National Reconstruction Fund: consultation paper

National Reconstruction Fund 2023
Consultation Submission to:
The Australian Department of Industry, Science and Resources

Introduction

The Critical Minerals Association Australia (CMAA) is a key interlocutor between the
Australian Government and the critical minerals industry. Our mission is to support the development of socially and environmentally responsible critical mineral supply chains to ensure Australia’s strategic security of supply for the Energy Transition, Green
Economy, and to capture move value in downstream processing and refining.

The CMAA amplifies the collective voice of its members to build a profitable, responsible, resilient and globally recognised Australian critical minerals industry. We want to support the industry in outlining the challenges it is facing, highlight opportunities to propel growth and innovation and position Australia as a critical minerals superpower.
Removing obstacles and mitigating market failures can help secure Australia’s future and benefit Australians from all backgrounds, including First Nations Peoples and regional communities.

Within the priority area of value-adding resources the CMAA suggests that the NRF give priority to investments that reflect the growing demand for critical minerals and feature value adding steps on shore and/or facilitate greater supply chain integration with like- minded nations.

The CMAA further suggests that a positive weighting be applied to those projects that contribute to and demonstrate net positive environmental, social and governance (ESG) outcomes on the local community and environment in which they operate. As the race to secure critical minerals that support clean energy supply chains and decarbonization accelerates, Australian critical minerals producers are well positioned to become globally recognised responsible suppliers. Greater adoption of ESG processes and alignment with recognised ESG standards would serve to demonstrate and project the country’s standards and values.

There are clear linkages between the value-adding resources and other NRF priority areas, such as renewables and low-emission technology, transport and enabling capabilities, as such the CMAA suggests that preference be given to investment in projects that are linked through the value-chain and that cross multiple priority areas.

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The CMAA has provided responses to the consultation questions collating the views of our members who operate across all aspects of the critical minerals industry including exploration, processing, provenance verification, critical minerals data, ESG, and mining consulting amongst others. Based on our responses outlined ahead, the CMAA stands ready to have further in-depth discussions with the Government to support and propel the Australian critical minerals industry.

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National Reconstruction Fund: Key Discussion Questions

Investment Needs and Opportunities

1. What are the opportunities for value-add, growth and diversification in each
of the priority areas?

The CMAA supports a range of industry sectors covered by the NRF within
Australia including:
• Growth in Australian renewables and low-emission technologies via facilitating
transfer of R&D from mining through to production /manufacturing for
renewable technologies.
• Logistics associated with shipbuilding, vehicle (including EV and battery) and
train manufacturing and maintenance and their associated supply chains
downstream from critical mineral extraction.
• Expanding Australia’s mining science technology, ensuring that once raw
materials are extracted, whenever possible, they are processed domestically
especially critical minerals of national importance. Several of our members
have recently supported the government with analysis and early insights on
options in this area.
o Australia is a leading mining nation, however significant value-adding
happens during midstream processing and refining where valuable
metals and minerals are concentrated and separated from waste. For
the majority of critical minerals this primarily occurs in China where the
supply chains are opaque, powered by cheap coal, and are often
environmentally damaging.
o Australia can lessen its reliance on China and diversify its supply chains,
by both investing in downstream processing on shore, and/or seeking
offtake agreements for offshore processing with like-minded nations.
Processing offshore should increasingly be tied to securing supply of
the processed materials that result, where they can replace imports
(from opaque supply chains) required for the emerging manufacturing
industry. However, this requires significant investment in infrastructure
to create ports that are well connected with rail links to key projects (i.e.,
those to national importance that stand to strengthen security of
supply, e.g., earths, tungsten etc), and to host processing and refining
facilities with access to cheap, renewable energy. This is essential to
ensure that Australian supply chains carry a low carbon footprint in
comparison to global competitors, despite their accelerated
investments in renewable energy generation, and in a carbon
constrained world that will deliver an important trading advantage to
Australian exporters.

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2. What are the manufacturing capabilities needed to support each priority
area?

The upstream critical minerals industry along with renewables and low emission
technology innovation, early-stage research and development, and
commercialisation should be an important focus for the NRF. Emphasis should be
placed on investments driving growth in creating hubs for NRF priorities. Critical
mass will be important in ensuring efficient infrastructure use, workforce
development, and innovation interchange in the cross-cutting priority areas of
critical minerals, renewable energy and low emissions technology.

