Assessing Private Equity Investment Risk in the Critical Minerals Supply Chain - A Strategic Approach

In our rapidly evolving energy landscape, critical minerals such as lithium, cobalt and nickel have emerged as essentials for technologies driving the energy transition. As demand for electric vehicles, renewable energy and advanced battery storage accelerates, so too does interest from private equity (PE) investors seeking to capitalise on these emerging opportunities. However, investing in critical minerals presents a unique set of risks that require a nuanced approach. Understanding these risks is crucial for investors aiming to balance financial returns with long-term sustainability.

Critical Minerals - The Backbone of a Low-Carbon Economy

Critical minerals are essential for manufacturing batteries, solar panels, wind turbines and other technologies pivotal to the green transition. Their strategic importance is underscored by growing government initiatives to secure access to these minerals, as well as efforts to reduce dependency on single-source suppliers. However, the scarcity of high-quality deposits, coupled with supply chain complexities can make investing in critical minerals a high-risk, high-reward proposition.

Private equity investors are often drawn to critical minerals due to the significant growth potential in this sector, but they must also navigate an array of risks across the supply chain, from exploration and extraction to processing, transportation and end-use.

Navigating the Critical Minerals Supply Chain

The critical minerals supply chain is complex and spans multiple stages:

• Exploration and Mining: Early-stage exploration carries geological risk in building a case for safe, economic extraction as well operational risks during construction and operation. Investors must evaluate factors such as resource quality, feasibility studies, permitting and the reliability of resource estimates and reserve development. More often new resources are found in increasingly difficult areas of the world, whether technically, logistically, or geopolitically.
• Processing and Refining: Minerals like lithium and cobalt require sophisticated refining processes. Supply chains for these processes are often concentrated in specific regions (e.g., China), leading to supply bottlenecks or increasingly tied to nationalist agendas.
• End-Use and Recycling: As sustainability and with-it mindfulness to strategies of smarter consumption of raw materials takes centre stage, companies that can integrate circular economy practices (e.g., recycling used batteries) offer significant upside. However, recycling technologies are still in their infancy and/or expensive, adding further uncertainty.

Market Dynamics and Investment Risks

Commodity price volatility is one of the greatest challenges for PE investors in critical minerals. The market for these materials is heavily influenced by macroeconomic factors, including the pace of the energy transition, geopolitical tensions and policy shifts. For example, a sharp rise in electric vehicle demand can lead to a price surge for lithium or nickel, but over-reliance on these market trends can expose investors to fluctuations in demand.

• Regulatory Risks: Government policies can create headwinds or tailwinds for projects. Favourable regulations, such as subsidies or tax incentives, can enhance project viability, while onerous environmental or social regulations can increase costs. Staying attuned to regulatory shifts, particularly Corporate Sustainability (e.g. Environmental, Social, Governance) regulations, is critical for mitigating risk.
• Technological Risks: Technological innovation in both extraction and material substitution is another critical factor. For example, advances in battery technologies could reduce demand for cobalt, displacing investments in its mining and processing.

Sovereign Risk and Global Supply Pathways

A pressing concern for investors in the critical minerals sector is sovereign risk. Many critical minerals are found in politically unstable or resource-nationalist regions. For instance, the Democratic Republic of Congo produces ~70% of the world’s cobalt, while China dominates the lithium refining market. These geopolitical concentrations create risks related to nationalisation, government intervention and sudden regulatory changes that can disrupt supply chains.

Sovereign risk is particularly acute in regions where the rule of law is weak, corruption is prevalent, or where there is potential for civil unrest. Investors must assess country-specific risks, including the stability of the local government, regulatory transparency and the protection of foreign investments. Political instability can lead to delays, revocation of licenses, or even expropriation of assets.

In addition to sovereign risk, the global nature of critical minerals supply chains brings logistics risks, particularly related to shipping lanes and trade routes. Many critical minerals must be transported long distances, often through politically sensitive areas such as the South China Sea, Strait of Hormuz, or Suez Canal. Disruptions to these global pathways, whether from trade disputes, blockades, or piracy can severely impact the availability of critical minerals and delay project timelines. Investors must factor these global supply risks into their strategic assessments and consider diversifying logistics to reduce vulnerabilities.

Financial and Operational Risk Management

Effectively managing financial risk in the critical minerals space requires a thorough understanding of the lifecycle costs of mining projects. Capital expenditure (CAPEX) can escalate quickly due to factors such as regulatory delays, unexpected environmental remediation, or labour disputes. Similarly, operating expenditure (OPEX) may be impacted by rising energy costs, particularly in remote locations with limited access to infrastructure.

Valuation methods such as Net Present Value (NPV) and Internal Rate of Return (IRR) must be applied with an understanding of these inherent risks. Investors can also utilise tools such as stress testing and sensitivity analysis to evaluate how different scenarios, such as a sharp drop in commodity prices, would affect their investment.

Corporate Governance: More Than Just a Box-Ticking Exercise

The growing emphasis on Corporate Sustainability metrics is not just about regulatory compliance. Corporate Sustainability performance directly affects a project’s long-term viability. From tailings management to local community engagement, critical minerals investments face increasing scrutiny from governments, non-governmental organisations (NGOs) and investors alike. Projects that fail to incorporate sustainable practices may face higher operational costs, negative public perception and even legal challenges.

PE investors can mitigate Corporate Sustainability risks by embedding sustainability considerations into the due diligence process. This can include environmental impact assessments, monitoring of water and land use and proactive community engagement to assure that the benefits of the project are shared with local populations.

Case Studies: Learning from the Market

Recent private equity investments in lithium and cobalt projects provide valuable insights into risk management strategies. Some successful investments have involved partnerships with governments or long-term off-take agreements with major end-users such as automakers. Conversely, failed projects often highlight the consequences of insufficient risk assessment, particularly around sovereign and logistical risks.

A Comprehensive Approach to Risk Mitigation

For private equity investors, the critical minerals sector offers significant opportunity but demands a careful and comprehensive risk assessment strategy. By understanding the supply chain, navigating geopolitical and sovereign risks and incorporating Corporate Sustainability considerations, investors can enhance their ability to manage risk while positioning themselves to benefit from the energy transition.

As the world moves toward a low-carbon future, private equity’s role in financing the development of critical minerals will be pivotal. By adopting a strategic, risk-aware approach, investors can unlock the full potential of this burgeoning sector while mitigating the unique risks it presents.

How SLR Can Support Critical Mineral Supply Chain Evaluation

SLR is a globally recognised leader in environmental, social, sustainability and engineering consulting. We are uniquely positioned to help clients navigate the complexities of the critical minerals supply chain. With a deep understanding of mining projects and their associated risks, SLR provides expert guidance in key areas such as exploration, feasibility assessments and Corporate Sustainability integration.

Leveraging our multi-disciplinary expertise, SLR offers clients tailored solutions for evaluating geological, environmental and regulatory challenges. Additionally, SLR’s experience in supply chain analysis, risk assessment and sustainability strategies assure that investors can make informed decisions, mitigate risks and capitalise on opportunities in this fast-evolving sector. Whether through managing community relations, optimising water and energy use, or ensuring compliance with global sustainability standards, SLR supports our clients in creating resilient, responsible and profitable critical mineral supply chains.