Auxilium Mining Advisory Update: Critical Metals – Nickel and Lithium Focus – Timing is Everything in Mining

The tide can turn quickly and relentlessly in the mining cycle. Go back 12-18 months ago and even mid 2023 and we had experienced substantially stronger metal prices for nickel and lithium than at present. This also entailed strong investment in these critical metals and a rush of new IPO’s hitting the market.

As we have seen so many times before in mining, “timing” can be everything!

A number of factors have impacted the slump in the nickel and lithium prices including EV sales not to forecast, China’s subdued or controlled demand (for now) and domestic Indonesian nickel supply. All of these factors were known to the market as key risks to pricing however the speed and quantum of the decline has taken many players by surprise or without adequate time to fully prepare for the movement.

We have since the start of 2024 observed a number of key WA nickel projects being mothballed and some subject to formal restructurings along with a number of lithium projects being scaled back for now in terms of exploration spend and construction capital being reduced. The question everyone is asking is “when will prices rebound”, “to what extent will they rebound” and “what will be a longer-term price medium”? This is the million-dollar question and timing is everything in mining!

Even the big players have been impacted by this decline in pricing including the likes of BHP with recent headlines of the future of NickelWest.

Strategy is now ever so critical for players in these metals (albeit strategy should always be on the mind of the leaders within the project) particularly those with less diversified portfolios and weaker balance sheets, (largely explorers or near-term producers). In the near term, those that need to, and can raise capital, will likely do so at heavily discounted equity valuations and at lower amounts of capital that avid investors would have been willing to risk 6 – 12 months ago. We are also likely to see at the junior end for exploration projects, an increase in Joint Venture of Farm-In type arrangements where the risk of exploration is shared with other parties, albeit a piece of the pie will be potentially shared.

Notwithstanding the above, where there is pain there is gain, and opportunity for those willing to support fundamentally robust projects as we wait for the tide to change. We have seen a number of well-known mining investors continue to significantly invest in critical metals despite current market conditions.

We have been pleased to see the Australian Government pay prompt attention to the sector and put forward a number of initiatives to support miners including certain nickel royalty relief and grants for exploration of critical minerals. We reserve our judgement on the effectiveness of these initiatives for now but will explore their success or otherwise later this year.

Auxilium Mining Advisory’s Key Thoughts

In the interim, those players caught in the changing tide should be looking to:

• Potentially re-prioritise capital spend relevant to their views on timing of when metal prices will return to an acceptable rate of return for their project;
• Where capital permits consider strategically whether further diversification of their company’s portfolio may be justified to spread risk;
• Consider strategies to share risk and spend on exploration projects with joint venture or farm-in type arrangements;
• Consider upcoming debt commitments and early communication with lenders and stakeholders regarding any restructure to facilities or new capital required to support ongoing project activities;
• Take a breather where exploration or construction activities may be halted or slowed to carefully re-assess the risk profile of their project(s) and bolster risk mitigation initiatives; and
• Consider the implications both financially and practically of mothballing or delaying operations or construction of projects in line with the timing of forecast pricing expectations i.e. don’t miss the boat if pricing improves quickly but similarly do not continue to burn your existing project’s resources where not financially viable to do so.

Here at Auxilium Partners, we are one of Perth’s most hands-on experienced and trusted mining and resources restructuring and advisory specialists, helping clients not only through difficult and complex situations but also assisting our clients in preparing for the future in times like now to ensure long-term preservation of assets and helping build robust corporate strategy and culture to deal with changing tides.

For a confidential discussion on any issues that may be on your mind please do not hesitate to reach out to us.