Investments in hubs or ‘clusters’ across the Australian critical minerals regions (e.g.
North West Mineral Region Queensland and its related transport, power and port
infrastructure, or the Port Pirie and Eyre Peninsula mining and processing region
in South Australia, and emerging clusters that should be considered as part of a
long term strategy) should aim to help generate a self-sustaining critical mass of
related and dependent industries (i.e., commodity-based hubs – lithium,
vanadium etc powered by renewable technologies).

Original equipment manufacturers (OEMs) are increasingly looking to secure low
carbon and responsibly produced critical minerals. For Australia to diversify its
existing supply chains, and attract international investment as well as OEMs, the
nation will need to invest in upgrading the existing infrastructure to expand
industry’s access to renewable energy.

This continues to be an obstacle to attracting finance as mining projects are
typically determined by the need to attract a large amount of up-front capital to
build non-process infrastructure. International investors are particularly averse to
this as they want to invest in a mine and processing capacity, and not
infrastructure - investors see this as the Australian Government’s role and not that
of the market.

3. What are other capabilities needed to support each priority area?

4. What are the strategic priorities for supply chains / enabling inputs in each
priority area?

Australia has an established, well-funded, reliable, and globally relevant mining
industry secure in its position as either the dominant global supplier, or a top 10
supplier of a number of minerals. The structural challenge Australia faces is that
two of its largest mineral exports in both volume and dollar values is mostly single
use hydrocarbons (coal and LNG). Australia needs to rapidly transition capital
flows and wealth generating activity to a focus on critical minerals for supply to
traditional industrial applications and emerging technologies.

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To do this, a strategy of bridging the upstream stable, well-resourced mining
industry, and the start-up and emerging manufacturers, will assist develop
sovereign capability. To onshore advanced manufacturing enterprises delivering
flow batteries and battery cells, to markets, Australia will have to become
regionally competitive, and produce ESG compliant, but equally price competitive
refined critical materials.

However, to build this vital midstream processing and refining capacity while
supporting onshore manufacturing the CMAA believes that the NRF should
consider investing in hubs or ‘clusters’ which are based on several critical mineral
commodities to facilitate optimal supply chain solutions for priority areas,
including critical minerals and renewable technologies. These could be informed
by the following:

1) Environmental, social, and governance measures.
Across all industries, successful hubs or ‘clusters’ would require companies to
demonstrate ESG best practice, and how they are generating net positive impact
on local communities.

2) Impacts on industry and supply chains.
Supply chain considerations within each industry must be addressed to
understand the impact on regional and local economies. For instance, prioritising
industries with the highest value-add potential or those supporting Australia’s
defence sector.

3) Workforce availability and technical expertise.
Understanding the opportunities and limitations of workforce resources within
the market is imperative to its success.

4) Available and competitively priced reliable renewable energy.
Renewable energy is a key input in the production of green power generation and
transmission. The Australian critical minerals sector cannot compete with China
on price however; it can only meet OEMs expectations of producing low carbon,
responsible critical minerals and materials if the Australian Government invests in
alternative energy and infrastructure.

5) Water and wastewater resources.
Guaranteeing water quality and availability are crucial for production facilities and
surrounding communities of critical minerals projects. Some critical minerals
processes can be water intensive. The Australian Government should invest in
water and wastewater R&D and commercialisation and companies should be
encouraged to implement innovative solutions to reduce their water usage.

6) Port and logistics supply.
Proximity to inland marine and port infrastructure, preferably with bulk liquid
and/or gas infrastructure, is key to domestic and export markets. There must also

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be efficient transport corridors and elements that enable safe and efficient
distribution and appropriate land zoning in the port vicinity to allow for the
production.

7) Open-source market research and statistics.
Providing clear market analysis, forecasting and production data could potentially
attract private investment and identify opportunities or threats within the market.

5. What are the gaps in or barriers to private sector investment in each of the
priority areas?

The private sector does not typically finance projects of strategic importance (e.g.,
rare earths production is strategic to Australia) as they can carry a greater
geopolitical risk. Projects necessary for defence needs, e.g., tungsten, might not
be as commercially attractive as other commodities but are crucial to national
security and carry a higher strategic importance to Australia.

