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Highlights
- Focus on transition commodities like lithium and rare earths.
- Emphasis on management track record and project feasibility.
- Importance of de-risking in sectors like rare earths.
Commodity investment bankers are increasingly focused on backing companies that play a critical role in the global transition toward cleaner energy. A growing emphasis on commodities tied to decarbonization is shaping their financial decisions, with a particular interest in resources like lithium and rare earths.
During the Critical Minerals and Energy Investment Conference held in Perth, Fabian Fuentes, a commodities investment banker, shared insights into what these bankers look for when deciding whether to support an ASX-listed company.
Focus on Transition Commodities
Investment banks like National Australia Bank (NAB) are concentrating heavily on transition commodities. According to Fuentes, NAB has maintained a strong position in traditional commodities such as gold and bulk resources but has recently been expanding its focus on materials essential to global decarbonization efforts.
"We’re still very solid in gold and bulk commodities, but we’ve been increasing our exposure to transition commodities," said Fuentes. Lithium and rare earths are two key areas where NAB has ramped up its activities. The demand for lithium, driven by the surge in electric vehicles and renewable energy storage, has attracted substantial attention. Rare earths, vital for various clean energy technologies, are another priority, though their market presents challenges due to the dominant role of Chinese suppliers.
Evaluating Feasibility and Long-Term Viability
Bankers look closely at the feasibility studies of the companies they consider financing. Fuentes explained that NAB works with consultants to assess management’s track record, the project’s cost-competitiveness, and whether the company has strong sponsors or off-take agreements in place. Off-take agreements are critical because they ensure that there is a committed buyer for the commodity before it is produced, which helps to reduce financial risk.
One of the key factors NAB evaluates is the robustness of a company’s feasibility study. This study must demonstrate that the company can navigate commodity price cycles while maintaining the ability to repay its debts. This is particularly crucial for lithium producers, like Pilbara Minerals (ASX:PLS) and Allkem (ASX:AKE), where long-term demand is promising, but the market is also volatile. Similarly, for companies involved in rare earths, such as Lynas Rare Earths (ASX:LYC), the feasibility study needs to address supply chain risks.
De-Risking Projects in Rare Earths
Rare earths present a unique challenge due to the concentrated supply chain, especially with China's stronghold in this market. NAB is working to de-risk rare earths projects by supporting companies that can offer transparency in their cost structures and secure stable supply lines outside of China. This is essential for the long-term sustainability of these projects and ensures that they can withstand market fluctuations.
In conclusion, commodity investment bankers focus on transition commodities and evaluate companies based on their management, project competitiveness, and the strength of their feasibility studies. By backing firms that meet these criteria, they aim to support projects that will thrive in the long run amidst changing global energy demands.
