Amid critical minerals rush, here’s what investors must consider

Many investors are seeking to profit from the race for critical minerals, which are essential for the manufacturing of semiconductors, wind turbines, electric vehicle batteries and solar panels.

But failing to account for ESG issues in the process of acquiring copper, lithium, cobalt and other minerals considered essential in the global transition away from fossil fuels could present major setbacks for the mining industry and its investors.

This tough lesson has been reinforced on multiple occasions, with mining projects around the world getting shut down and publicly denounced for their potential harms. This has led to a sharp dive in mining companies’ revenue and market value, along with waning investor confidence in the sector overall.

“The more that we invest in things that are not done right, it has more cost because, for example, a mining project might get challenged, the permits might get challenged,” said Colette Brown-Rodriguez, an Indigenous natural resources developer and co-chair of the Native American Relations Committee for the American Exploration Mining Association.

“Then that delays the project for years — and it adds up.”

A case study

Vancouver-based First Quantum Minerals Ltd.’s shuttered Cobre Panama copper mine presents a case study.

The mine’s fate is uncertain as the Panamanian government conducts an environmental audit to determine whether the mine, located in a biodiverse jungle on Panama’s Atlantic coast, should reopen or stay closed for good.

The audit comes after local environmentalists, Indigenous activists and trade unions took to the streets in October 2023 to demand the Panamanian government rescind the mine’s 20-year operating contract over environmental and Indigenous land rights concerns. The issue came to a head the following month, when Panama’s Supreme Court declared the contract unconstitutional. Soon after, the mine was shut down.

Shares in First Quantum Minerals have fluctuated in response to these developments.

The stock closed at $29.98 on the Toronto Stock Exchange when the mine’s contract was enacted into law on Oct. 20, 2023, plummeted to $12.64 when Panama’s high court ruled the contract was unconstitutional, and closed 5% above the previous day, at $18.52, when the environmental audit was announced on July 2, 2024.

To avoid drawn-out and costly projects, mining companies must prove their operations will do the least amount of harm and share the benefits with the local population, said Aimee Boulanger, executive director of the Initiative for Responsible Mining Assurance (IRMA). Only then will the projects receive buy-in from both communities and investors.

“New mining is very dependent on investment to even get started. When you are about to permit and construct a mine, you don’t have a product to sell. You only have an idea to sell initially. You need investors to come in,” Boulanger said.

ESG considerations

Investors also stand to benefit when they do the research to ensure they are funding mining projects that are environmentally and socially sound, Brown-Rodriguez said.

“If I want to put my money toward something that’s going to give me the best return, I need to make sure that it’s being done right, it’s on time, it’s leading those standards. So, if it’s not, I’m not getting my return, I’m putting my money more at risk,” she said.

Boulanger agreed, saying investors must exercise due diligence. One way to do so is by assessing whether a mine has received IRMA’s Standard for Responsible Mining, which defines best practices for what responsible mining should look like at industrial scale mine sites around the world, she suggested.

Through the voluntary IRMA system, companies must complete a self-assessment and receive an independent, third-party assessment and certification of ESG measures at their mines. They are assessed on grounds including community and stakeholder engagement, occupational health and safety, water management and greenhouse gas emissions.

So far, Boulanger said more than 80 mining firms from 30 countries have agreed for some or all of their mines to be assessed, with completed audits available to the public online. (First Quantum is not among those firms.)

“It’s for investors wanting to do their due diligence before funding,” Boulanger said of the audits.

When investing in the mining industry, BMO Global Asset Management looks to see which companies participate in the IRMA system, among other factors, said Graham Takata, director of climate change with the firm’s responsible investment team in Toronto.

BMO GAM is a member of Climate Engagement Canada (CEC) and has set an interim target of achieving 100% net-zero assets under management by 2050. The firm also engages with Canadian corporations to help them achieve net-zero emissions, which involves evaluating their ESG risks and Indigenous reconciliation efforts, Takata said.

“This is one of the measures we’re looking at when we’re evaluating companies to see if they’re risky or not on the ESG sphere,” he said.

Andrew Simpson, senior vice-president and portfolio manager with Mackenzie Investments, leads the Mackenzie Betterworld team, which aims to invest in companies that are making a positive impact on people and the planet. Simpson said the finance industry has “an opportunity and a responsibility to engage with companies to ensure that best-in-class processes are taking place.”

