Unpacking the NSW Critical Minerals Strategy: royalty deferrals and a positive vision

Key features and opportunities 10 min read

On 18 October 2024, the New South Wales Government released its Critical Minerals and High-Tech Metals Strategy 2024–35 (the Strategy), the centrepiece announcement under which is a $250 million royalty deferral initiative for critical minerals projects.

In this Insight, we provide a brief overview of the New South Wales Critical Minerals Strategy, explain a number of the key initiatives, including the royalty deferral initiative, and give our views on the need for continuing government support to unlock the enormous potential in Australia's critical minerals sector.

Key takeaways 

• Through the adoption of its critical minerals and high-tech metals strategy, the State Government has signalled its willingness to promote critical minerals. This is a positive step for the development of this industry in New South Wales, although there will naturally be disappointment by the lack of firm, detailed policy announcements.
• The centrepiece policy announcement to improve investment conditions is a $250 million deferred royalties scheme – targeted at projects commencing production between 1 July 2025 and 30 June 2030 – which would allow new critical minerals projects to defer the first five years of royalties. The devil is always in the detail – which is not yet forthcoming – but given the timing, we think that this policy will largely benefit projects that are already at an advanced stage of development or already in construction.
• In addition to exploring opportunities for financial support for projects, the Strategy also outlines proposals to facilitate the navigation of approvals pathways, as well as continued development of partnerships between industry participants and government.

Background

Critical minerals and high-tech metals have an important role to play both in the clean energy transition and in the development of future focussed industries. The need to maintain a secure and diversified supply of these resources has not been lost on governments across the world, with various initiatives being announced over the past few years – including, for example, the Federal Government's Critical Minerals Strategy 2023-30.

New South Wales has an abundance of mineral resources, including 21 of the 31 critical minerals and four of the five strategic minerals, designated on the Federal Government Critical Minerals List and Strategic Minerals List respectively. This potential has been recognised by miners; by 2023, expenditure in New South Wales on minerals exploration had grown to nearly $370 million. Recognising the opportunity to continue to grow and support the development of the critical minerals industry across all levels of the value chain, the State Government announced in September 2023 that it would begin a consultation process to explore the development of a new state-wide strategy. The result of this consultation process is the Critical Minerals and High-Tech Metals Strategy 2024-35, released last week.

Overview of the Strategy

At the centre of the Strategy is a vision for New South Wales to become a leader at all stages of the critical minerals and high-tech metals value chain – in exploration, mining, processing, recycling and advanced manufacturing. In developing the Strategy, the government identified five priority metals for the critical minerals and high-tech metals industry in New South Wales: rare earth elements, scandium, copper, silver and cobalt. The Strategy is constructed around five strategic pillars:

• encouraging exploration – reducing investment risk in exploration;
• incentivising production – streamlining planning approvals and providing a more attractive investment environment;
• establishing supply chains – encouraging collaboration between industry and government to grow domestic processing, manufacturing and metals recycling capabilities;
• developing future-ready skills – growing the critical minerals workforce, by focussing on skills and training; and
• engaging with communities – providing certainty to local communities and minimising environmental impacts.

Key initiatives

Although at present the Strategy represents more of an ambitious, high-level vision rather than a detailed plan of action, stakeholders will be interested in receiving greater detail about the measures it proposes, including the promise of facilitating easier access to funding sources, providing more attractive investment conditions through the deferred royalty payments scheme, and assisting projects to navigate the approvals process and comply with regulatory requirements.

On average, projects take 16 years to move from initial exploration to production. The consultation process revealed that, across New South Wales, there are currently 12 critical minerals and high-tech metals mining and processing projects requiring approximately $7.6 billion in capital investment.

A key challenge for new projects is the difficulty in obtaining funding. They require the commitment of substantial upfront capital costs in the face of significant investment uncertainty due to the challenge of navigating the approvals process, volatility of commodity prices and difficulty in obtaining offtake agreements to ensure the viability of a project.

Royalty deferral scheme

The major announcement within the Strategy is the introduction of a $250 million royalty deferral scheme.

The initiative is designed to increase the incentives for investment in New South Wales critical minerals projects by deferring royalties in the first production years to mitigate financial pressures facing such new projects.¹

The proposed scheme will operate on an opt-in basis, allowing projects to defer the first five years of royalties. Although the eligibility criteria and guidelines for the scheme are yet to be finalised, it is expected the scheme will be available to entities:

• that predominantly mine commodities (at the relevant New South Wales site) that are listed on the Critical Minerals List;
• with a market capitalisation under $5 billion; and
• which are expecting to be able to start production at the relevant critical minerals projects between 1 July 2025 and 30 June 2030.

