Seven factors driving M&A in the battery minerals industry

28 December 2020 Consultancy.com.au 4 min. read

Battery minerals (lithium, cobalt, nickel, manganese, graphite) is set to be a hot segment of the merger & acquisition market in 2021, according to Philip Wheeler, a partner at L.E.K. Consulting. He shares seven reasons why the battery minerals sector will attract interest from strategics and financial investors. 

Supply side drivers

The international community has fully awakened to the supply-side challenges of battery minerals. The US, Europe, and Australia have updated their critical mineral lists and identify lithium, cobalt, manganese, and/or graphite as essential to their economics. Other commodities that support future mobility in providing important characteristics to critical componentry outside the battery, such as rare earths and platinum group minerals, are also included in these lists.

For the US and Europe, as future demand centres for these minerals for use in electric vehicles, this focus on building reliable levels of supply will encourage local companies and agencies to make investments in production, development, exploration, and recycling assets in order to ensure availability.

M&A in battery minerals will rise in 2021

Beefing up local supplies

On the flipside, governments of countries that are endowed with great mineral wealth, such as Australia, are encouraging the development of local supply chains for lithium ion batteries. Austrade released its report on the potential of lithium ion battery manufacture in Australia in 2018, and the Future Battery Industries CRC released a scene setting report in May 2020. Both identify opportunities for Australia to play a larger role in the lithium ion battery sector. 

Spodumene processing assets are already being built today in Kemerton and Kwinana, but more assets and deeper value chain participation is desired.

In order to ensure the supply of critical minerals to the battery and electric vehicle industries, M&A activity is almost guaranteed to be a key lever to link the mineral sources, financial capacity, and demand centres needed for large scale production. 

Commodity prices

As one would expect, the valuation of battery mineral assets is highly correlated with commodity prices. Lithium and cobalt prices have dropped over 50% from their 2018 highs. But, while in 2020 these lower price levels have been associated with Covid-19 and the high levels of resulting uncertainty across markets, the situation appears to be improving as we move into 2021. Dealmakers may find more common ground on valuation in the new year than they did between 2018 and 2020. 

Interest rates

The market has found itself in a period of historically low interest rates that are conducive to promoting deals. Low interest rates allow companies to more easily finance the merger & acquisitions required to meet their strategies, but also provide some support to valuation.

Need for scale

Relatively small companies comprise the upstream industry of some battery mineral commodities in comparison to many other commodities. Increasing scale to seek the operational and financial benefits that come with scale will become more beneficial as we move into 2021. 

Competitive positioning

The battery minerals industry is seeing growing vertical integration. Producers and processors alike will seek to balance the levels of scale versus suppliers/customers, supply certainty, price exposure, and potential capital returns, through building vertically integrated positions. These opportunities remain unresolved in the current environment but may be ready for execution in 2021. 

Exposure to growth

Finally, the battery mineral industry is clearly ready for growth. It’s not certain whether the future industry will be 2 times, 20 times, or 200 times current scale, but we know that it will grow. Even competing technologies such as hydrogen are unlikely to fully cut into the potential growth of the battery minerals industry. 

Those companies that want exposure to the growth available in the battery mineral sector, and there are many mining companies with almost no exposure today, will be looking for opportunities to invest in the sector in 2021.