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06 April 2018

Copyright 2018 The Financial Times Ltd. All rights reserved.

Mining companies and their financiers cannot be sure whether what they are doing is compulsory or forbidden. Or both. Governments, investors and lenders in the developed world have a growing disdain for the so-last-century business of mining. That attitude should be reconsidered if we want a clean-energy economy.

For example, it has been known for some time in Europe, America and Japan that cobalt will be a necessary material for high-performance batteries for at least the next decade or so. Yet almost all the available finance for new cobalt production has come from Chinese investors and lenders.

So it should not be a surprise that by 2022, according to Bernstein Research, Chinese companies will control about three-quarters of the new mine supply of cobalt, and just under half of the world’s total production. The remaining supply will come mostly as a byproduct of nickel and copper mines scattered across the globe.

While Europe and America were generating slide decks and seminars about clean energy, the Chinese were buying mines in Africa. You can be certain that the Chinese industrial strategy will go beyond selling cobalt ore to selling electric batteries and vehicles to the rest of the world.

Maybe one could imagine a series of miracle breakthrough technologies that reduce the requirement for cobalt for electric vehicles and mobile devices. Then the Chinese would be left with a lot of surplus cobalt in the Democratic Republic of Congo.


Raising living standards

Even in that fantasy world, we will need a lot more copper, vanadium, lithium and other minerals to raise world living standards. Poor farmers in India with kerosene lamps will want electrified houses. Africans need electric generators and transmission lines to build an industrial economy. Of course the workers and peasants of Greenwich and Palo Alto need cars and multiple mobile devices.

If you think a class of oil company shareholders controls energy policy, wait until you find out how few companies control mining and mining finance. Before the October 1973 Middle East war, the “Seven Sisters” of international oil companies were supposed to rule the energy economy. They were then displaced, first by Opec members and other national oil companies, and then by smaller “independent” companies that eventually sponsored shale oil and gas development.

There is a reasonable case to be made that a very short list of mining companies collectively have more of a lock on new, private, non-ferrous metals finance than the Seven Sisters did over oil. Their managements, mind you, would laugh bitterly at the idea. Every day they are beset by tax and royalty demands by their host governments, not to mention ever-tightening environmental regulations. Still, try to start a new mining company without a rich state sponsor.

In the past several years the Chinese state-sponsored metals companies have managed to work and push their way to the top table. But even with today’s relatively favourable metals prices there are few real challengers to Glencore, Rio Tinto, BHP Billiton, Freeport-McMoRan, Anglo American and a handful of their peers.


Project financing

Part of the reason for this is the much more restrictive regulatory environment for project financings. All bank financing became more bureaucratised and risk-averse after the global financial crisis. But there was a sentiment that project financing for infrastructure and, yes, mining, could be structured in ways that would give some reassurance to the regulators and risk committees. That provided an opening for less well capitalised new entrants.

Obama administration officials took the lead in seeking more stringent rules for what the Basel committee of banking supervisors calls “specialised lending”. When the deregulation-happy Trump people came to power, there was a belief that this complex and previously self-regulated activity would receive less attention from the supervisors.

Nope. At the beginning of the year, the Basel committee, with American support, produced a slightly fudged set of agreed rules for “floors”, “slotting”, “losses given default”, and so on for the world’s bank lenders. “Specialised lending” (including project lending) would be reviewed “in due course”.

While that sounds like a loophole, project finance bankers understood it as a yellow-to-red signal. As one European specialised lending banker tells me: “Project finance is [risked] much the same as unsecured corporate loans, or even higher, because [the new rules] penalise the construction period. That is not right, because well structured project finance should be safer.”

Project financings are typically secured by contracts for the product or use of facilities, and incorporate commodity price, currency and interest rate hedges. The effect of the new Basel rules is a noticeable narrowing of the window to new entrants to an industry, who may be sponsoring sound investments but who do not have access to the public equity or corporate bond markets.

That would include smaller mining companies. While mining may not sound as politically appealing as infrastructure, you do not get to build that nice green infrastructure without metals and minerals. Someone has to dig those up and refine them. If new entrants are not given a well-watched financial path, then the materials will be produced by oligopolies and state enterprises.

Copyright 2018 The Financial Times Ltd. All rights reserved.

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