Early in 2023 the European Commission officially published its Critical Raw Materials Act. The Act represents a powerful achievement summarizing the EU’s aim to ensure a secure and sustainable supply of critical raw materials for Europe’s industry. The EU recognizes, firstly, that critical raw materials are needed for the green and digital transitions; secondly, that the EU is not alone in a global economic market where long-term competitiveness is key; and, thirdly, that economic and social autonomy for the EU is determined by a diversified source of critical raw materials in a geopolitical climate where access to and control of natural resources are considered strategic by many different jurisdictions.
The structure of the Critical Raw Materials Act addresses concerted internal and external actions. The EU recognizes that domestic supply chains are to be strengthened and that international engagements are to be reinforced to develop partnerships with third countries. The Act prepares for growing the European capacity, by identifying strategic projects domestically and in third countries that occur along the raw materials supply chain, from identifying and extracting strategic raw materials, to the processing of these materials, their transport, utilization, and ultimately their recycling. These strategic projects are candidates to potentially benefit from enhanced permitting procedures and from coordination of support to improve access to finance.
Identification of projects, enhancing permitting procedures, and improving governance frameworks represent a significant exercise in meeting the goals of the Critical Raw Materials Act. However, access to finance, streamlining funding, and building a concerted effort between financing parties underpins the success of the EU Critical Raw Materials Act. It is of vital importance to understand what “access to finance” will mean in reality; who will be providing capital, for what objective, and at what cost and terms?
AfricaMaVal: Powering the EU’s Raw Materials Act in Africa
The EU funded AfricaMaVal project, coordinated by BRGM, the French geological survey, represents a perfect geographic subset of the goals and structure of the Critical Raw Materials Act. The Project started mid-2022 and it provides assistance to the EU Critical Raw Materials Act by identifying strategic projects along the value chain on the African continent and in promoting engagement with African partners and stakeholders. Furthermore, AfricaMaVal supports the responsible development of the minerals sector across the value chain in Africa to benefit the African economy.
Like the Critical Raw Materials Act structure, access to capital is a crucial component of AfricaMaVal. A dedicated work package has been designed to assess “Financing instruments and funding requirements” and is led by HCF International Advisers.
Navigating Complex Financing Considerations for Raw Material Projects: Bridging the Gap in Risk and Funding
To understand the importance and complexity of financing in the context of AfricaMaVal and the EU Critical Raw Materials Act, it is critical to understand that projects exist at various stages of maturity (resource/market definition, feasibility study, pre-production, construction, expansion, etc) and at different points along the value chain (extraction, processing, transport, utilization, recycling). Adding further complexity is the fact that a project’s maturity and position in the value chain dictate the risk associated with financing, and therefore the parties who may or may not be willing to provide funding and under what conditions that funding can be made available.
The sources of available financing are also influenced by the standard to which projects have addressed technical, environmental, social, market, and stakeholder considerations. Projects that can demonstrate that these factors are well understood, have mitigated risk where possible, and can provide a return on invested capital, will have access to a larger pool of financing, on more favourable terms, from a more diverse group of parties.
Legislation like the EU Critical Raw Materials Act and projects like AfricaMaVal will play an important role in helping to unlock the supply of critical raw materials and expansion of the value chain. To do so, they must directly or indirectly help to bridge the gap between the financing requirements of projects and the risk tolerance of financing sources. While the list of potential financing solutions is expansive, a few ways that these goals can be achieved are by providing funding to derisk projects to a financeable level, directly fund strategic projects deemed too risky for commercial funding solutions or encourage commercial lending through loan coverage or guarantees.
HCF’s Role: Unlocking Financing Solutions for Raw Material Projects
For two decades HCF International Advisers has been advising mining companies and mineral development companies in establishing funding strategies, and in structuring funding solutions with capital from various sources, to benefit the construction or expansion of raw material production sites. HCF International Advisers holds a well-articulated knowledge of the financing sector, financing instruments, and the stakeholders involved. Individual team members contribute combined know-how from the mineral resources, engineering, and financing sectors. The company has extended experience in working with Export Credit Agencies, with Development Finance Institutions, and in establishing political risk mitigation strategies, in many jurisdictions around the world, including a large number of African countries. Lastly, HCF’s participation in EU-, US-, Canada-, and Australia-led discussions and roundtables ensured the team is familiar with what various developed jurisdictions are trying to achieve from a financing perspective in securing the supply of critical raw materials to their respective industries. Securing supply for critical raw materials has triggered a form of competition amongst developed countries, and the EU must act decisively to keep pace with its peers.
The purpose of HCF’s work in AfricaMaVal is the assessment, identification, and structuring of potential sources of funding. It is important to understand that the outcome of the work will not be a pool of capital ready to deploy, but rather an inventory of structures and financing solutions for which potential financiers will have appetite for. The work will determine available sources of financing for mining projects in Africa. It will determine what constitutes an attractive opportunity for investors, lenders, and/or other financiers. It will provide the necessary tools to assess the attractiveness of a mining project as well as a check list of items that should be in place prior to seeking funding for the development or expansion of a raw material project.
In this way, HCF is available as a translator for AfricaMaVal partners and external stakeholders as the work conducted will help stakeholders to understand the different technical, financial, and legal languages required to conduct the financing exercise from a risk and credit management perspective. Indirectly, it will also help provide assurance for appropriate ESG (Environmental, Social, and Governance) standards, and appropriate transparency and accountability measures that could alleviate reputational risk concerns of potential financiers. The work provides the opportunity to be a communication vector, working with a developing B2B platform, providing workshops for partners and external stakeholders, matchmaking, and providing guidance through education, information sharing, and communication.
Andor Lips, PhD. MSc. , Senior Advisor HCF International Advisors and coordinator of AfricaMaVal WorkPackage 3 “Identifying financial instruments”
Eloise Nederveen, Executive Director HCF International Advisers
Bryce Albery, P.Eng. MBA, Associate HCF International Advisers