March 5, 2024 | Emerging Markets Debt

Metals of the Future: Capturing a Share of the Pie

Alexandra Symeonidi, CFA

Senior Corporate Credit and Sustainability Analyst

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Countries in which mining for the metals of the future has made up a significant part of gross domestic product (GDP) have taken an active stance toward the development and commercialization of these resources. Several emerging markets (EM) governments recognize the value of these metals to future technologies and aim to capture a larger share of a growing pie. Below we highlight such cases.

Copper

Chile, the top producer of copper, finalized an amendment to its mining tax regime in 2023. The regime, now royalty-based, will increase taxes from 5% to 14% of operating profits to 8% to 26% of operating profits for large producers. The new royalty will also have an ad-valorem component of 1%. While the calculation of taxable income has changed, the new royalty regime promises to increase state revenues from the sector, especially in a high-price environment.

In 2019 Zambia revised its royalty rates from 4% to 6% of operating profits to 5.5% to 10% of operating profits, depending on prices. Copper exports account for as much as 12% of Zambia’s GDP, making the resource crucial to its economic development.

In Panama, the mining concession contract for the country’s largest copper mine recently sparked unprecedented protests due to its impact on the environment and the distribution of profits between the mine operator and the state. In late November, Panama’s supreme court ruled the contract unconstitutional, while the mine, which contributes 3% to 5% to the country’s GDP, halted operations due to blockades. Earlier in the same month, Panama’s Congress banned new mining concessions and extensions of current concessions. Certainly, this exemplifies a case of resource nationalism, in which a country asserts control over its natural resources.

Lithium

China’s push to become the world’s top supplier of solar cells, lithium-ion batteries, and electric vehicles (EVs), is driving the need for the country to secure a large share of the lithium supply chain. Indeed, China has invested billions to acquire stakes in lithium mines in Latin America and most recently Africa. According to Benchmark Minerals, two-thirds of forecast lithium production will be owned by China in 2030.

Chile, which is home to the world’s largest lithium reserves, announced earlier this year a strategy to nationalize its lithium industry. The strategy would allow the state to lead lithium mining and processing projects through national companies, thereby ensuring a larger revenue share to the state and better environmental conditions.

Chile is not the first country to nationalize its lithium resources. Earlier in 2022, Mexico declared lithium as a strategic mineral.

Under the current regime, independent lithium producers are leasing mineral concessions from a governmental organization called Corporación de Fomento de la Producción (CORFO). These leases contributed more than $5 billion dollars to the Chilean treasury in 2022, about 2% of the country’s GDP.

But Chile is not the first country to nationalize its lithium resources. Earlier in 2022, Mexico declared lithium as a strategic mineral, meaning that the exploration, exploitation, and end-use of lithium will be an exclusive right of the state. The country has set up a national lithium company that will seek to establish Mexico as a prominent lithium mining nation.

Nickel

Perhaps another example of resource nationalism has been the ban on exports of nickel ores from Indonesia. Initially implemented in 2014 and reinforced in 2020, the ban sought to develop domestic nickel and EV supply chains.

Part of the strategy to develop the domestic market is tax incentives to nickel processing facilities. The government has recently revoked the 10-year tax holiday for low-grade producers to encourage more investment in downstream processes and battery-grade nickel manufacturing.

Investment Implications

We believe the likelihood of enduring demand for metals of the future due to the energy transition bodes well for market prices. For the corporate credit investor, this should translate into robust credit fundamentals, such as margins and cash flows.

Moreover, many metal companies in the EM debt universe have reduced leverage, which could help them withstand metal price volatility.

The metals sector should continue to be a strong driver of GDP and attract foreign direct investment.

Maturities are addressed well in advance, while we have noticed an investor preference for debt issued by “future metals” companies in contrast to other metals producers.

As we have highlighted, companies rich in future metals could increasingly benefit from the production and sale of these minerals.

For the countries mentioned above, the metals sector should continue to be a strong driver of GDP and attract foreign direct investment (FDI).

We believe the export value and tax revenue from these metals could increase due to higher production and a resilient price outlook, and over time this should lead to an improvement in sovereign credit fundamentals, which is appealing to the sovereign investor.

Alexandra Symeonidi, CFA, is a senior corporate credit and sustainability analyst on William Blair’s emerging markets debt team.

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Metals of the Future 2.0 Series

Part 1 | Metals of the Future: Demand Dynamics in the Driver’s Seat

Part 2 | Metals of the Future: Can Supply Meet Demand?

Part 3 | Metals of the Future: Capturing a Share of the Pie

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