In Search of Battery Metals, BHP (NYSE:BHP) Ready to Expand to New Jurisdictions

Brazzaville, called Pont de Corniche, opened 2016, connected with the Route de la Corniche in the Democratic Republic of Congo.

Mining companies often need to contend with adverse factors and environments. Mining requires a complex infrastructure of mining equipment, transportation, and resource management. The last thing miners want to contend with is a dangerous or politically unstable jurisdiction. 

However, some companies are finding that the risk far outweighs the reward and are willing to work in jurisdictions often avoided by most companies. This includes countries that contain deposits of metals and minerals gaining in value and demand, making the investment and risk worth the effort.

BHP (NYSE:BHP) is one of those companies, as CEO Mike Henry recently said that BHP is prepared to shift out of its usual operational comfort zone of advanced economies to work in “tougher jurisdictions”. Why would BHP take on more risk in countries that have politically volatile environments? To gain exposure to commodities like copper, nickel, or cobalt, for which demand is booming as they are needed for the green energy transition underway. 

Investment in projects in these areas will require careful planning and understanding the political climate of areas typically avoided by mining companies. BHP’s scale and expertise will allow it to manage those risks to capitalize on the potential profits. 

Henry commented, “But of course, the size of the opportunity needs to be commensurate with the increased management effort that is going to be required to pursue opportunities in jurisdictions that we may not currently be operating in,” Henry said. 

Where and When? 

The Democratic Republic of Congo (DRC) is host to Ivanhoe Mines’s (TSX:IVN) Kamoa-Kakula mine, also known as Western Foreland. This mine has been profitable for the company, and BHP is now holding talks with Ivanhoe over an exploration site adjacent to Kamoa-Kakula. 

The DRC  has also made it clear that it wants to open it doors wide for foreign investment, particularly for its copper and cobalt deposits. This would exploring outside of many companies’ “comfort zones”, but would also put companies who invest in these countries at an advantage in the future.

Besides the growing demand for these metals and minerals, there is also the probability that politically volatile jurisdictions could transform rapidly into stable ones, making it even more attractive for mining companies. But the miners who are first into these countries will have more attractive terms and a lower overall cost as incentives are higher and competition is lower.

While BHP is prepared to move into new areas, the company will be exploring opportunities in the “areas we like” as well. That may mean higher costs as some projects become less accessible, but BHP is prepared to invest in the effort to maximise returns in countries it has operational experience.

Henry continued, “I want to be clear we don’t see exploration success as being confined to moving into new jurisdictions. We know there is more copper to be found in the areas we like but it is going to be harder to find and perhaps deeper, which is going to bring different technological and financial challenges,” he said.

The Democratic Republic of Congo’s First Mover Advantage

In an effort to court more foreign investment, the DRC has paved the way for simpler and smoother deals to be made with lower taxes and support from local communities. This has made it a new focus for some miners.

Murray Hitzman, a former US Geological Survey scientist who spent more than a decade touring the southern Congo and advising mining projects, said the region’s rich cobalt and copper deposits began life at the bottom of shallow, ancient seas eight hundred million years ago. Over time, sedimentary rocks were buried under gentle hills, and salty liquids containing metals seeped into the earth and mineralized the rock.

A quarter of the world’s gold, tin and tantalum reserves are produced by artisanal and small miners. The artisanal miners are particularly interested in copper and cobalt; cobalt is a major attraction due to its high value-weight ratio, but efficient copper mining requires large-scale operations. A handful of mines provide semi-formal access for artisanal miners as part of the site, but industrial mining companies are in the default position of refusing to cooperate with them.

Africa Moving Rapidly

In recent decades, African governments have lifted restrictions and privatized their mining industries, attracting significant foreign direct investment. As a result, these industries have been dominated by transnational corporations such as Glencore, AngloAmerican, and Barrick Gold. These companies operate outside the formal reach and control of African governments and sit next to artisanal and small-scale mining sectors.

At the peak of the commodity boom in 2007 when the Democratic Republic of Congo began implementation of the EITI, decades of conflict, political instability, corruption, looting, and mineral smuggling decimated the mining sector, once the country’s growth engine. In the last decade of civil war and conflict, flagship industrial mining has declined, while informal artisanal mining has expanded. Now that peace has returned to most parts of the country and a new democratically elected government is in place, the potential is excellent for mining to contribute to economic growth.

The Government of the Democratic Republic of Congo is also helping artisanal miners to earn a living by opening up new artisanal mining zones. The increasing global demand for battery minerals represents a unique opportunity to develop a model for socially responsible business. The benefits of this model can be applied to the estimated 40 million artisanal miners around the world who work to extract various minerals for a living.

Cobalt is an indispensable mineral used in batteries for electric cars, computers, and mobile phones. Demand for cobalt is rising as electric cars are sold in Europe, where governments encourage sales with generous environmental bonuses. Recent projections from the World Economic Forum and the Global Battery Alliance suggest that demand for cobalt to be used in batteries by 2030 will quadruple as a result of the boom in electric vehicles.

While the country has pledged approximately $6 billion to revamped infrastructure and expanding electricity and water access to new areas, infrastructure remains a major challenge. The Democratic Republic of Congo has one of the biggest minerals reserves in Africa, with copper reserves of 120 million tonnes and cobalt reserves among the largest in the world, over 45 million tonnes of lithium reserves, 31 million tonnes of niobium, zinc, and manganese, and over 7 million tonnes of gold reserves of 600 tonnes. To mine all those minerals takes a lot of energy. 

A 700 MW deficit exists in the former Katanga province in the mining sector, where there are no projects, resulting in 1 GW of energy imports from neighboring countries. However, with companies like BHP looking to possibly enter the country for new projects, all of that could change very quickly.

 

The above references an opinion and is for information purposes only. It is not intended to be investment advice. Seek a licensed professional for investment advice. The author is not an insider or shareholder of any of the companies mentioned above.

By Matthew Evanoff

I cover the mining industry and the best mining stocks around the world. I write about industry news, individual companies, projects, management, and profiles on industry leaders.

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