Given the long lead time required to develop mining projects and the fact that the royalty deferral scheme is proposed to come into effect next year, we expect that the scheme will, principally, benefit projects that are close to taking a final investment decision or in construction already. However, we note that, as yet, little detail has been released about the scheme, and there is certainly a risk that the scheme is more narrowly available than the headline announcement might suggest. We look forward to supporting clients in navigating the eligibility criteria of this scheme and any conditions attaching to the award of a deferral as those details become available.

Access to funding

As noted above, the Strategy acknowledges the challenges of obtaining funding to develop projects. This is particularly the case for junior and mid-tier mining companies, which are leading the development of critical minerals projects in New South Wales and, given their small balance sheets, typically rely on external funding sources (as distinct from internally funding development).

One of the themes that the Strategy identifies as arising from the consultation process is that there could be a role for government to support projects to attract investment. This could include assisting projects to secure offtake arrangements and access federal funding.

The Strategy indicates that the New South Wales Government intends to support projects to access federal funding by helping them access debt finance, grants and other funding opportunities offered by the Australian Government, including the $4 billion Critical Minerals Facility. It is not clear from the Strategy what form this support will take.

Project approvals processes reform

The experience of our clients is reflected in the acknowledgement by the Strategy that regulatory frameworks, environmental approvals and other permits and approvals processes often prove to be complicating factors in the development of critical minerals projects. The uncertainty that these processes create and the significant delays they can impose often have the effect of dampening investor enthusiasm, making it harder for projects to get off the ground even after costly and time-consuming approvals have been obtained.

The Strategy promises to address these challenges through:

• undertaking a review of planning processes;
• continuing to implement a Rapid Assessment Framework for critical minerals projects; and
• developing a guidebook for navigating of approval pathways and compliance with regulatory requirements.

Again, while setting lofty ambitions with these actions, the absence of detail means it is difficult as yet to assess the impact these will have on improving the approvals processes for projects.

Further initiatives

These initiatives are only several of the nineteen key actions in the Strategy, with other short to medium-term measures being:

• co-investing in the exploration programs to attract investment in underexplored areas, support the testing of geological ideas, and expand efforts to include geochemistry, exploration drilling, and geophysics;
• investigating collaboration between Australian and NSW governments for regional infrastructure development and common user infrastructure; and
• partnering with the Australian Nuclear Science and Technology Organisation to investigate the opportunity for a common user rare earth elements refinery in NSW.

How does the New South Wales approach stack up with the Federal Government's?

In our Insight discussing the Federal Government's Critical Minerals Strategy 2023-30 last year, we noted that industry participants would be disappointed by the lack of detail within the strategy. We also expressed concern that an absence of proposals to improve tax settings or provide for significant new government investment was surprising, given the priority placed by the Federal Government on the development of a domestic downstream processing capability.

In this sense, despite the announcement of the deferred royalty scheme targeting the production stage, the New South Wales Strategy is equally lacking in substantive proposals for how to develop advanced processing facilities, despite the establishment of supply chains being one of the five pillars of the Strategy. We do note, however, the proposal to investigate a common-user refinery for the processing of rare earth elements, to be delivered in collaboration with Federal Government agencies, but – as with much of the Strategy – it is difficult to determine the impact of this proposal without further detail.

Highlighting the need for continuing government support

New South Wales is the most recent of a number of Australian States to release a critical minerals strategy. In particular:

• as highlighted in our recent Insight, the West Australian and Federal Governments have announced initiatives to support critical minerals investment, namely Western Australia’s Battery and Critical Minerals Strategy 2024-2030, as published on 22 May 2024, and support for the critical minerals industry in the recent Federal Budget;
• similarly, the unveiling of Queensland's Critical Minerals Strategy in June 2023 contained $245 million in initiatives aimed at unlocking Queensland's critical minerals industry; and
• Victoria has also announced the development of a roadmap to support the state's emerging critical minerals sector.

In addition to these broader strategies, there are examples of more ad-hoc support. In particular in February 2024, the WA Government announced a Nickel Financial Assistance Program, which offered royalty rebates (albeit capped at 50%) for the Nickel industry in Western Australia.

While the market for each critical mineral is different, for many minerals, the industry is emerging and government support is critical to proponents' ability to develop projects and obtain funding in what can be a volatile market.

Where capital is agile, and sources of funding can move to international jurisdictions that facilitate and promote investment in critical minerals projects, the states are not only competing with each other to attract capital inflows, but also against international jurisdictions.

While more is needed from Australian governments of all stripes, the trend is promising, and the key to Australia maximising the critical minerals economic opportunity being driven by the energy transition and geopolitical changes, will be execution of the strategies and plans that have already been announced.

Next steps

The details of core announcements – including the deferred royalties scheme, accelerated project approvals, co-investment opportunities, and financing initiatives – are yet to be announced by the New South Wales Government. Companies at all stages of the critical minerals and high-tech metals value chain are likely to benefit from these initiatives, and they and their advisers should remain informed about how they can take advantage of these.