Navigating geopolitical challenges in critical minerals projects

Critical minerals, essential for modern technology and the energy transition, are not evenly distributed across the globe. With the demand for critical minerals increasing, miners are taking the opportunity to explore and cultivate such minerals in less developed or more politically unstable regions. The unavoidable reality of any critical minerals project is its geopolitical environment. Geopolitical risks are diverse and wide-ranging, and miners and their investors must consider strategies to mitigate and allocate these risks.

Legal stability is crucial for assuring the integrity and enforceability of a miner’s legal rights. Miners need to be confident that their land, exploration, mining, and other contractual rights can be recognised and enforced in a neutral forum with a well-established and understood legal regime. Miners want assurance that their rights in the project are protected from revocation, seizure or expropriation by the host government, as recently occurred with the sudden suspension of more than 20 mining licences by the government of the Democratic Republic of the Congo.

Political risk can also present challenges to a mining project. In less stable regions, the risk of war or political violence may make the region inaccessible or shutdown the project. Even in more stable regions, legal challenges on indigenous rights, social or environmental grounds may hinder the development of a project, as is being experienced by the Barroso Lithium Project in Portugal.

Foreign exchange restrictions and legal and fiscal instability can also impair a minerals project. Currency transfer and convertibility restrictions can hinder a miner’s ability to pay foreign contractors, service foreign debts, and repatriate profits. Many mineral-producing nations impose such restrictions, though often with exemptions for the mining industry.

Political and fiscal stability is essential for investors to commit to funding a project. Shifting political and economic cycles and fluctuating mineral prices may shift the balance of negotiations over time. This may tempt governments to make changes to the legal and fiscal regime for the mining sector, including raising taxes, restricting the export or sale of minerals, or requiring that minerals are refined or processed locally. Changes to legal or fiscal regimes may severely impact a project’s economics and miners’ decisions to invest, as recently seen in Chile, where an increase in mining royalties has caused several miners to reconsider their investments in the country.

Miners have several potential tools at their disposal to help mitigate political risks in critical minerals projects:

1. Host Government Agreements: For politically significant projects, miners may be able to enter into agreements with the host governments. These agreements can include government undertakings to issue permits, cooperate with the provision of infrastructure, and provide physical security. They can protect the miner against seizure or expropriation of the project, and stabilise certain elements of the legal and fiscal regimes, with the government compensating the miner for any adverse changes or government action.
2. Investment treaties: Investment treaties are government-to-government treaties which provide varying levels of protection for foreign investors against discriminatory actions, unfair treatment, and expropriation by host nations. Miners should pay careful attention to investment treaty protection for any project, particularly if establishing a development company outside of their home jurisdiction. Early assessment is key, because ‘investment treaty shopping’ is typically not effective after a dispute has already arisen.
3. Dispute resolution: The choice of jurisdiction and forum for enforcement are essential in contracts. A neutral jurisdiction and international arbitration are often preferred options for dispute resolution clauses due to confidentiality, insulation from political interference, and enforceability through internationally recognised treaties.
4. Political risk insurance: Specialised insurance can cover political risks, including expropriation, war and political violence, currency inconvertibility and non-transferability, and breach of contract. This can be obtained from commercial insurance providers, or from governmental or international institutions, such as the Multilateral Investment Guarantee Agency. ‘Soft’ political risk mitigation may also be achieved through involving export credit agencies or multilateral development agencies in the financing of a mining project, as they are able to access diplomatic channels to raise such issues with host governments.
5. Early engagement: Full and early engagement with local authorities and communities is essential for project success. Increasingly, miners require not only legal permits and licences to operate, but a ‘social licence’. The local community must be seen to benefit from the mining project. Maintaining positive and mutually beneficial relationships with local communities can help a miner to anticipate, prevent, and mitigate potential challenges to the project.

Critical minerals projects will continue to be vital in sustaining modern industries and the energy transition for years to come. While miners generally cannot choose, or sometimes even predict, the geopolitical risks of a project, the above are some of the tools that a well-advised miner may be able to utilise to mitigate some of these risks and ensure a stable supply of these essential resources.

Read the article online at: https://www.globalminingreview.com/special-reports/10112023/navigating-geopolitical-challenges-in-critical-minerals-projects/