Critical minerals are a group of minerals that are essential to many high-tech and emerging industries, including electric vehicles, renewable energy technologies, and advanced manufacturing, such as lithium, nickel, graphite, cobalt and rare earth elements (“REEs”).  These minerals are considered critical because of their importance to the economy and because of their potential supply chain risks.

The Australian Government's policy towards the critical minerals sector includes the following key elements:

1. Supporting exploration and development: The government provides support for exploration and development of critical minerals through initiatives such as the Junior Minerals Exploration Incentive (JMEI) program and the $225 million Exploring for the Future program.
2. Promoting investment: The government is committed to promoting investment in the critical minerals sector through initiatives such as the Critical Minerals Facilitation Office, which works to attract investment in critical minerals projects.
3. Strengthening supply chains: The government is working to strengthen critical minerals supply chains through initiatives such as the Critical Minerals Strategy, which aims to secure Australia's critical minerals supply chain and support the growth of downstream processing and manufacturing industries.
4. Supporting research and development: The government supports research and development in the critical minerals sector through initiatives such as the Cooperative Research Centre for Optimising Resource Extraction (CRC ORE), which focuses on developing innovative solutions for mining and mineral processing.

The Junior Minerals Exploration Incentive

The Junior Minerals Exploration Incentive (JMEI) is a program operated by the Australian Commonwealth Government that provides tax incentives to eligible companies conducting greenfields mineral exploration in Australia. The program was established in 2017 and aims to encourage investment in the mining sector and support the discovery of new mineral deposits.

Under the JMEI program, eligible exploration companies can generate a tax credit by giving up a portion of their tax losses from greenfields mineral exploration expenditure. The tax credit is issued to the company's shareholders in proportion to the new capital they have invested in the applicable period.  These credits can then be used by eligible shareholders to offset their own tax liabilities while shareholders that are companies receive the credits in the form of franking credits instead.

To be eligible for the JMEI program, companies must be small exploration companies with no taxable income and have no mining production income.

The JMEI program operates on a first-come, first-served basis, with a limited pool of tax credits available each year. The program is currently intended to run until 2024-2025, with a total pool of $100 million available to eligible companies for the period from 2021-2022 to 2024-2025.

What is included in “exploration expenditure”?

While the JMEI is an important plank in Commonwealth Government Policy, in our view it has certain shortcomings which are particularly pertinent in relation to critical minerals.  Those shortcomings relate to what can be included as exploration expenditure for the purpose of the JMEI.

For the purposes of the JMEI, exploration expenditure includes expenses incurred on activities related to mineral exploration, such as:

1. Geological and geophysical surveys
2. Drilling and trenching
3. Sampling and assaying
4. Environmental studies and monitoring
5. Native title and heritage surveys
6. Overhead expenses related to the above activities.

However, not all types of expenditure are eligible for the JMEI tax credit. The following expenses are excluded:

1. Expenditure on mining production or (as discussed below) feasibility studies.
2. Expenditure on acquiring or disposing of mining rights.
3. Expenditure on buildings, plant or equipment, or any other fixed assets, except to the extent of a decline in value of depreciating assets used for certain exploration or prospecting activities.
4. Expenditure incurred by non-eligible entities, such as large mining companies or entities or corporate groups with mining production income.
5. Expenditure on activities carried out outside Australia or on non-greenfields sites.

What sets many critical mineral projects apart is the requirement for extensive studies on downstream aspects of the project in order to ascertain the technical pathway to production of a saleable product.  This is usually more technically challenging (and expensive) for critical minerals projects than, say, a gold or iron ore mine.  Indeed, these aspects of a critical mineral project development are often more challenging than the exploration geology itself.

Unfortunately, expenditure on prefeasibility or feasibility studies is considered to be part of mining production expenditure and therefore, excluded from eligibility for the JMEI tax credit.  Prefeasibility studies are carried out to assess the technical and economic viability of a mining project, while feasibility studies are more detailed assessments of the viability of a proposed mining operation. These studies are typically carried out after mineral deposits have been identified, and the focus is on developing a plan for mining and production.

To the extent feasibility study work involves the construction and operation of a pilot plant (as is often the case) that, too, would be ineligible expenditure.

Recently, the Full Federal Court considered the meaning of exploration in the context of petroleum exploration in Commissioner of Taxation v Shell Energy Holdings Australia Limited, which extended exploration to include steps take after the discovery of a resource to find or discover its extent, worth or commercial feasibility for exploitation.  The Commissioner, however, has stated his intention to read the decision narrowly and limit the inclusion of post-discovery work within the meaning of exploration for provisions such as the JMEI.

JMEI Reform: The Key to Boosting the Critical Minerals Sector

While pre-feasibility and feasibility studies are important for advancing critical mineral projects, they are not eligible for the JMEI tax credit. 

Our suggestion for reform is simply to extend the categories of eligible expenditure under the JMEI to include pre-feasibility and feasibility study work, where the predominant mineral product is included within the Commonwealth’s list of critical minerals.

We think this will have the desired effect of “crowding in” additional private capital to the critical minerals sector, helping junior mining companies overcome what can be one of the more difficult phases of development to attract speculative capital.

This is in line with the Commonwealth Government’s Critical Minerals Strategy and will help spur the development of a sector which is central to the country’s economic wellbeing in a world seeking to rapidly decarbonise.