Banks are also reluctant to finance mining projects for critical minerals where they
have no experience or deem them too risky (e.g., rare earths) and projects are not
funded or back by the Federal, State and / or Local Government entities.

The lack of domestic processing and refining capacity in Australia adds to
investment risk due to overreliance on China and geopolitical uncertainty.
Investors are increasingly driven by ESG best practice and sovereignty as
mechanisms to reduce risk. Due to the existing monopolisation of critical mineral
supply chains, investments in new refining facilities are seen as high risk without
Government backing.

6. How can the NRF help build or encourage stronger pathways for Australian
developed innovation and research, and encourage additional private
investment in priority areas?

Underwriting by the Government reduces risk and entices private investment into
projects of strategic importance. Government underwriting has a go-ahead green
light effect. Generally, the private sector (and then the global market) would see
early or anchor NRF funding as an indicator of the quality of a potential investment
and the government’s backing of the industry.

If the NRF wants to build and encourage strong pathways for Australian developed
innovation and research and encourage additional private (global) investment in
priority areas, it may choose to demonstrate the value in Australian money going
into Australian businesses – this could involve businesses that have accepted NRF
funding and have a viable product being preferentially assessed when tendering
for federal government contracts. Or it could involve downstream research and
development tax benefits or assistance with bringing in skilled migrants to grow a
workforce.

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Tangible longer-term commitments by the government, beyond just the NRF, may
encourage further private (global) investment in priority areas, by demonstrating
clearly that they are blue-chip business opportunities, and that the federal
government is invested in the critical minerals industry.

7. How could the NRF consider Government policy priorities in performing its
investment function?

The NRF might consider, at the highest level, which government policy priorities
define the national interest, and therefore whether or not its investment function
is performing in the national interest not only federally but in support of or being
complimentary with State Government strategies for critical minerals. The NRF
must consider investment in both the commercial opportunity and strategic
security of supply.

In the absence of a formal, streamlined national strategy for critical minerals, the
NRF might consider, for example, whether or not all levels of government are
acting in support of the Critical Minerals Strategy. Are they acting in accordance
with Departmental strategies and corporate plans to build a long term and
sustainable critical minerals industry within Australia? Are there policy proposals
currently under development or under consultation either at a Federal or State (or
private) level that should be somehow involved in NRF-related decisions?

Which areas the NRF prioritises will depend on Australia’s long-term vision. Due to
the scale of supply chain monopolisation, the Australian Government will need to
select where it wants to specialise and then invest in the infrastructure to attract
private investment and grow that sector. Extraction, processing, and refining are
long-term ventures that require 20-30 year vision with immediate investments
opportunities that can help Australia move into processing and refining within the
next 5-10 years. Growing the renewable energy industries and component
manufacture of powertrains, wind turbines etc will rely on a stable, secure access
to responsibly refined materials that are also competitively priced.

Returns, financial instruments and working with other investors

8. What factors and considerations should inform the portfolio rate of return
for the NRF?

The strategic importance of security of supply, defence, and support for key
priority areas industries (e.g., energy, transport,) may outweigh the commercial
rate of return. It is not the private sector’s responsibility to strategically position
Australia and mitigate against geopolitical risk.

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The NRF should be driven by diversification and selection of projects that are
either critical to national security or have high likelihood of commercial success.
Picking winners (whether strategic or commercial) is essential to maximise benefit
to the taxpayers. Solid ESG practices should also be factored in, both private
investors and OEMs are increasingly expecting a project to generate net positive
impact on the local community and the environment.

The success of companies operating in sectors or areas that are typically deemed
too risky by traditional finance, opens a window of opportunity, for the private
sector to follow suit. It also sends a strong signal that to the market that the
Australian Government is serious about supporting the critical minerals sector
and securing Australia’s future.

9. What factors and considerations should inform the setting of acceptable but
not excessive level of risk? Should the acceptable level of risk differ between
priority areas?

Risk will always be higher in resources, especially strategic resources needed for
defence and heavily monopolised supply chains, hence investment decisions
should take into consideration a higher risk threshold (e.g., higher risk should be
accepted for REEs vs lithium).

