourselves against because they're ultimately who we're competing against on this issue, they go and invest in capacity across the supply chain indiscriminate.

They don't wait until there's an off taker with a firm 10-year commitment or something and they don't wait until there's guaranteed feedstock with such and such concentration that is economic to this degree. They just build capacity and then they go and they find feedstock and they figure out and innovate ways of using the materials, which is frankly why they're so far advanced in terms of what they're doing with electric vehicles and everything else because they have access to these materials and they've created innovation systems that allow them to have no fear about the availability of these materials in the future. And I think to my view, that's actually again, and this is sort of beyond the scope of the question, but one of the biggest concerns in my mind is not whether we're going to have the minerals for the F 35 or whether we can get the batteries in electric vehicles, but it's what is our innovation ecosystem lacking by not having access to these materials at scale, at competitive prices such that if you are doing a startup, you can go and create a new application or a new technology leveraging these materials and what's that going to be that we are missing out on that China will inevitably invent over the next decades and move ahead of us in terms of those end applications as well.

Gracelin Baskaran: That's really interesting. I think one of the biggest challenges we face is how to be competitive with the Chinese state and Chinese backed companies because western companies have shareholders they have to report to, so they are not able to absorb those losses particularly on a quarterback order basis or a year-on-year basis. You mentioned your experience working with rare earth magnets projects, and this is particularly timely given that in December, China banned the export of rare earth technology and processing technology. Two challenges to me when it comes to this, but I welcome your thoughts on it and how we can address it, is that there's technical complexity to developing these processing capacity that China has kind of held on to. And then the second thing is obviously financing, which the U.S. government has made some headway with a few hundred million dollars of subsidies to building these processing capacities. Do you think that we are going to be able to catch up or make meaningful headway without being able to import Chinese processing technology?

Adam Johnson: Absolutely. We have the technical capabilities on the processing side to scale processing solvent extraction is known. The hydrometallurgy and the pyro metallurgy across the critical minerals are known. We're working on new innovation around that related to new proteins that have been discovered that say you can actually recover from lower grade ores to ionic liquids to biological membranes. We have a lot of interesting tech. A lot of it needs to be proven to scale, but we have significant capabilities, and we have great engineers, so we have the chops so to speak. I think question is whether we have labor and some of the other things, but we have the ability to do this. I think the question is whether we have the political will to really scale this with the risk appetite that I believe is ultimately going to be necessary.

Gracelin Baskaran: Are we able to do this in the near to medium term? We know that more and more export restrictions are coming in and they don't give us the luxury of saying we're cutting off export in two years. They pretty much go into effect right away. So, are able to build this capacity quickly?

Adam Johnson: Yes and no. So, if there was a blank check that said, let's go build this capacity, absolutely we could go build that capacity. The big question is where does that check come from and what again is the risk appetite associated with that check? I think that we are seeing challenges in terms of project delays. We are seeing challenges in terms of labor and availability and competition for labor, whether you're scaling up processing or manufacturing of advanced materials, you have to compete for labor and you have to pay them and you have to say, come work and be a machinist here or be an electrician here versus going and working at that new facility that's building semiconductors or automobiles or whatever else is out there that people are competing against in what is I think a declining pool of labor force relative to what's needed in manufacturing and industrials. So those are the core challenges I think is doing this at scale and then who is going to ultimately be writing those checks.

Gracelin Baskaran: And I think this gets to the beating heart of public-private partnerships, public-private partnerships can be a risk mitigation tool ultimately because it means that nobody is bearing all the risk, nobody is bearing all the costs, and nobody is bearing all the technical know-how that you need to get a project off of the ground. In your experience, how should public-private partnerships be structured to boost investment in critical minerals while still ensuring sustainability and sustainability on multiple front? We know that there has been increasing pushback from some U.S. policy makers about debt and fiscal overreach, so there's a little bit of a hesitancy to continue spending on that end, but there's also other challenges that we're facing with sustainability. Environmental concerns processing is not necessarily the cleanest production and processing aren't very clean, which is again one of the challenges with permitting. How do we structure a public-private partnership amidst these challenges?

