Why projects for energy transition minerals are in trouble

Price volatility of energy transition minerals like nickel and lithium has raised doubts about the viability of projects and real demand, which were compounded by Horizonte Minerals suspending its Araguaia nickel project in Brazil.

Moreover, plans to sell Sigma Lithium, which is also developing a project in Brazil, were frozen amid falling prices. 

Tito Martins, a senior mining consultant at Kaiau Consultoria, former CEO of Nexa Resources and former head of Vale's Canadian nickel operations, talks with BNamericas about the China factor and industry prospects.

BNamericas: Why have nickel prices come under pressure?

Martins: Part of the explanation is related to the start of operations at some projects in Indonesia, which generated an increase on the supply side.

In addition, it is also important to remember that the industry in general learned to work with lower quality nickel, so these effects also generated greater supply.

Still relating to issues of supply and demand, it is also true that many minerals associated with the energy transition have not seen the projected demand in recent months.

Lithium is another segment that also saw a drop in prices because demand is not in line with what was projected.

There was a very high demand expectation for some materials associated with the energy transition that has not, in fact, materialized yet.

BNamericas: Are there any other factors to be considered?

Martins: There is speculation in the market that many projects, including those linked to nickel, have come into operation with support from China.

This would be a deliberate strategy by China to reduce the prices of inputs to supply the production of batteries in its industries. However, it is difficult to quantify this, as there is not very clear information on exactly which projects China would be supporting.

China ends up being, in one way or another, an important guide for the prices of various materials, such as nickel and lithium.

However, this does not happen in all areas.

Some segments are a little more shielded than others from interference from China. For example, copper sees more globalized price formation, not as linked to the forces coming from China.

BNamericas: Aside from price, what are the main risks to the viability of nickel, lithium, copper or other projects in Brazil?

Martins: The combination of commodity prices, financing conditions and high interest rates are greatly affecting the viability of projects.

But these problems are not the only ones. There are also issues related to the delay in licensing, problems that companies face in their relationship with communities close to projects under development, which end up generating delays and even, in some cases, significantly increasing the costs of projects.

The price of commodities and financing conditions are important, but they are not the only elements that can hinder the viability and advancement of mining projects.

BNamericas: Horizonte Minerals recently halted a nickel project in Brazil. Do you see risks of other mining projects being suspended?

Martins: If we look at the price level of nickel, and also copper and lithium, these ended the first quarter of this year at a lower price than the first quarter of 2023.

Despite this price drop, the current price level does not make projects in these sectors unfeasible.

What happened with Horizonte Minerals seems to be an isolated incident, where they had problems with project management. They did not properly assess the risks and associated costs of their project.

A mining project must also have a good engineering assessment, otherwise it will not be viable.

In practice, all mining projects in their planning and development phases experience an increase in capex projections.

I have managed the development of a series of projects and I have never seen a mining project that did not have to undergo an upward revision of the capex projection, either because there was an increase in the prices of inputs and services, or even due to a delay in some phase.

However, it is necessary to manage the project well so that these increases do not get out of control.

BNamericas: Brazil’s mining sector has benefited from China’s growth. What would happen in the sector if China’s economy started to expand at a slower pace?

Martins: The Chinese economy grew rapidly and for many years on a certain economic basis. 

Currently, China is growing less, but on a much larger economic basis than it was 10 years ago. In other words, we are talking about an economic power that will continue to demand a lot of Brazilian mining products, even if the economy actually slows down.

I am optimistic about the mining sector in Brazil in the long term because of factors that go beyond China.

We are also seeing great expansion in Southeast Asia and we have India emerging with high growth. These countries still have major social inequalities and that will require a lot of investment in infrastructure, in segments that will require a lot of raw materials from the Brazilian mineral sector in the coming years.