Key considerations:

• Where is the offtake going? If the offtake is feeding directly into domestic
industry and the project is of higher strategic importance, the potential
benefits may outweigh the risk.
• Who are the owners / shareholders? E.g., can the project ensure sovereign
capability and is it protected from a non-aligned takeover /influence as
already seen with Peak Resources?
• Is the project aligned with Australia's future goals? Projects within already
saturated markets (e.g., lithium) carry a lower risk than other critical
minerals, including those for tech solutions. However, the higher risk
projects present an opportunity to open new avenues and diversify
Australia’s critical minerals portfolio and supply chains.

10. What types of concessional offerings would be preferred if these were
offered (for example, lower interest rates) and why?

11. What factors drive or constrain co-investment (for example, by industry,
financial sector or domestic or offshore investors) and how should these be
taken into account?

Factors that drive co-investment include:

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• Tax Incentives
o The US Inflation Reduction Act (IRA) is an example of attracting
foreign investment and enticing domestic production, refining, and
manufacture.
• Favourable Policy & Ease of Operations
o Off-shore investment is better attracted without regulatory red tape
and with policies encouraging innovation, use of novel technologies,
centralised source of knowledge / dedicated point of contact to
provide information on taxation, regulations, and planning and
permitting requirements.
• Offtake Agreements / Access to Offtake
o Signed offtake agreements typically attract co-investment as the risk
is reduced once agreements are negotiated. Increasingly offshore
investors and OEMs want to have access to offtake to feed into their
supply chain.
• Government Support
o Government support via underwriting or funding is viewed
favourably by domestic and offshore investors. Complex and high-
rick projects can attract suitable investment with the right level of
Government support.

Factors that constrain co-investment include:

• Red Tape
o Cutting red tape for businesses especially offshore investors from
allied nations is necessary, to position Australia as an attractive
destination.
• High Risk
o Strategic projects and those in midstream processing and refining
carry a higher risk but also a fantastic opportunity for Australia to
diversify its supply chains. Investors are reluctant to take on extra
risk without Government backing.
• Rules of Origin
o Rules of Origin are key to tapping into OEM markets in Asia, Europe,
and US. These vary depending on commodities and are difficult to
meet and benefit from, for some critical minerals.
• Offtake Arrangements
o Lack of signed offtake agreements can deter investment,
increasingly investors are looking for projects that have signed
agreements with allied nations, outside of the existing monopoly.
• National Protectionism
o Globally, increased nationalism of resources is perceived as a
significant risk by investors. Some nations, including Australia (for

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rare earths specifically), is limiting the percentage of offtake that is
allowed to be sold overseas over the lifetime of the project as part
of the Government funding terms. As there are limited options to
sell to the Australian market this poses a significant investment risk.
The potential offtake may not be able to leave Australia, without the
capability to sell or refine it within Australia, with no guarantee from
the Government that it will build refining capacity within a specified
timeframe.
• Limited Access to End-user Markets
o Australia has a limited OEM sector, reliant on critical minerals. To
attract more offshore OEMs, Australia needs to create a secure
supply. To do this, it must first build a specialised processing and
refining capacity.

12. What are the mechanisms and types of finance which will best attract co-
investment from the private sector? How can the NRF best crowd-in
investment?

It may not be about the mechanisms, or types of financing, or provisioning
associated with the timing of investment, or the target of the investment that will
attract co-investment or crowd-in investment. The NRF might consider signalling
to the private (global) investment and funding sector where it is going to invest on
behalf of Australia in the critical minerals sector to demonstrate commitment to
the industry, and highlighting its commitment to stimulate investment in the
critical mineral industry within Australia.

This may include communicating that it is willing to take on more risk than a typical
sovereign investor. It could collaborate with state and local governments to
provide a more streamlined approach to investment, ESG requirements,
approvals etc so it is not simply seeking to fill funding gaps or provide short term
funding or grants to the critical minerals industry, but is truly committed to the
success of an investment. This is because the return it seeks is not purely financial,
it is a return on sovereignty. Therefore, the NRF may be able to, in effect, de-risk
investments that that private sector might not otherwise see as attractive.

NRF can also mirror proven methods of signalling to the private sector by
underwriting high-rick projects of national defence /security importance. Canada’s
model of providing equity and like-for-like finance (with variable conditions
attached based on the project) has been well received by the private sector.

Complementary reforms

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13. What are the non-financial barriers preventing businesses from making the
most of opportunities for value-add, growth and diversification in the
priority areas?