For its part, Mackenzie Investments, which is also a CEC member, similarly engages with companies and looks for certifications that demonstrate their responsible mining practices and commitment to net zero, Simpson said.

Among mining industry players, the firm looks for companies that have achieved the “Copper Mark” stamp of approval — an assurance framework that promotes responsible practices across the copper, molybdenum, nickel and zinc value chains.

“The Copper Mark looks at copper producer sites across 32 responsible production criteria. And so that covers the core areas of environmental, social and governance issues, and it gives an opportunity to really validate a company’s business processes or investing class,” Simpson explained.

Capstone Copper and Teck Resources Ltd. are among the companies that have achieved Copper Mark certification. Mackenzie invests in both.

“Those companies have gone through the process of getting a Copper Mark certification, and so we found that it’s providing us with a positive indicator of their sustainable investment processes,” Simpson said.

Retail investors can make a positive impact too, Simpson said. He recommended having a conversation with a financial advisor to ensure their portfolio is aligned with their sustainability values.

“If you don’t have the conversation, you might not get the exposure to those opportunities,” Simpson said.

“Looking at how a company treats the planet and the communities they operate in, we think that’s going to be increasingly important.”

More than half of the energy transition resource base is located on or near the lands of Indigenous peoples, making it important to assess a mining company’s track record of engaging with Indigenous peoples. In many cases, trust in the mining sector has been eroded, said Brown-Rodriguez, who is a member of the Confederated Salish Kootenai Tribe and a descendant of the Navajo Nation.

“It takes time to develop relationships,” she stressed.

“[Companies] also have to understand each individual Indigenous community’s different, so making sure that [they] understand the concerns and interests of each of those communities and their history, because there’s a lot of generational trauma that comes with those communities.”

It’s crucial for the voices of local communities that may be impacted by mining projects to be “heard at the highest levels of leadership,” whether through community engagement or representation in a mining company’s governance structure, Brown-Rodriguez said.

As well, she said giving Indigenous peoples some ownership in projects is another way to “truly do that partnership.”

Rio Tinto learned these lessons the hard way.

The British-Australian mining company triggered a public outcry in May 2020 when it permanently destroyed ancient Indigenous rock shelters to make way for the expansion of an iron-ore mine in Western Australia.

The destruction of the 46,000-year-old Juukan Gorge, which had profound cultural significance to the Puutu Kunti Kurrama and Pinikura peoples, received widespread backlash — despite being legal on paper — and led to three of Rio Tinto’s top executives and two board members stepping down.

As a result of the incident, Rio Tinto suffered “considerable damage to its reputation, trust, and social licence to operate,” Alberto Serna Martin, Morningstar Sustainalytics’ then-associate director of ESG research, said at the time.

As reported by Reuters, Rio Tinto chairman Dominic Barton has said low rates of investment in the global mining sector have put the global energy transition at risk and that the mining industry must convince the public of the vital role the industry plays in decarbonization.

He cited the Juukan Gorge incident as one of the company’s own failures in that regard, describing it as “terrible” and “embarrassing.”

In the wake of the incident, Rio Tinto has been working to remedy and rebuild its relationship with the Puutu Kunti Kurrama and Pinikura peoples, while also beefing up its broader ESG practices.

At the same time, organizations such as the First Nations Major Projects Coalition and BC First Nations Energy and Mining Council are working to hold the mining industry accountable. Both organizations support and facilitate energy and mining resource development that protects the environment and ensures the cultural, economic and political wellbeing of First Nations.

“What they’re trying to do is create the standards from a First Nations perspective and say, ‘Yes, we want to do this natural-resources development and mining, and here’s how we want it to be done,’” Brown-Rodriguez explained.

Attracting capital

In Canada, there is currently an estimated $115-billion annual shortfall in spending required for the country to get to net zero by 2050.

As Takata pointed out, some people will argue that critical minerals required for the energy transition are needed quickly and that there should be no barriers to extracting them. But he suggested taking a more cautious approach.

“I would say, ‘No. What you have to do is follow the proper process to reduce your risk of these projects failing, such that you could drive the certainty that the mining and exploration projects will go ahead, will result in the lowest carbon, most sustainable extraction of these minerals. And that requires the social element,’” Takata said.

Brown-Rodriguez echoed those comments.

“Mining doesn’t happen without money,” she said.

“That’s where the finance industry [and investors have] high, high influence on investing in those projects and companies that are willing to do things the right way. I think that’s where they can lead that change, in determining where they put their money.”