DEEP SEABED MINING - Does the Financial Math Work?

A copy of the letter we have written to investors in Deep Seabed Mining this last week:

I write to you as a concerned citizen and producer of the International Union for the Conservation of Nature (IUCN) report on Deep Seabed Mining.

As you may be aware,?the International Seabed Authority (“ISA”) meets in Jamaica for a significant meeting regarding the prospect of deep seabed mining, your company has considerable exposure to companies that are proponents of deep seabed mining (“DSM”).

?I wish to bring your attention to some of the business risks of your investment in these companies that are proponents of DSM.

While there are many arguments against Deep Seabed Mining on an ethical and environmental basis, we feel it is important to provide further information on the economic risks of investing in DSM as a matter of due diligence.

There is a question of increasing costs due to the inhospitable nature of the environment from which these minerals will be extracted. Previous tests have cost two DSM companies millions in failed attempts to retrieve nodules from the ocean floor. As a current example of an offsea operation, the Gorgon gas project off the coast of western Australia, originally projected to cost $11 billion is now on the books for $54 billion. Operating costs—and the less-appreciated cost of finance, such as interest payments on loans—could easily tip ledgers into the red. So the question is: does the financial maths work?

?Market Security and Scarcity

Some argue that the Green Transition will require a huge surge in demand for rare minerals. But this is not the case. As outlined by the SINTEF report?“The Future is Circular”, demand for critical minerals may be reduced[1] by an estimated 58% through new technology and circular economy models.?It also demonstrates that technological choices make a significant difference for future mineral demand. Shifting to new technologies with less critical minerals can reduce total demand for the seven minerals considered in the report by 30%. Thus, supply of minerals for the energy transition is already well within reach utilising sustainable methodologies. This availability will lower the price of those resources.

?Proponents of DSM are using data that is based on current technologies; therefore, the demand will be reduced significantly with the emergence of innovative solutions and the development of recycling processes. Is there such a need to take the risk of further polluting our oceans if we can find alternative solutions? And what would the costs be of remediation? (See below).

?Resources are the quantities for which “economic extraction is feasible”; reserves are the working inventory. This article outlines why the world's reserves are such that we have enough for several decades.

Researchers have suggested that, by disrupting deep-sea food webs and microbial communities, mining could reduce the deep sea’s carbon sequestration capacity. It is also possible that those disruptions, along with sediment plumes created by mining, could have far-flung effects on commercial fisheries. Thus, there is a risk that companies or investors could be held liable, and that uncertainty should be factored into the economic equations of deep seabed mining.

?Emerging Technologies

?New battery technologies that do not require deep sea metals are quickly coming to market and replacing today’s conventional lithium nickel manganese cobalt (“NMC” or “Li-NMC”) batteries.

• ?For example, lithium ferro-phosphate (LiFePO4, more commonly known as “LFP”) batteries which are increasingly coming to market, are cobalt-free[2]. This is not niche; it is led by Tesla and BYD (the two largest electric vehicles manufacturers). About 90% of BYD‘s domestic market cars used LFP batteries that did not have any metals from the deep sea last year. The same for Tesla: 50% of Tesla‘s new cars in 2022 did not use metals found in the deep. Ford and VW are also planning to use LFP.
• ?Aside from LFP, there are also solid-state batteries that offer a lot of the performance advantages at lower cost over the traditional cobalt, nickel and manganese-based lithium-ion batteries. Quantumscape is one example of manufacturer, who holds a joint venture with VW and expect to fully commercialise their batteries by 2025.
• ?Technologies based on sodium are also on the rise: Sodium ion is another popular technology adopted by China’s biggest battery manufacturer CATL and 30 other companies worldwide including Clarios-Norton energy in the USA. Similar they offer performance upsides at a lower cost; sodium-sulphur is one more technology developed in Australia that could also be a game changer.
• ?Then there is the fact that cobalt could be extracted from sea water through passive absorption MIT 2019 research found that modifying 76 unused oil rigs in the Gulf of Mexico could extract over a quarter of USA’s 2017 consumption of cobalt through passive absorption technologies.
• ?In addition to new battery technologies, several recycling and circular economy models are being supported in the market, boosted by tax incentives and policies, especially in Europe and the USA. Furthermore, minerals demand models vary widely, and a metals study commissioned by the ISA itself found that the exhaustion of key minerals is not on the horizon.

In brief, projected gaps between demand and capacity[3] and the expected “opportunity” that DSM companies seek to position themselves for might well be a mirage, an image spun by proponents with little to back it except their marketing spin, compounded by the time-and-bandwidth-constraints of busy investor personnel. I do hope that investors such as yourselves do not become an unsuspecting victim of such circumstances.

?Future Costs

?Last week Planet Tracker issued a report on the costs of restoration post-exploitation "The Sky High Cost of Deep Sea Mining” finding that, at a cost of between $5.3-5.7 million per square kilometre, restoring deep sea biomes from damage caused by mining could more than double the reported $2.7m per km2 cost of mining itself.

?Financial institutions are already leading the way by denying funding to DSM operations.

?I trust that my message gives you reason and evidence enough to communicate concerns to the Boards of these DSM companies, and I hope that you will be able to convince them and their Chief Executive against embarking on a path that puts the reputation of your company at significant risk of damage to value to its shaSreholders.

[1] Sintec Report “The Future is Circular” https://wwfint.awsassets.panda.org/downloads/the_future_is_circular___sintefmineralsfinalreport_nov_2022__1__1.pdf

[2] See https://onlinelibrary.wiley.com/doi/10.1002/adma.202002718

[3] See https://www.woodmac.com/press-releases/global-lithium-ion-battery-capacity-to-rise-five-fold-by-2030/