Critical minerals—and the soaring demand for them—are a key challenge for policymakers and analysts around the world. The factors driving that demand, especially energy transition technologies like electric vehicle batteries, are usually the focus of discussion. But the story of critical minerals is two-sided; it features both demand and supply. 

While demand is expected to soar in the coming years, the future supply of minerals remains uncertain. Exploration is the first step to increase that supply, but this essential activity faces challenges that include both limited access to affordable capital for junior mining companies and minimal growth in the exploration budgets of major mining companies. 

As the US government seeks to increase critical minerals mining in the United States, it should provide targeted grants for such exploration with spending caps to help narrow the supply shortfall. 

Junior Miners Leading with Less 

Mineral exploration is a costly and complex endeavor. It is mainly undertaken by junior mining companies making less than $50 million in annual revenue on average. These smaller players made up 42% of global mineral exploration budgets in 2023. 

When a junior mining company discovers a high-grade or large-scale mineral deposit as a result of its investment, it often sells access to the resource to a major mining company such as BHP, Vale, or Glencore. Sometimes the junior company is acquired by the major mining company which ultimately develops the new deposit into a producing mine. 

The geological and engineering demands required to conduct mineral exploration are high, so junior mining companies often depend on investors to fund programs. Yet it can be difficult to find investors, as exploration rates fluctuate greatly since they are driven by financial markets, macroeconomic conditions, and critical metal prices. 

For instance, high inflation and interest rates in 2023 meant that exploration budgets for nonferrous (non-iron-based) materials fell 3 percent when compared to 2022. It is also important to note that Chinese companies hold a substantial share of global mineral production, and they have a history of overproduction, depressing prices and disincentivizing mineral exploration.  

Since junior mining firms rely heavily on raising capital, they promote the value of their stock with project announcements that feature drill intersections or merger and acquisition activity. But investors view some of these stock promotion practices as questionable—and even deceptive—giving junior mining companies and their executives a negative reputation. Many retail investors do not invest in juniors, which stymies their role in exploration.

Commercial lenders and investors also typically prefer lower-risk sectors to junior mining companies. Certain institutional investors and brokerage houses are prohibited or discouraged by internal policies from dealing with low-priced stocks, which is often the class in which junior mining stocks are placed. Junior mining companies that secure financing and investment commonly face higher interest rates on loans, due to both  repayment risks and greater difficulties raising capital due to permitting uncertainty and local community opposition.

Green Minerals Attract New Investors

As junior mining companies face these significant financial hurdles, project capital must increasingly come from major mining companies, commodity traders, venture capital funds, and off-takers such as battery and electric vehicle companies. This outside capital usually funds exploration and subsequent project development, and it arrives via equity investments or joint ventures with junior mining companies. 

For example, Glencore’s investment in Stillwater Critical Minerals, (which has a platinum group metals project in Montana), or Mitsubishi Corporation’s investment in the Turnagain nickel project in British Columbia—which is operated by Giga Metals. 

This funding model provides significant value both to junior mining firms that need this capital, as well as to major mining companies that gain cheap access to potentially successful mineral projects. Importantly, this influx of outside capital also primarily targets minerals related to the energy transition like lithium, nickel, and cobalt, but not other critical minerals such as bismuth and tantalum.

Major miners and commodity traders have considerable capital that can be deployed into exploration. Yet, over the last 20 years, major firms have relied upon mergers, acquisitions, and optimizing production at existing mines. They have preferred these activities over new exploration, especially given the risks (financial challenges and local opposition due to environmental concerns) that are attached to exploration.

Still, future mineral exploration budgets, which peaked in 2012 as well as future mineral supply will be significantly impacted by the exploration budgets of major mining companies. This will occur whether they invest directly in exploration themselves, or fund exploration by junior mining companies. 

A Case for Government Intervention

Private capital is not the only source in this effort. Governments are increasingly funding mineral exploration, too. The US Department of Defense’s Manufacturing Capability Expansion and Investment Prioritization office offers financial support for domestic exploration projects, such as cobalt exploration in Idaho and nickel exploration in Minnesota. 

Similarly, Saudi Arabia has created a $182 million program to incentivize domestic mineral exploration, while China’s Minister of Natural Resources Wang Guanghua has said that China will increase its mineral exploration efforts. The Australian government has also allocated $373 million for mapping critical mineral deposits in Australia.

Exploration drilling in Western Australia – a key region for nickel, lithium, gold, and iron ore. 

All of these government policies should help increase the mineral supply. And the US government should increase grants to support domestic mineral exploration and early-stage development. The US Department of Defense already has the authority and the funds to incentivize mineral exploration. The US Department of Energy also could support such efforts, given its experience disbursing grants to mineral-related projects. 

Yet there should be responsibilities attached to this investment. Moving forward, as a precondition for awarding grants, the US government should require the recipients to ensure that less than 15% of their total expenditure is allotted to general and administrative expenses. This requirement will impose financial discipline on the mining companies, and also steer more government funds toward exploration. 

Given the expected surge in mineral demand, exploration must accelerate. Junior miners are often pioneers, but their exploration spending faces financial constraints. Thus, increased funding will need to come from major miners, commodity traders, and governments. Continued government support of these institutions through targeted grants with spending caps can significantly narrow the projected gap between future mineral demand and supply.