The NRF in collaboration with other departments should determine where key
renewable hubs and critical minerals development and growth could be located
(long term focus not just short term or election cycle focus) to benefit the entire
sector along the value chain as a whole and not just state by state. Access to
common use facilities can help accelerate diversification.

Other non-financial barriers, especially in moving downstream include:

• Lack of skills and talent available.
• Red tape around planning and permitting in projects and commodities that
the State Governments are not as familiar with.
• Geopolitics and China’s state-backing, lower prices, and technological edge
are difficult for Australian companies to effectively compete with unless
they compromise on health and safety, environmental regulations, and
responsible practices.

14. Are there non-financial mechanisms that could support priority areas and
the objectives of the NRF?

Assist businesses in securing industrial sites that are affordable and collated with
supporting industries that meet their specifications. The NRF could consider
investing in the establishment of regional industrial hubs. This could be through
identifying available land, facilities, infrastructure, and services to meet
operational requirements. The NRF could provide support by linking investment
to prioritise support for businesses willing to establish or grow their operations in
regional hubs.

The hubs could act as ecosystems of supporting companies – e.g., for lithium,
collocating lithium refining with anode production, hydrogen production,
renewable energy production (solar, wind, hydro), other component
manufacturers, water treatment facilities /innovative wastewater treatment
companies to maximise the value add and shorten supply chains where possible.
Similar approaches could be taken with other commodities /groups of critical
minerals and would incentivize offshore investment without significant capital
outlay by the NRF.

15. How could the NRF work alongside other complementary reforms to best
deliver on the Government’s policy priorities?

The NRF could support the building of sustainable regional growth hubs and
centres of excellence from upstream through to midstream and eventually

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downstream industries associated with the critical minerals industry. Amid
regional and global geopolitical uncertainty, and constrained supply chains,
Australia should seek greater self-reliance and economic certainty through on-
shore value-adding to a strong extractive resources sector – critical minerals are
the key priority.

16. To what extent are other levers required to support the objectives of the
NRF (for example, skills, trade, supply chains)?

Along with available land and common user non-process infrastructure these are
critical levers to ensure the investments made by the NRF are successful and
generate whole of industry growth at not only an Australian level but also
regionally and locally. Without considering these factors and indeed having an
effective and efficient process to inform the NRF Board of how proposed
investments address these levers, the ultimate success of those companies,
industrial hubs and other associated infrastructure may be compromised and
therefore the investment returns sought by the fund.

To best position Australia as a critical mineral superpower and to limit its over
reliance on dominant market players, the NRF will need to work with other
Departments and State counterparts to address the critical skills gap, and a lack
of a talent pipeline. Each year fewer and fewer geologists, engineers, and
metallurgists graduate from Australian universities. This is also occurring across
the Western world. China is on the other hand investing in creating a future
generation of critical minerals experts and leaders. In the short term, the NRF
would benefit from relaxing visa requirements for critical minerals experts and
academics. In the long-term, the NRF would benefit from collaboration with the
full range of relevant Federal Government Departments and State Governments
to address the skills shortage and ensure responsible extraction is embedded in
the education system, to encourage more students pursue careers in the sector.

Trade and offshore investment can greatly support the NRF’s objectives if Australia
can position itself as being open for business and open to creating integrated
supply chains with like-minded nations including the EU, UK, USA, India, Korea,
and Japan.

17. How does the NRF, with other private and Government settings, drive the
right ecosystems for sustainable industry growth?

The NRF should focus on not just taking orphan investment decisions or short -
term projects, but also explore how to create the right ecosystems for sustainable
industry growth at regional and a national level through targeted, coordinated
investments that help stimulate and drive the industry forward allowing for
private (global) investment to move in. Investment decisions should reflect long-
term value add, rather than quick but unsustainable wins.

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We often hear that upstream inputs needed for production processes are missing
or are unaffordable, and, that downstream access to markets and customers or
logistics is missing or incomplete, which affects overall viability for global
investment. Therefore, being cognisant of the overall ecosystem being
augmented through investment choices would be a valuable approach to drive
sustainable industry growth in priority areas.

Conclusion

The CMAA calls on the Government to consult us and our industry partners on any
aspect of this submission. In doing so, our goal is to support and grow the Australian
critical minerals industry to be world leading, responsible, and secure.

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