Adam Johnson: I think it would be great if there was involvement on government in a way that could help identify partnerships across the value chain. I think that one challenge is if you are thinking about investing into processing or mining or the advanced manufacturer of materials and you're working with a partner and then ultimately you find in the news the next day that some other company is getting a huge check from the government and you're going to have to now compete with them or now your project looks less economic and you have this constant complexity around how you coordinate that from a private standpoint. And I think that working with the government, I think more deliberately on sort of the entire value chain instead of independent projects would be very helpful. To that end, there are also I think methods for taking what is really strong technologies across the national labs as well as the universities, and I think working more deliberately around commercialization of those with private industry, I would like to see that happen at a greater pace.

Gracelin Baskaran: This has been a fascinating conversation. We've touched on geopolitics creating an innovation ecosystem, risk management financing, public-private partnerships. My last question is this, looking ahead, there is a little bit of doom and gloom that we hear about of the U.S. is not making enough progress and the U.S. is not going to be able to meet its demand and the U.S. is not equipped and will not be equipped for the future of dealing with critical minerals. But from your perspective, what emerging trends or untapped opportunities exist in the critical mineral sector and what should investors be aware of which will in turn then enable them to best position themselves in a rapidly evolving landscape? You and I both know you've been in critical minerals for about five years. I've been in the space for about 10 years, is there has been a rapid uptake of activity in the last three years and that's not a significant amount of time. So being able to pivot to find opportunities and address the challenges requires an incredible amount of agility. What trends and opportunities do we need to be aware of to remain agile?

Adam Johnson: I'm incredibly optimistic. As you said in the last three years, we've seen rapid efforts for deployment around initiatives from the U.S. government, but also that's being mirrored I think really aggressively from the private sector. I think that the enthusiasm for the space and the challenge is growing. I think that we have seen a great market response in terms of an ambition to go after this, so I think that we'll continue to see that evolve in new and surprising ways. I think that we will see increases in private capital across the value chain. I think there are some areas that are really starting to see more investment. I've been incredibly lucky to be a part of multiple projects that have sought and secured financing for well-thought through well-structured business cases. And I think that we'll continue to see that we're seeing that in other areas. I think lithium has grown in maturity and we'll see technical innovation follow because as more capital is being spent, we will continue to see technical innovation. I think that we have to continue to push leadership in the space and have the goal ultimately of becoming a true competitor on a global scale because without that we'll continue to see cycles of boom and bust. And I think that this is too important to allow that to be the ongoing trend cycle.

Gracelin Baskaran: I love a good amount of optimism and I think you're right. I think the amount of interest from the private sector investing both domestically and abroad has been exciting to see and I think we're only going to see an increase in that. I would add that one of the challenges you mentioned price volatility earlier is that the price outlook can be a deterrent. Mining companies we've discovered are oddly price sensitive even though it's very much a long-term venture. For me, one of the things that I lose a little bit of sleep about is how we ensure that investments are a little bit less price sensitive knowing that the mining sector is inherently boom and bust and full of cycles. I don't know if you have any thoughts on that to wrap up.

Adam Johnson: I think that that gets solved with market maturity a little bit. This is a very new space in terms of investing at the scale that's needed and ultimately volatility declines as the markets mature. It doesn't ever go away. I think to your point, it's always sort of odd in the space where you see lack of capital because of price declines currently for businesses that are going to be making their cash flows in five years from now and you look at the bigger demand cycles and you say, okay, well there's a mismatch. Investors should see that as an opportunity. The challenge is that price volatility today is indicative of the influence of a major monopoly in some ways and immature markets. And so, when you're an investor, you are also investing against that, right? You're investing against sort of that maturity curve and you're investing against a monopoly. And I think that those are very scary scenarios to be investing into. And so, I do empathize with investors and I do think that we have to be very pragmatic while maintaining the optimism.

Gracelin Baskaran: Absolutely, and the copper sector has left me feeling a bit optimistic. I woke up this morning and thought about copper prices going up and thought it is a more mature sector than other sectors because we need copper for everything. So, I'm hoping that investors follow the copper track. Adam, it's been such a pleasure to have you here. Thank you so much for joining me and I look forward to seeing more of what you're doing in the mining space going forward.

Adam Johnson: Thank you so much for having me, Gracelin. It's a pleasure.

Lisa Hyland: Thanks to Adam for joining us this week. We look forward to having him back soon to share more insights on Critical Minerals. You can also check out Gracelin’s work on Critical Minerals through our website and we've included a few key pieces in the show notes. Find more episodes of Energy 360 wherever you listen to podcasts. Find us at csis.org and follow us on social media for the latest updates from our team. As always, thanks for listening.

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