How co-ownership and common-user infrastructure can kickstart Australia’s new economy minerals boom
The Australian Government’s Critical Minerals Strategy 2022 lists 26 minerals as priority areas for development and investment in Australia. These minerals are not new discoveries, but their application to new technologies presents a significant economic opportunity for Australia: they represent a transitional sector which will reduce carbon emissions, and are a major national security consideration. Despite this exciting opportunity, project developers continue to face the challenges experienced by any new entrant to the resources sector, the most significant being upfront capital costs for project development and delays in obtaining the required approvals.
Australia has an opportunity now to apply learnings from past mining booms, by setting a strategy from the outset that both enables efficient project development, and delivers long-term financial benefits. In particular, we see a significant opportunity for the development of ‘co-use’ and ‘co-owned’ infrastructure for the processing of critical minerals. This article explores how this might be achieved.
State of play
One of the greatest hurdles for Australia’s critical minerals industry is not the lack of resource deposits, but rather, the lack of an established supply chain capability, specifically in relation to transport, processing and manufacturing.
Global demand for critical minerals is increasing, including for lithium, nickel, vanadium and cobalt, and while this places Australian producers in a prime position to become a leading global exporter, we continue to process very little onshore. Further, we are competing with other countries, particularly China, who are already well-established in the critical minerals production market.
Adding to this, the effects of COVID-19, combined with recent political and trade challenges with China and Russia, have emphasised the importance of a resilient and stable supply chain. We’re already seeing overseas investors such as Tesla, Ford and Toyota engaging with the Australian Government in respect to co-investment in critical minerals processing developments. As a result of these market pressures Australia is left in an excellent position to capitalise on this current and unique opportunity.
What are the challenges?
A key difference between the extraction and processing requirements for critical minerals, compared to Australia’s signature mining commodities such as iron ore and coal, is that once out of the ground, critical minerals usually require extensive processing to produce a useable resource. The processing stage is technologically complicated, can require significant amounts of water and energy and can produce tailings which often require storage and appropriate management.
These factors are further compounded by the fact that critical mineral deposits are commonly discovered in remote locations with limited or no access to established infrastructure including water supply, reliable electricity and rail connections. This culminates in significant upfront capital requirements for developers of new projects, and creates barriers to timely development or expansion of these resources.
The large upfront capital expenditure and the tyranny of distance are not new hurdles for the Australian resources sector, and there are many examples of these issues being overcome with public sector investment – the Bravus ‘royalty holiday’ being a prime example. However, without a developer willing to invest large amounts of capital, and without public sector commitment to providing further financial or regulatory support, the development of critical mineral hubs may stall, and the opportunity available to the resource rich states of Queensland, New South Wales and Western Australia will diminish.
Opportunity for change — what is ‘co-use’ and ‘co-ownership’?
During the height of the early 2000s coal boom, miners invested significantly in the construction of wash plants and other infrastructure on-site, to ensure access for coal production and to reduce transport and other costs.
Recently, we have seen smaller coal miners enter into toll washing and access agreements with neighbouring coal miners to carry out the wash process, as the capital expenditure required to construct dedicated wash facilities for each new mine has become commercially unviable or untimely. While this tolling model adds transport and other costs, and relies on a suitably located facility having washing capacity, it provides smaller miners with a stronger balance sheet and avoids significant upfront capital output, while retaining the ability to capitalise on current record coal prices.
Taking these lessons from the coal industry, we see a ‘co-use’ and ‘co-ownership’ model as a path forward for critical mineral miners to carry out their operations and add value to their product onshore.
