Miners explore next-gen joint ventures in pursuit of sustainability

Joint ventures (JVs) have long been an important tool used in the mining industry to manage a wide array of risks, ranging from sharing the substantial capital costs of greenfield development to mitigating political challenges to augmenting technical capabilities.

Traditional mining JVs have often seen major sector participants join forces to develop mega projects in remote and sometimes politically sensitive locations. Junior players with promising resources have regularly teamed up with larger counterparts to facilitate the development of the mines. In Asia, major trading houses are often part of consortia as they look to ensure feedstock for their industrial groups.

In recent years, miners have sought to form new alliances as part of efforts to decarbonize operations, reduce their environmental footprint and generally evolve to become more sustainable. They have joined forces with equipment manufacturers (such as makers of haulage truck fleets used on mining sites), developers of process technologies, renewable power companies, and innovators in the energy transition.

They have also teamed with original equipment manufacturers, most notably automobile manufacturers and companies in the battery supply chain, which seek to ensure the supply of critical minerals that enable the roll-out of electric vehicles and other energy transition technologies they produce.

These alliances help mine sites and the economy more broadly by transitioning power sources from high carbon-emitting power generation and transport facilities to renewable and other lower carbon-emitting sources, facilitating the development of more environmentally friendly processes, and addressing concerns over the projected roll-out of electric vehicles and other energy transition technologies.

Such alliances come in many forms, from softer cooperation and joint development agreements, to stricter contractual joint ventures, to very formal partnerships or corporate structures. The combination might accordingly involve a newly incorporated special purpose vehicle with a defined goal in mind, or be an open-ended contractual partnership focused on operational collaboration in a particular sector or region.

Decision-making may be by mutual agreement, through a general/limited partner-type arrangement, or through majority/minority corporate voting rights. In addition to the corporate arrangements, these alliances often involve commercial agreements, notably offtake and supply contracts, and in particular mineral offtake and power purchase agreements (PPAs).

Cross-sector alliances are often more complex than joint ventures between businesses in the same industry, or with parties such as major trading houses or government entities whose business and objectives for the joint venture are often closely aligned to those of the mining companies.

Mining companies need to consider how to adjust traditional JV structures and terms to address the issues that arise in these cross-sector JV arrangements to protect their commercial interests and manage emerging and often unpredictable risks.

Structuring cross-sector alliances to manage more complex risk

Standard JV agreements set the terms and conditions of the alliance, and define the roles, responsibilities, and incentives for each party to ensure alignment and agree allocation of risks.

They also govern each party’s:

• financial (including required and optional funding and applicable dilution mechanics),
• operational, and in-kind contributions;
• governance arrangements;
• procedures for making decisions and resolving deadlocks;
• exit provisions;
• IP rights;
• measures to deal with non-performance;
• tax considerations;
• and information sharing and use.

 

In addition, they may have very different characteristics in terms of credit quality, liquidity, size, global footprint, and business stability. Finally, their motivations and incentives for entry into - and trigger points for exit from - the alliance will be distinct. Their risk tolerance for some aspects of the transaction will also vary. All of these factors must be considered and reflected in detailed, bespoke agreements setting out the terms.

An alliance between a major mining company and an early-stage, highly expert, founder-led counterpart (for example in the tech sector) should reflect the balance of power between, and the value contributed to the alliance by, the partner entities. This can be done by assigning majority owners full control over decisions and operations, while protecting the minority owners’ interests. Determining value to the contribution of the founder-led counterpart can be a complex negotiation.

The parties will want to anticipate the potential lifecycle risks and build flexibility into their agreements to prepare for potential changes at different stages of the alliance. Pilot programs for example can serve as a preliminary test to determine whether a collaboration is likely to be successful, after which the nature of the relationship between the parties will need to adapt.

Allocating risk and rights

Certain JV features often have increased importance when working with businesses outside the sector. This is especially true when it comes to IP rights and how and whether to share any new innovations developed through the JV with the market; exit rights; financing commitments; and “stapled” and “severable” JV rights.

When allocating development and operational risks among partners, it is crucial to understand what each party is best placed to control, as well as the potential ramifications to each one if a project does not work, and plan for downside scenarios.

For instance, if one party is responsible for design, construction and operations, does it assume more risk – and therefore, have more liability – or not? If it does, then in what ways is that liability limited (assuming it is limited)?

