Critical minerals outlook: M&A to ramp up in 2025

An optimistic outlook 10 min read

2024 was a turbulent year for dealmakers, project developers and investors in critical minerals. New supply outpacing short-term demand growth in immature markets led to declining prices, affecting financing availability and dealmaking activity.

However, we see reasons for optimism in the coming year. Recent large-scale M&A activity shows that—while there may be oversupply of certain critical minerals in today's market—long-term demand is growing in line with the expansion of clean energy technologies and the global energy transition.

Moreover, we expect to see increasing competition for ownership and control of assets and associated infrastructure as governments around the world increasingly look to inject themselves (and their capital) into securing and investing in critical minerals supply chains. Specifically, we have seen state government and federal government financial support for Australian-based critical mineral companies including the recently announced funding package for Illuka's flagship Eneabba rare earths refinery project.  

In this Insight, we'll look back at the trends in critical minerals from 2024 and explain what to expect in 2025.

Prices expected to rebound over the medium term

The lithium hydroxide, lithium carbonate and spodumene prices have had a rollercoaster ride—climbing to previously unseen heights in late 2022 and 2023 before crashing by a more than 80% throughout 2023 and into 2024.¹

Will prices recover? There appears to be some renewed optimism, despite the anticipated slowdown in China. Electric vehicle sales continue to drive demand for lithium globally, with a 17% year-on-year rise expected between 2023 and 2026, by which time Australia's lithium exports are expected to top $10 billion. Equally, the global energy transition is powering global copper consumption, with 2.5% and 3.2% growth expected in 2025 and 2026.² Other critical minerals are expected to follow suit.

While no one is predicting the return of the sky-high prices of 2022 and 2023, it is clear that structural sources of demand driven by the global energy transition, as well as a narrowing of the market surplus for certain minerals (including lithium)³ mean the outlook for critical minerals over the medium to longer term remains positive. Indeed, with mining being a long-lag industry, notoriously subject to boom and bust cycles, the delaying of investment into new production driven by short-term pricing considerations could result in less supply in the coming years. In our view, those that are able to ride out this pricing storm will be well positioned for the inevitable market upturn.

M&A will ramp up

Kicking off at the end of 2023, the critical minerals sector delivered a series of 'big ticket' M&A deals this year, including:

• Albermarle's abandoned bid for Liontown for A$6.6 billion
• the merger of equals between Allkem and Livent for A$10 billion
• Rio Tinto's proposed acquisition of Arcadium Lithium for A$10 billion
• Evolution's acquisition of CMOC's 80% interest in the Northparkes copper gold mine for US$475 million
• Pilbara Minerals' acquisition of Latin Resources for A$560 million
• SQM and Hancock Prospecting's acquisition of Azure Minerals for A$1.7 billion
• BHP's rejected bid for Anglo American (primarily driven by BHP's desire for high-quality copper assets)
• Australia's Sayona Mining (buying US-based Piedmont Lithium to consolidate its Canadian operations and strengthen its exposure to the North American electric vehicle sector).

Interest rate cuts in the US and Europe, the prospect of rate cuts in Australia, and a moderate price recovery for critical minerals in 2025 set the scene for an action packed year in which M&A activity is expected to rebound.

Investors will have greater flexibility to expand and diversify their portfolios as funding costs fall and project economics improve. However, some foreign investors (in particular those from non-allied jurisdictions) can expect headwinds as governments introduce new policies to secure critical minerals supply chains. For those investors, careful planning for regulatory engagement will be vital to obtain the foreign investment approval necessary to participate in the next wave of critical minerals M&A.

Number of transactions, deal value and diverse commodities

Although there have only been 24 critical minerals M&A deals in 2024 (so far) compared to 49 in 2023, the total deal value is markedly higher—$14.8 billion, compared to only $5.3 billion in 2023.

Lithium stands out with both the highest volume of deals and largest total deal value from 2020-24 ($24 billion). Deal volume for lithium M&A deals peaked in 2023, but remains relatively high in 2024, showing comparable volume to 2022.

The volume of deals for less prevalent critical minerals like vanadium and rare earth elements peaked in 2023, but still represents a consistent (if also minor) portion of M&A deals in 2024. Moderate but consistent M&A volume for critical minerals other than lithium, nickel and copper is expected to continue in 2025.

Data source: Mergermarket

ECM transactions where copper was the primary commodity of the relevant company accounted for 243 transactions and $2.4 billion over the period from September 2019 to January 2024, compared to only 119 transactions representing $1.2 billion for nickel, and 118 transactions for $1.8 billion for lithium. There also remains capital markets appetite for other critical minerals, including graphite, with ASX-listed Novonix recently raising around $50m on the back of announcing a binding offtake agreement with PowerCo (owned by Volkswagen Group). 

Data source: Mergermarket

Developers will increasingly rely on creative financing strategies to get deals done

Traditional greenfield project financing has been challenging for critical minerals developers amid softer commodity prices. This has opened the door to other, alternative sources of funding from government and offtakers to supplement traditional project financing from banks. We expect developers to continue to look for more creative ways to finance projects.

Over the last few years we've seen an increased role for government lenders to provide support during the initial phases of development and ramp up. Similarly, customers focused on securing long-term supply are putting their hands into their pockets to assist with the startup funding. Customer finance can come in a variety of forms; from pure debt to offtake prepayments and convertible note structures. Ultimatley, given customer lenders want the product rather than straight repayment of the debt, they can apply a different credit lens, thereby removing some of the obstacles to a traditional project financing. Such financing arrangements also offer a short-term solution that we expect will only increase in 2025 as producers seek to diversify their capital stacks.