A ‘co-use’ and ‘co-ownership’ model involves multiple parties pooling their resources to achieve a mutual advantage. There are existing examples of this, being:
- a publicly-funded, common-user new economy mineral processing plant in Townsville, which will initially process vanadium. The project will give developing vanadium miners access to a shared processing facility to assist in the export of their mineral, while reducing overhead costs and lead times; and
- a private co-use and co-ownership enterprise – the Newcastle Coal Infrastructure Group – which is an incorporated joint venture between BHP, Yancoal Australia, Whitehaven Coal, Peabody Energy and Banpu Public Company that owns and operates rail, coal storage, ship loading facilities servicing the Hunter Valley. In Queensland, a similar model is used at Wiggins Island Coal Export Terminal in North Queensland, which is also an incorporated joint venture between Aquila Resources, Glencore, Coronado Curragh and Yancoal that owns and operates similar port infrastructure.
Each project involved multiple parties in the same sector funding the development, construction and operation of port infrastructure to ensure access and capacity. While this latter example is a more traditional case of co-use and co-ownership, more creative arrangements can also be adopted. These arrangements may include each party contributing different assets ‘in kind’, such as land, capital or technology. It is rare to find an explorer with all three attributes, and by pooling resources and spreading investment risk between participants, each party will receive stronger financial and operational outcomes.
Choosing the most effective structure
There are various corporate structures that can be adopted, each with their own advantages and drawbacks. The appropriate structure will depend on the specific circumstances of a project including location, minerals and development stage.
Some common corporate structure options include the following:
- Incorporated Joint Venture – The establishment of a special purpose corporate vehicle (Project SPV) is a common structure and is more suited to critical minerals processing than other stages of the mining process, such as mine development or operation. This is because once the mineral is extracted, there is no need to attribute ownership of the extracted resource as would otherwise be necessary in a traditional mining unincorporated joint venture. Under this structure, the Project SPV owns and operates the facility, with ownership interest in the Project SPV based on value contribution. The Project SPV contracts with each party separately to provide for that party’s use of the facility (which is determined in advance). There is also significant flexibility in respect to a party’s financial contributions, which can be undertaken through either debt or equity advancement.
When to use: The Project SPV model is most suited for situations with relatively similar parties or standing, as it emphasises joint control and requires significant cooperation and aggregation of resources.
- Unincorporated Joint Venture/co-development agreement – As a more ‘traditional’ approach for a resources project, the use of an unincorporated joint venture or co-development agreement is suited to situations where parties may be contributing different types of ‘value’, such as land, experience or capital. The parties agree on their relevant participating interests and contributions and establish or engage a separate company with the appropriate experience to operate and maintain the facility. In exchange for their contributions, parties are guaranteed capacity in the processing plant and other rights in respect to the management and control of the facility. Ongoing funding is made by way of cash call in proportion to the parties’ participation interest.
When to use: This model is suitable for parties at different stages of development and/or who contribute different forms of value. This model also more readily facilitates third-party engagement for operation of the facility.
- Contracting for long-term capacity – This structure is ideal for situations where one party is able to take control of development, operation and management of a processing facility, but may not have suitable financial backing to start development. Under this structure, parties enter into a processing agreement whereby they agree to long-term arrangements which can be used to underpin the development and financing of the project.
When to use: This model is most suited to situations where there is one agreed operator with the necessary skills, as this model requires parties to enter into long-term contracts. This model also has the flexibility to allow each party to contract for capacity by making advance payments to assist with project’s funding development (i.e. with the advance payment amount to be offset against future processing fees). Further, surplus capacity can be offered to other market participants to underpin the financials of the project.
These corporate structures are just a few examples of what parties with common interests can agree to. Although the arrangements ultimately agreed in any particular case may be more ‘bespoke’, when assessing which structure is right for each project, the key factors which remain consistent are:
- the parties’ mutual goals;
- compatibility of processes; and
- confidence in the other parties’ ability to perform their obligations.
This assessment process will require detailed financial, legal and technical due diligence, but the resulting capital and time-cost savings may be significant.
Like the development process for most projects, selecting the right corporate structure is just one step towards project development. The next step is ensuring suitable approvals have been obtained that reflect the proposed arrangement. The development and operation of shared infrastructure presents a number of challenges and opportunities from a planning approvals perspective.