This is notably the case in relation to offtake agreements, under which a buyer agrees to purchase a certain portion of the producer's output. A miner could play a role on both sides of the agreement, selling product to a JV it has entered into with a carmaker to test clean energy-powered vehicles. More traditionally, it could simply be the supplier under the agreement, providing the lithium the carmaker requires for EV batteries.

Take for example a transaction in which a miner signs a JV agreement with a carmaker as offtaker for the supply of lithium. Here, the contract would need to define the consequences of a delay in start-up of production or if mine production fell below anticipated amounts.

Which party assumes those risks: the mining company as operator, the JV between the mining company and the carmaker, or the carmaker? Does the operator or the JV need to take mitigating measures (at its cost) such as sourcing lithium from elsewhere to deliver into the supply agreement? Similarly, the carmaker would likely seek flexibility in the supply contract to accommodate any interruption to its production schedule whatever the cause, be it a lower than anticipated market demand, a labor dispute, a force majeure, or other event. If such flexibility is granted, who absorbs the JV’s losses or, at least, baseline costs?

The miner may have to consider issues it might not have encountered in more traditional JV arrangements. For example, it could enter into an alliance with a cleantech developer to run its plant more efficiently and sustainably. But if the technology fails, causing an operational shutdown, it is essential to have determined in advance where the liability sits - especially if the overall operation of the mine is substantially impacted. Additionally, the capability of the party to bear such liability needs to be assessed and possibly backstopped.

It is possible that such an arrangement could require the mining company to provide market sensitive data for analysis as part of a development process for new equipment or processes and in turn necessitate operational adjustments. In this case, the JV agreement would need to take any disruption into account to balance the commercial interests of the two parties or protect against misuse and disclosure of the sensitive information.

Likewise, in JVs with equipment manufacturers, mining companies will need to ensure the agreement covers their rights to the latest products and technology upgrades, as well as potential benefits such as discounts or rights of first refusal to purchase jointly developed innovations.

When one JV partner is significantly larger than the other, such as a miner and a technology start-up, the related agreement also needs to be structured differently than in situations where the alliance involves businesses that are more evenly balanced. The smaller company may have a transformational idea, but it requires a partner to pilot and fund its development and commercialization.

If partners are developing new intellectual property (otherwise known as foreground IP) – or end up doing so inadvertently – they must agree how any commercial upside is apportioned during the life of the JV, and how any ownership and use rights will be allocated once the venture terminates.

Can the parties develop the IP further? Can they monetize it, or is it only for use in day-to-day operations? If they can commercialize the IP, are they able to sell it outright, or must it be licensed to third parties? How will any IP-related disputes between the parties be resolved?

Here, any contractual arrangements need to be considered with broader factors in mind. If for example the parties wish to exploit foreground IP jointly, a perpetual license arrangement may be a viable option, although this would require the parties to maintain a positive post-JV relationship.

At the same time, all parties must be aligned on a financing plan that considers all contingencies. The agreement should clarify how budgeted costs will be funded as well as how cost overruns are dealt with, and whether this will impact the future equity structure, cashflow and/or profit sharing.

Clarity between the parties on funding commitments and the limits of such commitments is fundamental. Counterparty risk (i.e., the risk of non-performance by one of the JV parties) is a significant consideration, particularly where the partners are of unequal sizes and consequently impacted differently by events. Larger companies may require various protections (insolvency and cyber security are common examples) to insulate them from risks, including from supply chain partners outside the JV, and to ensure business continuity.

For instance, car manufacturers might wish to retain an offtake without long-term involvement in the mining company’s development and operations. Conversely, mining companies may wish to exit the equity of JVs to develop equipment or processes, but retain preferred rights under supply agreements.

Ending, updating and exiting partnerships

A robust JV agreement will set out how ownership rights will be structured once the alliance has ended. If one of the partners needs to use the venture — or the output from the venture — to ensure continuity of business operations, the agreement must outline the procedures and conditions under which this can happen.

A mine must be able to continue operations even if there is a change to — or dispute with — a partner, for example a power supplier. A power purchase agreement in this context should ensure operational continuity while minimizing disruptions.

Conversely, when a JV is successful, there must be a clear mechanism for allocating benefits that themselves require a degree of flexibility. This could involve updating the terms, selling the venture as a standalone business, or monetizing the developed technologies and processes within the broader industry.

