Five eyes on critical minerals

A key theme emerging from the COVID-19 pandemic in Australia was national supply chain integrity and resiliency. This, in combination with global decarbonisation efforts and geopolitical tensions, has triggered a recognition within the Federal Government – as announced by the Treasurer, Jim Chalmers in his recent address to The Australian Critical Minerals Summit – of the need to move Australia “up and along” the critical minerals value chain as part of a refresh of Australia’s Critical Minerals Strategy. Repositioning Australia in the critical minerals value chain will require significant investment. This poses the question of how, and in what form, does foreign investment fit into that picture.

The Treasurer made it clear in his address that Australia will be adopting a more assertive position when it comes to assessing whether foreign investment is in the national interest. In doing so, the Treasurer said that Australia, in close cooperation with key international partners, will be developing a more sophisticated and data driven method of monitoring foreign investment patterns in critical minerals.

Australia is a member of Five Eyes – an intelligence sharing alliance which emerged out of World War II that also includes the United States, the United Kingdom, Canada and New Zealand. Investors from Five Eyes nations, together with investors from other key partners (including Japan and South Korea), already benefit from a favourable approach from the Foreign Investment Review Board (or “FIRB”) in its assessment of foreign investment proposals.

Historically used for espionage and defence intelligence, Five Eyes has been utilised for other purposes. For example, in 2012 Five Eyes established the “Critical Five”, which was tasked to determine infrastructure assets that were considered critical to national security. In today’s environment, a focus on supply chain resilience and self-sufficiency in the critical minerals sector seems to be a natural extension of that function. This is already happening to some extent: the US, Canada and Australia have formed the Critical Minerals Mapping Initiative, with its stated aim to “build a diversified supply of critical minerals in all three countries and establish a foundational understanding of each country’s geologic framework”.

Given prevailing geopolitical tensions, it is likely we will see a more coordinated and collaborative approach between a “Five Eyes+” network in relation to foreign investment in Australia’s critical minerals sector in the future. And while this might be a positive development, in formulating Australia’s updated Critical Minerals Strategy, it will be important to ensure that the policy settings are not unduly protectionist or have the effect of limiting foreign investment in the sector to investors from a select group of countries.

This is important for a number of reasons.

First, while the market dynamic for critical minerals is currently positive (which is providing a broadly accommodative capital raising environment), that may not always be the case. Take lithium as an example. Most analysts expect lithium prices to moderate in the coming years. Domestication of downstream processing of spodumene in Western Australia is at a nascent stage, and the majority of sector participants currently operate at the lower end of the lithium value chain and are (or will be) capital “hungry”. While Government funding programs, including the Northern Australian Infrastructure Fund and Clean Energy Finance Corporation are available to certain companies and projects, access to private capital will remain important. To that end, it would be prudent to establish an “all weather” foreign investment policy setting to ensure that Australian companies (particularly those in the junior to mid-market) have access to a range of foreign capital sources when market conditions may be less favourable.

The second is sovereign risk. There are signs of a more assertive approach to foreign investment in the critical minerals sector among Australia’s Five Eyes partners. For example, the Canadian government recently ordered certain Chinese companies to divest their interests in three Canadian critical minerals companies. It attributed its decision to advice from the security and intelligence community and other government partners. There is scope for Australia to follow suit through the Treasurer’s ability to exercise relatively new “call in” and “last resort” review powers. While unlikely, if Australia was to follow Canada’s lead, it would raise Australia’s sovereign risk profile and likely have a cooling effect on investment proposals from the affected jurisdictions. Those companies seeking to move up and along the value chain may find it commensurately more difficult to fund project development. 

Time and money is a third factor. By its own admission, FIRB is taking longer to review applications for transactions, and our experience is that transactions in the critical minerals sector are particularly affected. This is partly due to the consultation process FIRB undertakes with key government departments in scrutinising an application (including the ATO, Department of Defence and the Department of Industry, Science and Resources). If this consultation process is widened to include Five Eyes and other international partners, it runs the risk of further protracting the FIRB approval process. Delays to closing M&A and capital raising transactions (which are often subject to FIRB approval) will only put Australian companies at a commercial disadvantage.

And these days, if a foreign investor seeks anything more than a 10% economic interest in an Australian critical minerals company, it will likely fall into FIRB territory. In our experience, the market approach has evolved to err on the side of seeking FIRB approval even if it is not mandatory. This is despite FIRB application fees doubling this year (which are not refundable for rejected applications). If, by virtue of the Government’s updated policy settings, a particular investor has little prospect of success with its application, it does not strike as being particularly fair to require the investor (or the company it proposes to invest in) to go through the expense and time of a FIRB application.

It is encouraging to see Government recognising the value of Australia’s natural endowment of critical minerals and the potential to optimise that value through the domestication of midstream and downstream processing. That said, it is increasingly viewing foreign investment in critical minerals through a national security lens and involving international partners in that process. While that might be prudent, the Government’s approach should be as transparent as possible and calibrated in a way that does not unnecessarily close off the foreign capital sources needed to move Australian companies up and along the value chain.