Key considerations include:
- land access and ownership;
- responsibility for undertaking environmental assessments and obtaining approvals; and
- ongoing operational compliance with approval conditions and statutory obligations.
Beyond the significant financial benefits that can be achieved by utilising co-use and co-owned infrastructure, there is a long list of positive environmental outcomes, such as reduced vegetation clearing and lower cumulative noise, dust and water impacts.
Development of any project of this scale will present a myriad of environmental issues that need to be addressed during the environmental assessment and approval process. Common issues that miners are confronted with for this type of development include:
- biodiversity offsets;
- water licensing;
- native title and Aboriginal cultural heritage;
- bushfire risks; and
- traffic management.
With the public and private sector working together to develop Australia’s onshore critical minerals processing and manufacturing sector, we see an opportunity for government to play a key stakeholder role in the environmental assessment and approval of co-use and co-owned infrastructure. This will ensure that a robust process is undertaken, while a timely outcome is achieved. This potential could be realised during the following critical steps:
- There is a clear opportunity for government to pave the way for miners, by kick-starting this sector through initial funding, approval and construction of shared infrastructure. One scenario could involve state governments using existing Crown land, or using compulsory acquisition powers to secure land in centrally-located areas near tenement clusters or port facilities, to construct common-user processing facilities. This approach would be similar to the NSW Government’s establishment of EnergyCo to advance the development of renewable energy hubs in NSW, which are essential to supporting the broader renewable energy industry.
- In order to progress environmental assessments and planning approvals for a common-user facility, the detailed design of the facility needs to be resolved. This requires input from the mining sector to ensure that the operational design of a common-user facility meets the current and future needs of the industry. This will be particularly relevant if the developers of the facility intend to sub-let excess capacity to industry in the future. If government and industry are able to align on the key components of a common-user facility, then this approach has the potential to produce long-term benefits for the broader industry and economy.
- The next step is to ensure that these precincts have access to electricity, water and rail which are necessary to process critical minerals. In terms of linear infrastructure including water pipelines and rail infrastructure, government could again fast-track the environmental assessment approvals for such essential infrastructure, so it is established in a centralised location. Each miner would then ordinarily be responsible for progressing the approvals and construction of significantly shorter segments of such infrastructure to their respective mine site or to privately-owned common-user processing facilities.
- The final piece of the puzzle is the upfront capital investment that will be required to construct the infrastructure. While the federal and state governments already provide grants and low-interest loans to miners to fund the construction of these projects and the associated infrastructure, realistically the size of any government contribution for an individual project is not sufficient to ensure that the project can proceed. Therefore, government needs to either significantly increase their financial contributions to bolster the whole industry, or take active steps to develop common-user infrastructure for the benefit of the broader sector.
A coordinated approach is required from the public and private sector to ensure Australia’s onshore critical mineral processing and manufacturing sector gets the opportunity it deserves.
The development of a critical mineral processing and manufacturing sector in Australia will generate significant national, state and local economic and employment opportunities for decades to come. However, significant upfront investment is required to unlock the benefits which could be achieved from Australia’s abundance of critical minerals.
Co-use and co-ownership of infrastructure allows participants to spread and share their financial risk, with the added potential to speed up development timeframes for groups of projects. If upfront and operational costs are shared between many users, and supported by government, there is potential to reduce ongoing costs and an added benefit of sharing or sub-contracting surplus capacity to bolster efficiency. Co-use and co-ownership truly do offer a ‘life-of-mine’ benefit. Although co-use and co-ownership arrangements can be complicated to initiate and document, with so many participants being at the same early exploration or development stage, and provided there is genuine whole of government support through financial and approvals support for shared infrastructure, the potential for cooperation in the development of this ‘critical’ infrastructure could be fast tracked for the benefit of all participants and the sector as a whole.
This publication covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. It is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication.