A new era of government support

We are experiencing a renaissance of interventionist industry policy in Australia, which is designed to secure the future success of industries considered critical to the nation’s economic growth and sovereign capability.  There are now more Government funding programmes available than ever before, with flexibility to invest across nearly the entire financial spectrum, from grant funding to equity, debt, and bond-like products. 

Historically, Government support of Australian industry has taken several forms:

  • Protection: tariffs, targeted foreign investment restrictions (eg in the domain of “critical infrastructure” under the Foreign Acquisitions and Takeovers Act and the Security of Critical Infrastructure Act)
  • In-kind support and collaboration: such as through Co-operative Research Centres, Industry Growth Centres, and the Critical Minerals Facilitation Office (CMFO)
  • Procurement policy and Australian Industry Participation Plans: by directing Government spending to achieve desired industry policy outcomes
  • Fiscal support: in the form of tax concessions such as the Research and Development Tax Incentive
  • Grants: of which there are now over 130 Commonwealth programmes alone, including ARENA, the Modern Manufacturing Initiative, and most recently the Critical Minerals Accelerator Initiative (CMAI)
  • Debt or equity funding:  which can be directly administered by Commonwealth departments such as Industry, Science, Energy and resources, or delivered through corporate Commonwealth entities such as Clean Energy Finance Corporation (CEFC), Export Finance Australia (EFA) or the Northern Australia Infrastructure Facility (NAIF)

The vast array of Government support programmes available can be a challenge for proponents to navigate, thanks to differing governance structures, probity requirements and the complexity of mandatory investment criteria and opportunity guidelines proponents need to digest and respond to.  And it can also be challenging for private sector proponents, who are understandably focused on their own business rather than lofty policy goals, to articulate the case for support in a manner which both dovetails with the policy priorities of the government of the day and provides a convincing rationale for taxpayer support, without undermining the fundamentals of the project involved – particularly in the eyes of investors.  Yet this balancing act is key to unlocking the substantial benefits that government funding can bring.

Support for the critical minerals sector in Australia

One area in which the Commonwealth Government continues to demonstrate serious intent is in relation to the development of Australia’s critical minerals sector.  Its support here is notable in that it recognises that, despite deep pools of both expertise and funding in the Australian mining and metals sector, there are still aspects of critical minerals exploration, development and processing that evidence the need for Government intervention.

Chief amongst these is the requirement to spend a disproportionate amount of project capex in the development of downstream processing capacity to deliver a saleable product, in comparison to (say) Australia’s largest export commodities iron ore and coal, which require little more than crushing, screening and washing prior to shipping to end users.  While ample capacity may exist in debt and equity markets servicing the mining and metals sector, this is frequently not of the tenor or at the rates of return required to support critical minerals processes through the pilot plant and optimisaton phases of development, which may run to the years, or possible even decades.

Typical of the challenge faced by the sector is the new breed of Australian lithium miners, almost all of whom are investing in or investigating downstream capacity to convert spodumene concentrate into lithium carbonate or hydroxide (or some other precursor material) for integration into the battery minerals value chain. 

In the domain of rare earths, a critical component of magnets incorporated into everything from wind turbines to electric vehicles to fighter jets, the complexity of downstream processing required to meet market specifications has stymied all but a handful of proponents, the most well-known of which is Lynas Corporation. 

The Commonwealth’s Critical Minerals Strategy: Replacing the stick with the carrot

Anyone with a passing knowledge of industry policy in Australia will know that Government attempts to “force” value-adding efforts in the mining sector have met with mixed success at best.  In this context the Commonwealth’s recently announced initiatives in the critical minerals space are notable in replacing the figurative stick with a financial carrot.

In 2019, the Commonwealth Government released its first Critical Minerals Strategy, outlining the government’s vision that by 2030, Australia is a global critical minerals powerhouse, integral to international critical minerals supply chains and technologies crucial to the global economy. A centrepiece of the 2019 strategy was the establishment of a $2 billion loan facility, known as the Critical Minerals Facility, to be administered by EFA.

On 16 March 2022, the same day it announced a total of $243 million in funding for a range of battery metals projects under the Modern Manufacturing Initiative, the Government released its updated Critical Minerals Strategy. Two key planks of the revised 2022 Critical Minerals Strategy involve the establishment of a $200m accelerator programme (the CMAI) and the establishment of a $50 million virtual National Critical Minerals Research and Development Centre, which will draw together expertise from CSIRO, Geoscience Australia, and the Australian Nuclear Science and Technology Organisation.

The Commonwealth Government’s determination to support the critical minerals sector was most recently evidenced in the form of a $1.05 billion non-recourse loan under the Critical Minerals Facility to mineral sands miner Iluka Resources, for the construction of a rare earths refinery at Eneabba.  Importantly, the refinery will be capable of producing rare earth oxides from a range of feedstocks sourced not only from Iluka’s portfolio but also third party suppliers, aligning the project with the Government’s broader policy objective to “crowd in” and incentivize further investment in the sector,

The loan follows suggestions in that the Biden Administration will soon move to invoke the provisions of the US Defence Production Act to spur greater domestic production of critical minerals, providing a fillip to the defence and clean energy industries and reducing reliance on foreign imports. 

Accessing government funding

Going forward, it can be seen that Government support can potentially play a role not only in major capital developments but also in M&A transactions (as shown by the Commonwealth’s backing of Telstra’s acquisition of Digicel) and refinancing (such as CEFC’s participation in Pilbara Minerals bond refinancing).

While Government support could make the difference in marginal projects or transactions, there are several considerations that applicants need to bear in mind when seeking support.  These include:

  • The identity and investment mandate of the administering authority – who is the decision maker and what are the constraints (if any) on their decision making powers?  What kind of support is needed (debt, equity, grant or some other form of support) and is this within the mandate of the relevant authority?
  • Government policy – how does the applicant’s project align with relevant Commonwealth Government policy objectives including on matters such as sovereign capability, energy security and Australian industry participation?  Is there a risk that government support will “crowd out” or otherwise complicate private investment in the sector?
  • The extent of public benefit that can be achieved outside the proponent – this can include jobs, technology transfer, regional development, enhanced sovereign capability in key sectors, and other social objectives such as indigenous engagement.

Careful review of the terms or reference or empowering legislation for the relevant programme is required, along with the grant opportunity guidelines (GoGs) produced by the administering authority for the information of applicants.  Early engagement with the relevant government departments is essential.

The chart below sets out a simplified step list for applicants seeking government support:

Applicants also need to be conscious of commercial confidentiality issues and the potential for disclosure of details of an application through Parliamentary processes or Freedom of Information applications (albeit the “commercial-in-confidence” exception will often be available in respect of the latter).

Opportunity remains in the critical mineral sector

Whether the paucity of critical minerals projects in Australia evidences market failure is open to debate.  There are credible arguments to the contrary. However, in our experience, policy makers, particularly at the Commonwealth level, are increasingly motivated by the broader strategic and security context in which Australia now finds itself and prepared to back their judgment to accelerate investment in the critical minerals sector even at the risk of “crowding out” of private capital. 

In fact, evidence from several NAIF and CEFC commitments suggests that tapping pools of Government liquidity can be a useful means of de-risking the proposition for debt or enhancing returns to equity, actually serving to “crowd in”, rather than crown out, additional capital.

In simple terms, with such powerful momentum behind it, the opportunity for government to play a role in funding the development of critical minerals projects is one proponents in the sector cannot afford to ignore.