Risk on the (Rare Earth) Rocks: The Geopolitics of Critical Minerals

Companies exposed to the race for critical minerals, including rare earth elements (REEs), face many daunting compliance challenges. From the standpoint of environmental and human rights-related risks, ongoing conflicts and increased regulation, the mining industry is a proverbial minefield.

What makes minerals critical?

Although the definition of “critical” can vary, the American Geosciences Institute defines critical minerals as “mineral resources that are essential to the economy and whose supply may be disrupted.”

Several critical minerals are also rare earth elements (REEs) made up of 17 specific metallic elements, including lanthanum, terbium, scandium, europium and others. They are deemed rare because of the technical complexity involved in their extraction. Promethium, used in such items as pacemakers and guided missiles, is so rare that it is even produced synthetically via uranium fission.

The World Trade Organization estimates global trade in energy-related critical minerals has increased to $378 billion. Companies involved in electronics manufacturing, which now includes high-tech industries at the center of economic advancement, depend on critical mineral supplies. For example, REEs are integral to Apple’s iPhones, as well as the tech needed for space exploration, medicine and quantum computing technology.

Recently, the U.S. has closely scrutinized the sources and supply of these minerals based on deteriorating international relations with mineral-rich source countries, particularly China.

The geopolitics of critical minerals

Whichever countries dominate critical minerals will set the rules for the modern economy. Companies involved need to keep an ear to the ground to know where the treasure is buried.

Power politics is driving foreign economic policy in the U.S., China and Europe aimed at securing the mineral resources needed for advanced technologies. For the United States, developing and safeguarding critical mineral supplies is a concentric goal of both foreign and domestic economic policy. The White House recently announced several initiatives underway to strengthen critical mineral supply chains, including a new website highlighting U.S. government activities.  

However, China currently produces 60% of the world’s REEs while also processing 90%. This creates a problem for U.S. companies as U.S.-China relations have deteriorated. In addition, Taiwan’s semiconductor industry, which feeds technological development globally, is uniquely exposed to China’s REE stranglehold if conflict unfolds.

This means the U.S. and its allies must establish new critical mineral sources. 

In search of supply

Currently, only a single U.S. mine serves the American commercial market. Although multiple companies recently received bids to increase domestic capacity, internationally sourced minerals are needed for sustainable U.S. economic growth.

Based on geopolitical tensions, the U.S. is searching for international alternatives to China. An emerging front-runner that could drastically offset China’s REE dominance is Africa. Deputy Treasury Secretary Wally Adeyemo recently confirmed that “Africa is going to play a huge role.” 

However, companies operating in Africa face a labyrinth of geopolitical risks and compliance challenges. To alleviate these challenges and decrease geopolitical tensions, the U.S. government has facilitated increased investment into infrastructure in the region and funded programs to help U.S. companies mitigate their risks. This economic statecraft includes major investment in a railway project linking the Democratic Republic of the Congo, Zambia and Angola.

Elsewhere, India and Australia both hold major reserves of REEs and are coincidentally members of the “QUAD” of countries, along with the U.S. and Japan, who are all working to disrupt China’s market dominance.

The critical mineral marketplace will look very different in five years based on increased investment overseas and new multilateral agreements. 

Critical mineral risk exposure

Last year, the Business and Human Rights Resource Center noted that mining operations for lithium, nickel, zinc and cobalt, ultimately used in solar panels and battery manufacturing, are linked to multiple human rights violations in Africa. 

Local risks are proliferating in mineral-rich countries. In Myanmar, militias are involved in local extraction. In Sweden, activists have held up mining due to concerns over water pollution. On the California-Nevada border, environmental concerns and defense needs have created an awkward regulatory landscape.

In addition, executives face politically motivated investor activism and interference from foreign state actors. Last year, the chairman of Australian mining firm Northern Minerals faced a shareholder coup attempt spearheaded by the China-owned Yuxiao Investment Fund. 

Any company involved in extracting, refining or developing critical minerals is also a prime target for economic espionage and manipulation. Canadian law enforcement has increased monitoring of mineral deposits and infrastructure surrounding its critical mineral deposits in the Yukon to defend against foreign interference.

The risks highlighted above require a clearly defined compliance and risk management strategy for companies utilizing critical minerals to avoid potential reputational and financial damage. Identifying key partnerships and who owns those entities is crucial.

Strategies for compliance teams

As international relations and policy goals continue to influence the critical mineral industry, compliance teams must stay abreast of emerging regulations and trade agreements. This requires an inflow of the right intelligence to understand how the political tides are shifting about critical minerals.

Supply chain due diligence is also extremely important to ensure no environmental or social violations related to service providers. Importantly, this requires going beyond reviewing your immediate service providers and looking at the entire supply chain holistically. Sanctions due diligence alone is insufficient to identify risks.

The Organization for Economic Cooperation and Development (OECD) offers due diligence guidance. One of the main recommendations is enhanced surveillance to record the chain of custody for minerals as they move through the supply chain. The OECD also notes that screening for conflicts and political risks related to suppliers warrants an “on-the-ground” assessment team to monitor processes and liaise with authorities and local stakeholders.

Some companies have also developed in-house due diligence systems to mitigate compliance risks associated with critical minerals. For example, Mercedes-Benz formed its own mechanisms for avoiding minerals associated with human rights violations. This is accomplished by monitoring suppliers throughout the mineral procurement and processing process, including only using smelters it can directly monitor. 

Clearly, close monitoring is vital to avoiding risk in the critical mineral space. At the outset, a boots-on-the-ground approach to due diligence is also required to ensure that a given supply chain can meet a company’s set standards. This is particularly important for publicly traded companies with added SEC disclosure requirements.