Canada’s critical mineral opportunity is real—and big
By Marisa Beck, Research Director, Clean Growth at the Canadian Climate Institute
Critical minerals have quickly climbed to the top of the political agenda in recent months, largely thanks to the aggressive and erratic trade actions coming from south of the border. Canada has significant reserves of the six priority critical minerals that are essential for manufacturing the technologies that will drive national prosperity, competitiveness, and security in the decades to come, including clean energy technologies, and information and communication technologies.
The opportunity ahead is substantial: in some scenarios, the combined market value of these critical minerals—copper, nickel, graphite, cobalt, lithium, and rare earth elements—more than doubles by 2040[1]. Geopolitical tensions, including the escalating trade war between the U.S. and China, only increase the strategic value of bringing Canadian critical minerals to market—and fast.
The challenge is that capital is simply not flowing in Canada’s mining sector at the pace and scale one could expect given the size of the economic opportunity. What is holding back investment in Canadian critical minerals?
Despite strong demand projections for these materials, investors face significant financial hurdles. While there are many factors creating risks and deterring investment (as we argue in our upcoming report for the Canadian Climate Institute), one specific barrier is worth extra attention—the high price volatility in some critical mineral markets. This volatility stymies much-needed investment to accelerate critical minerals production in Canada.
Fortunately, there are smart policies the government can adopt to boost capital flow by sharing price risk with investors. As we argue, financial risk-sharing is a necessary piece in a package of policies required to de-risk critical minerals projects for investors and capitalize on opportunities in the sector.
The current investment gap will create a production gap in the future
Current investment in Canada’s upstream mining of critical minerals is not keeping pace with both domestic and global demand growth. Our analysis indicates that Canada requires new investment between about $30 billion and $65 billion in upstream mining projects between now and 2040 to tap into its full production potential. Without new investment at this scale, critical mineral production in Canada from existing mines is projected to drop significantly below even domestic demand over time, resulting in a production gap valued at around $12 billion by 2040.
We have a good sense of some of the factors that impede this investment. In 2024, we conducted an online survey to learn more about the barriers to investment in Canadian critical minerals. Respondents indicated that the high capital cost of critical minerals mining projects combined with long payback periods are the most important capital market barrier.
These characteristics make critical minerals projects vulnerable to significant volatility in global markets for these commodities. For example, lithium prices have swung wildly over the past five years, first falling by about 40 per cent below the January 2018 reference price, then peaking at close to five times that price before falling off drastically again.
The economic viability of Canadian critical mineral mining projects will hinge on future market prices. High price volatility makes it more difficult to secure financing while also delaying project development and interrupting operations. Unpredictable price drops can make projects (temporarily) uneconomic, further prolonging the time period until projects generate profits.
Immaturity, market power, and geopolitical uncertainty = big price swings
One reason prices are highly volatile is that the markets for some critical minerals are immature and fairly opaque. For example, the London Metal Exchange (LME), the world’s largest commodity exchange, first listed copper in 1877 and nickel in 1979, but to date, lithium is only listed in the form of futures, while the LME does not list graphite and rare earths at all. Buyers and sellers typically negotiate prices on a case-by-case basis in mostly opaque and unstandardized transactions.
This opaqueness makes these markets more vulnerable to the influence by a few powerful players. For example, when China’s electric vehicle purchase subsidies expired at the start of 2023, domestic electric vehicle demand growth slowed by more than half, and the price of lithium dropped by 80 per cent over the course of the year, sending investment interest into a tailspin.
The escalating trade war between the U.S. and China is leading to further uncertainty and price swings in global critical mineral markets, especially for rare earths. In an era of mineral geopolitics, future prices are increasingly unlikely to be determined by the interactions of supply and demand alone.
Governments can de-risk projects by sharing price risk with companies
Immature markets and concentrated market power are market failures that justify focused government intervention to protect investment and encourage new market entrants.
Financial risk-sharing agreements can take various forms, but two may be particularly useful: contracts-for-difference and government-backed offtake agreements.
Contracts-for-difference are contracts designed to protect producers from price volatility by establishing a fixed reference price. When market prices fall below this threshold, a government pays the difference to the producer which makes it easier for projects to secure financing.
Offtake agreements with governments can significantly reduce demand- and price-risks for mines, and help projects secure financing. This instrument can have the added benefits of enabling Canadian governments to strategically stockpile certain minerals to build resilience.
Financial risk-sharing is necessary but not sufficient
Contracts for difference and offtake agreements are central elements in a package of policies that Canadian governments should implement to seize Canada’s opportunities in critical minerals. But on their own, these instruments will not be sufficient to ensure a thriving critical minerals mining sector in Canada in the long run.
Rather, Canadian governments should implement smart policies that reduce investment risks and speed up projects by sharing financial risks, upholding Indigenous rights and strengthening environmental protections. The Canadian Climate Institute’s upcoming report on Canada’s critical minerals will identify a detailed policy package that can help accelerate investment in Canada and secure the country’s place in the global critical minerals race.
[1] In the International Energy Agency’s Announced Pledges Scenario and Net Zero Scenario.