Partners may wish to exit or transfer their positions within the JV independently of the other party, raising questions about their resulting rights.

A JV agreement must therefore explicitly define the conditions under which rights are “stapled” — or linked — and “severed” — or de-linked — based on contractual, regulatory, and operational factors.

For example, an auto manufacturer might find that its equity stake cannot be separated from its role as the main offtaker in a JV with a miner, meaning it might need to remain in the alliance to continue accessing the resources. In other cases, the two positions will not be linked and the auto manufacturer’s rights and obligations as offtaker will remain even if its equity stake is reduced or eliminated.

Other cases may be less controversial, so a partner may be able to sever its rights without raising a concern with its other partners. For example, a partner that has provided debt to the JV might wish to sell that debt while keeping its offtake rights.

The future of cross-sector alliances

Cross-sector alliances enable mining companies to facilitate the development of innovative solutions to the sector’s sustainability challenges. They also assist them in mitigating the risks of such development.

Given that the mining sector is still at the start of this current innovation phase, it will need time to evaluate how well different alliance arrangements work. Observers will be monitoring which JVs succeed and which do not, learning lessons for future alliances.

These questions include how should success (and failure) be defined, when to exit an unproductive arrangement, and how to structure an agreement that best protects all parties.

Stakeholders in the sector meanwhile will seek what they view as appropriate returns on their mining investments, and will likely be hesitant to back long forays into adjacent sectors.

If the efforts of these alliances prove successful or companies outside the sector otherwise step in to develop the equipment and technology needed to meet the sector’s sustainability goals, the mining companies will likely exit. This would free them up to return to their core business competency of mining.

Until then, we will likely see mining companies stepping in to jumpstart and progress research and development work. Similarly, once the market dynamics of the energy transition are better understood and are perceived as more predictable, OEMs will likely no longer feel the need to pursue a quasi-vertical integration strategy. They would then exit these investments, leaving mining to the miners.

Cross-sector partnerships in mining

Decarbonization of equipment and processing

In 2021, BHP announced a collaboration with Caterpillar to deploy zero-exhaust emissions trucks at its sites. Three years later, BHP revealed it was also trialing Caterpillar technology that can transfer energy to both diesel electric and battery electric large mining trucks while they are in operation, and can charge an electric haul truck’s batteries on the move.

Both BHP and Rio Tinto have formed partnerships with Australian steelmaker BlueScope to pilot its electric smelting furnaces.

Rio Tinto and Japanese conglomerate Sumitomo agreed in 2023 to explore the use of green hydrogen for alumina refining.

Fortescue, meanwhile, signed a USD2.8 billion deal with Liebherr to develop and deploy zero-emission equipment (including battery-electric trucks, excavators, and bulldozers) as part of its drive to create one of the world's largest zero-emission mining fleets by 2030.

Critical mineral supply

Automaker General Motors has formed a JV with Lithium Americas to fund, develop, construct and operate a lithium mine in Nevada in order to exert greater control over its electric vehicle and battery supply network.

Ford announced plans in 2023 to take a direct stake in an Indonesian battery-nickel plant to secure EV supplies alongside co-investors Indonesia’s PT Vale and China’s Huayou Cobalt.

Carmaker Stellantis signed a deal with NioCorp enabling it to access rare earth minerals used to produce high-powered magnets for its EVs.

South Korean battery manufacturer LG Energy Solution agreed to produce lithium hydroxide in Morocco alongside China’s Yahua Industrial Group.

Power supply

BHP has a 12-year PPA with Enel Green Power in Australia, through which BHP receives 100% of the electricity from Enel’s Flat Rocks Wind Farm Stage 1, which it is using to decarbonize its nickel operations in the country.

Anglo American and EDF Renewables agreed to form a jointly owned company, Envusa Energy, to develop a regional wind and solar ecosystem in South Africa.

IAMGOLD has signed a PPA with Total Eren that will see IAMGOLD’s operations in Burkina Faso supplied by a 15MW solar plant.

Chilean state-owned mining company Codelco has agreed a PPA with Atlas Renewable Energy to purchase 375GWh a year from a solar-plus-storage project.

Fortescue and Anglo American, which aim to reach net zero in 2030 and 2040 respectively, are the miners that have signed the most PPA deals, alongside Rio Tinto and BHP, according to Wood MacKenzie.