Challenges in the Mining Industry

By: Carson Ezell

In the mountains of Southern Peru, the Quellaveco Copper Mine—a 5 billion dollar investment by mining firm Anglo American—is set to become operational in 2022. Beyond that, there are relatively few new mining projects under development, especially related to copper.

Nevertheless, the demand for minerals including copper, lithium, cobalt, nickel, molybdenum and rare earth metals is set to drastically increase over the next several decades, led by the push towards renewable energy. Electric vehicles are significantly more mineral-intensive than cars with internal combustion engines, and copper is needed for wind turbines and transmission lines to support the development of massive wind and solar projects. One estimate suggests that the demand for electric vehicle (EV) batteries is set to grow by 87,000 percent from 2015 to 2060, and the demand for wind power is projected to increase by 1,000 percent over the same period. Moreover, with uses ranging from F-35 fighter jets to semiconductors, critical minerals are a strategic asset, and a White House report from June stressed the importance of securing mineral supply chains.

Considering the importance of the mining industry to the future, proper investment seems to have been neglected both by the mining industry and the U.S. Government. During the last commodities “supercycle”—a phrase used when prices exceed their trajectories for an extended period of time—mining firms significantly overspent on new projects. When commodity prices finally decreased around 2012 as rapid Chinese industrialization slowed, the mining industry was left without sufficient returns on its investments, leading to significant decreases in capital expenditures on new exploration and development projects.

Figure 1 depicts the capital expenditures of four of the largest five Western mining companies in the world from 2001 to 2020. The decrease in investment following the end of the last supercycle around 2012, and the lack of full recovery, are depicted. The data comes from the Compustat Global database at Wharton Research Data Services.

Given a mine can take over a decade to begin extracting resources after discovery, demand for critical minerals may outpace supply well into the future, leading to higher mineral prices. Recently, mineral prices have displayed an upward trend, outpacing other commodities such as petroleum.

Figure 2

Figure 2 depicts the prices of 5 commodities from Q1 2016 to Q1 2021 based on a price index (average of 2016 = 100). The upward trend in critical mineral prices is shown to be greater than the price increase of petroleum, which is related to the recent rise in fuel prices. The data was retrieved from the International Monetary Fund’s Primary Commodity Price System (PCPS) database.

The structure of the mining industry also discourages increases in production of certain minerals. Five diversified mining companies—BHP Group, Anglo American, Glencore, Rio Tinto, and Vale—command a large market share across several mineral markets. Since they still have significantly greater revenues from larger markets such as fossil fuels and iron ore relative to smaller markets such as cobalt, they may be discouraged from expanding their mining operations for critical minerals. Furthermore, about two-thirds of global cobalt is being mined within the Democratic Republic of the Congo, where human rights concerns plague the mining industry. Many Western firms, with the exception of Glencore, stay away from the region entirely.

The United States’ reliance on global supply chains for minerals, which are largely concentrated in China, also worries some officials. The U.S. relies on imports for 78 percent of its cobalt demand and 100 percent of its rare earths demand, with 80 percent of its rare earths coming from China. The only U.S. rare earths mine, located at Mountain Pass, California, went out of operation in 2015 until MP Materials, an American firm, purchased the mine in 2017. Even still, rare earths mined at Mountain Pass are sent to China for processing.

To strengthen domestic supply chains, the U.S. Department of Defense has given out several contracts to American firms. The new investment can also serve to boost supply and stabilize prices in the foreseeable future. MP Materials was given a grant to develop its rare earths processing capacity within the U.S., and Lynas was also awarded a contract to develop a rare earths processing plant in Texas. The Biden Administration also approved a controversial proposal for Resolution Copper, a joint venture between BHP Group and Rio Tinto, to access an Arizona copper deposit within the Tonto National Forest. The land, known as Oak Flat, is sacred to the San Carlos Apache Tribe.

U.S. government investment in strengthening critical mineral production and supply chains is progress, but it may not be enough. To ensure that supply can keep up with rapidly increasing demand for critical minerals over the next decade, comprehensive public and private investments in exploration, mining and processing are needed. As the race to transition to a green economy continues to heat up, the struggle to continue to develop the mining capacity to support it will continue below the surface.