Green future, price volatility demand optimised time to production

By Andrew van Zyl, Director and Pricinipal Consultant at SRK Consulting

The evaluation and planning of new mining projects is being complicated by increased volatility in commodity prices. Much of this volatility is linked to fast-moving research and development in battery technology – where there is considerable scope for improvement. This scope creates uncertainty about which minerals are likely to play the largest role in the journey towards decarbonisation.

To make the appropriate investment decisions, mining companies and project champions have always needed to predict adequate demand and price levels. A recent comment by a platinum executive at the recently held virtual African Mining Indaba, for example, firmly linked the hydrogen economy to a bright future for PGMs. However, despite increased clarity on the likely overall trend the challenge is to have some confidence in price and demand despite the rapidly changing environment and the potential for substitution.

Clearly it would be preferable to have high levels of certainty in demand trends before proceeding with new developments and expansions. However, in practice – and especially in today’s market – this leads to the price spiking as demand grows and supply lags. The lead times to bring on new mineral production range typically from five to 10 years; emerging technology options are driving demand trends over much shorter timelines.

If a price spike is excessive, it creates a strong incentive to find substitutes and can change whether a solution remains economically viable. Those producers already in the game can temporarily make outsize profits, but sooner or later the price declines as a result of either additional supply or, often, substitution reducing demand. If both occur – more supply and a substitute – then the price remains low for extended periods while demand builds or supply drops through natural attrition as mines close.

The upshot is that this volatile-price environment demands more than ever that developers proactively study the options for different scenarios – and dedicate the relatively modest resources that good groundwork requires. Such work is time-consuming but vital, and includes processes such as stakeholder engagement, baseline studies, environmental assessments, water use licences and technical studies, particularly quality pre-feasibility studies that allow companies to identify optimal solutions under different outcomes.

This facilitates a balance between the reasonable business practice of waiting for more confidence in demand and prices and gearing up for a quicker response when those higher prices materialise. This shorter response time reduces the risk of, on the one hand, too much supply entering the market and, on the other, a substitute being developed that will undermine demand.

Right now, the future is a moving target for producers of any mineral that will be affected by global decarbonisation efforts. To seize the opportunities, those quickest out of the starting blocks will be those who have carefully prepared their project pipelines and taken the early steps. Flexible and modular approaches to design and production are also more likely to be considered. Some vertical integration may also create some stability for producers and users.