That said, with interest rates expected to fall, we still expect that major domestic and international lenders will be critical to the debt financing of critical minerals projects—particularly later in the lifecycle of the projects that are operational. Many banks are still bullish on critical minerals, and we expect they will be eager to put their balance sheets to work to finance the energy transition as prices recover.

Government involvement in critical minerals is set to increase

It is well recognised across industry and government that China wields significant influence over critical minerals processing and battery manufacturing. With competitive advantages including economies of scale, abundant capacity, lower labour costs and government subsidies, China remains the single most influential player in global critical minerals. By way of example, a recent Goldman Sachs paper found that the operation of a $230 million, 50 kiloton per annum lithium hydroxide plant in China would cost $650 million in Australia.⁴

This reality has led many governments, including Australia's, to recognise that this concentration creates real geopolitical risks. Following the US Inflation Reduction Act and Jobs Act and the EU's Critical Raw Materials Act, 2024 saw an increase in the number of country-specific and multi-national efforts to address this imbalance, including:

• the Australian Government committing an estimated $7.1 billion over 11 years from 2023-24 to support the refining and processing of critical minerals (including the Critical Minerals Production Tax Incentive), plus the recently announced additional $21 million funding to support 5 critical minerals projects across Western Australia, Queensland, and South Australia. 
• the Western Australian Government announcing a Lithium Industry Support Program valued at $150 million designed to preserve WA's critical minerals industry, including the temporary waiver of government fees to support downstream processing (valued at $90 million), miners in ramp-up phase having port charges and tenement fees waived for 24 months, and a $50 million loan facility to provide miners with temporary interest free loans to sustain their operations.
• the establishment of the Minerals Security Partnership Finance Network, which is designed to facilitate a coordinated approach to the financing of critical minerals projects by development finance institutions and export credit agencies of specific countries (including the US, Australia, Canada, the UK, the EU, India and Japan).
• loans and grants (valued in the hundreds of millions) from the US Department of Energy to ASX-listed critical minerals companies for critical minerals projects in the United States (including the offer of US$700m to ASX-listed Ioneer Ltd to help build its lithium mine in Nevada).
• the US government, in May 2024, announcing an increase of the tariffs on Chinese EV exports to the US from 27.5% to 102.5%, and that tariffs on batteries and battery parts would increase from 7.5% to 25%.
• the US government, in October 2024, announcing new guidance enabling producers to claim tax credits on mining and extraction costs of critical minerals (as long as they process some of the material).
• the European Commission imposing import duties on Chinese BEV producers on 5 July 2024.

The surge in the size and scale of these government-sponsored initiatives is promising, and indicates that the rhetoric of Australia and other governments as to their ambition for critical minerals is starting to be matched by the scale of the investment required. Although the incoming Trump administration has indicated a desire to wind back some of the Biden administration's polices, including the IRA, we believe that bipartisan agreement on the need to build critical minerals security in the US will ensure that US Government support for critical minerals remains strong.  

This has recently been most clearly demonstrated by the Federal Government re-affirming its commitment to Iluka's vision to establish a domestic rare earths supply chain, by upsizing the funding package provided for construction of the Eneabba Rare Earths Refinery. The terms of this additional investment include a further A$400 million in construction facilities and $75 million for cost overruns at the same attractive, low interest rate of BBSY+3% offered under the initial funding support announced in April 2022. The expanded financing, which now totals $1.725 billion of non-recourse government-funded support, is intended to see Iluka through construction and into commissioning of the Eneabba Rare Earth Refinery in 2027.

In 2025, we anticipate:

• an increasing willingness on the part of government finance bodies to invest directly in critical minerals projects and entities in the form of long-term commitments (including in the absence of private sector capital).
• like-mind partners increasing international cooperation and coordination on their strategy for critical minerals investment (this is part of a broader theme of national governments seeking to align foreign investment, security alliances and trade alliances).
• critical minerals transactions are likely to be subject to ever greater geopolitical and regulatory risks.

Clear guidance on foreign investment is key

As noted above, the growing geographic concentration of mining and processing of critical minerals resulted in 2024 seemingly being an inflection point for governments in relation to the security of critical minerals supply (and the products they are used to create).

In terms of Australia's Foreign Investment Review Board approval regime, the Australian Government has adopted an increasingly sharper focus on corporate activity related to critical minerals assets and companies. The Government has publicly stated that investments in critical minerals will face greater scrutiny to protect the national interest. It has not, however, provided clear guidance on what is likely, or not likely, to be considered contrary to the national interest in terms of foreign investment in critical minerals. Its June 2023 'Critical Minerals Strategy 2023–2030' refers to working with 'like-minded partners', but that remains an undefined concept.

While firmer scrutiny from Treasury (and other regulators) is understandable, the absence of clear guidance on foreign investment into critical minerals in Australia risks stymieing key sources of capital for project development.

It may be that the subdued level of M&A activity in critical minerals for much of 2024 has resulted in fewer opportunities to observe Treasury's approach to assessing critical minerals investments. Nevertheless, it is clear from the transactions that have involved interaction with Treasury that this is an area that attracts a higher degree of scrutiny. In turn, this has been complicated by the fact that investment structures into critical minerals extend beyond long-term offtake agreements for EV cell manufacturers and OEMs—this now extends to direct equity positions, debt-like instruments and board level participation. As this trend is only likely to grow, we expect that Treasury's familiarity with these structures will improve, which will in turn allow it to better manage and assess these types of investment structures.