Investing into Canada's Critical Mineral and Battery Ecosystem

The conversation, led by Canada’s ZEV industrial alliance, Accelerate, comes amid a challenging and competitive market environment.

Being the first to invest in new technologies and projects can be a risky venture and participants debated whether private equity or governments should make the initial bet. Regulatory challenges and geopolitics can also make it difficult for projects to move forward. This discussion focused on the complex dynamics involved and how participants might move forward. Here are the top four takeaways:

An Enormous Strategic Opportunity For Canada, But Challenges Await

There will be a significant pipeline of battery manufacturing capacity, including in Canada, in the years ahead as the energy transition moves forward and battery demand in the West surges. Canada is well positioned geographically to be a key player in every part of the battery and EV supply chain, given i) our wealth of critical minerals resources, ii) a robust auto manufacturing sector, and iii) our strategic position next to the world’s largest auto market in the US. Competition is heightening, however, as countries around the world move aggressively to establish their position in an effort to win market share away from China and other industry leaders in East Asia.

Canadian companies need to navigate these challenges amid tough market conditions. Low critical mineral and metals prices are threatening to stall much needed investment in resource extraction and battery manufacturing capacity. On their current trajectory, key material markets face potential structural deficits by the late 2020s, some participants predicted. Lower prices have meant a slowdown in capital coming into these industries, meaning the companies and countries with a head start and currently controlling the supply chain will dictate where raw materials go in the near term.

Despite these uncertain market conditions, the energy transition and the strategic opportunity for Canada depend on new mining, refining and battery materials projects coming online. Executives at the roundtable urged that action be taken now to catalyze these, particularly given the length of time required to ramp up raw materials production.

Capital Is There, But There Are Hurdles To Access

Executives and entrepreneurs are trying to establish their companies within this emerging market, but face an enormous conundrum when trying to access much-needed capital, with financing markets described as “broken”, “fractured”, and “stagnant”:

• Companies are competing against the entire global market, with many other countries offering heavy subsidies to incentivize investment.
• Public companies are excluded from the huge pool of strategic venture capital funds because these investors do not want the public exposure. While other countries face similar challenges, Canada is unique in that the country is trying to build a fully integrated supply chain to supply the North American auto market.
• Funding grants are available from various branches and levels of government, but many hinge on a company’s ability to raise their own money first. Despite a national push to support and prioritize the industry, much of it still depends on the vagaries of the market and the price of metals – and those conditions are currently not ideal.

Start The Conversation Early With Potential Investors

Investors at the roundtable discussion said they see the transition to a low carbon economy as a “megaforce” reshaping markets. When looking at early-stage ventures, investors want to see value beyond the project itself, and critically, a project’s ability to scale. Transparency around the supply chain and sound market design are also important.

Some investors encourage companies to bring them into the conversation early – before the project or initiative has even been structured, or if a company believes significant external capital will be required. The financing, revenue model, structure do not have to be fully in place for the communication to begin.  As part of a potential multi-year journey together, some investors are very open to having early discussions on how to help companies lay out their long term plans.

Governments Can Help Clear The Path

With Canadian companies competing against state-funded competitors overseas, there is pressure on the federal government and provinces to deploy capital. Some investors say governments are best positioned to take the risk and be the “first money in”, with other sources of capital to follow. The greatest risk is government investment into projects that are ultimately unsuccessful, which could be interpreted as a misuse of taxpayer dollars and erode political support for other similar investments.

Meanwhile, it may not be clear to companies that different government sources of funding may have different appetites for risk, with some being more risk-tolerant than others. At the same time, governments should think more creatively about their mandate, and even consider taking on more risk in some instances. Stakeholders say governments can also play a critical role in de-risking even without putting up capital investments. This can be achieved through better integration between provincial regulators, implementing regulatory policies that can help make Canada more competitive, and reducing the time it takes to get to market.

Yes, our domestic critical mineral and battery ecosystem faces significant obstacles towards achieving its ambitions, but if the political will is there, capital investment will follow and Canada can fulfill our once-in-a-generation opportunity to become a global supply chain leader for the energy transition.

The Roundtable on Investing into Canada’s Critical Mineral and Battery Ecosystem was co-convened by RBC Capital Markets and Accelerate. Participants included senior executive leaders from the following organizations: