As described in our Critical Minerals market update, the Critical Mineral Strategy 2023-2030 (Strategy) proposes to take a concerted, targeted, and proportionate approach to developing Australia’s critical minerals sector, setting out six focus areas. One focus area being to work with likeminded international partners to attract and leverage foreign investment and diversify supply chains.

The Government’s drive to develop Australia’s critical minerals sector has already seen an increase in regulatory scrutiny, particularly Foreign Investment Review Board (FIRB) compliance. Foreign investment in Australia’s critical minerals sector is classified as an investment into the national security sector for FIRB purposes, and in the last year we saw the first public rejection by FIRB of an application in some time and the first in the critical minerals sector. This heightened level of oversight of certain countries, specifically the Peoples Republic of China, is an advantage for investors from the US and UK but creates problems for projects in sourcing much needed capital.

Critical minerals

Certain minerals are commonly referred to as ‘critical minerals’ due to their uses, scarcity, and geographical concentration. Australia’s Critical Minerals List contains 31 minerals that can be used in a wide range of essential technologies, most recently nickel being added to this list due to its use in electric vehicles.

Under Australia’s foreign investment regime depending on what stage in the project development an investment is taking place, mandatory FIRB approval is not strictly required to invest in the critical mineral sector. However, with the designation of critical minerals as a matter of national security, investors are on notice that FIRB may use its broad call-in powers if a proposed investment is deemed not to align with the Strategy.

Current FIRB regime

Foreign investment into Australia’s critical mineral sector will generally require FIRB approval to:

  • acquire an interest of 10% or more in an entity that is an Australian land entity (i.e. an entity where 50% of the value of its assets are interests in Australian land specifically mining leases). If 10% or more of the entity’s asset value is mining, the relevant threshold for FIRB approval is nil;
  • acquire a substantial interest (i.e. an interest of 20% or more) in an Australian entity where the relevant monetary threshold is met, currently $330 million; and
  • acquire an existing mining lease where a relevant exemption does not exist.

Additional rules and reduced thresholds apply to foreign persons who are classed as foreign government investors (FGI). FGIs investing into Australia’s critical mineral sector will generally always require mandatory FIRB approval to invest in mining leases, exploration tenements, and certainly any investment into the processing stages of these minerals.

Historical FIRB regime

Prior to 1 January 2021, FIRB did not differentiate between mineral classes. The general rule was that all foreign investors required FIRB approvals to acquire mining or production tenements but not for an exploration tenement (except for FGIs). The national security reforms, which came into effect on 1 January 2021, introduced two new different types of FIRB approval depending on the mineral being mined:

  • notifiable national security action which requires compulsory pre-notification (regardless of value) for:
    • the acquisition of an interest in or starting of a ‘national security business’; or
    • the acquisition of a direct interest in ‘national security land’; and
    • reviewable national security action being an action which is not otherwise captured by the FIRB rules (i.e. not a
    • notifiable action, significant action or notifiable national security action) but may nevertheless raise national security concerns.

There is no obligation to notify the Treasurer of a reviewable national security action. However, the Treasurer may ‘call-in’ and review an action of this kind if the Treasurer considers it is a national security concern. The Treasurer maintains the power to ‘call-in’ an action for up to 10 years after the action was taken. For investments ‘called-in’, the Treasurer may issue a no objection notification, including with conditions, or prohibit the action, or require divestment.

Given the clear direction from the Federal Government that investment into critical minerals is a national security matter, the risk of this call-in power being exercised needs careful consideration.

Changes to FIRB’s treatment of critical minerals has followed the increased global demand for critical minerals used to produce essential modern technologies. China currently dominates the global critical mineral processing sector – processing roughly 85% of the world’s cobalt and 75% of the world’s lithium.

In response, we saw two FIRB rejections last year:

  • in February 2023 the Treasurer blocked Yuxiao, a Chinese-linked investment fund from increasing its stake in Northern Minerals Limited from 9.98% to 19.9%; and
  • in July 2023 the Treasurer blocked China-linked mining company, Austroid Corporation, from acquiring an additional 90.10% of lithium miner Alinta Resources Limited. This acquisition would have brought its stake in Alinta Resources Limited to 100%. The Australian subsidiary of Austroid Corporation, Austroid Australia Pty Ltd, was also barred from wholly acquiring Alinta Resources Limited.

To meet the demand of trade and investment partners, Australia will need to develop downstream capabilities by enabling more processing and refining of minerals onshore in Australia. Australia cannot do this alone. The Strategy relies heavily on foreign investment with like minded partners to achieve its goals.

What does it all mean?

The prior resources booms in Australia, most recently coal, iron ore and gas, have all relied heavily on foreign capital to develop these projects. Australian companies recognise their capital limitations and understand that progress for the critical minerals industry will require foreign capital and trading infrastructure and partners.

During these investment waves, China has been a cornerstone investor and offtaker, and with limited processing ability in countries other than China it is difficult to see how in the short term the sector can be developed at the pace required to meet decarbonisation demands without Chinese investor involvement.

The Treasurer is advised by FIRB which reviews foreign investment proposals in the context of national interest implications. The Treasurer has the power to decide whether to approve a proposed investment, impose conditions on an investment, prohibit a proposed investment, or require the disposal of an interest. The imposition of conditions on foreign investment is guided by the need to facilitate foreign investment while protecting Australia’s national interest and balancing regulatory burden with compliance assurance outcomes.

We see this playing out in practice in the critical minerals space where FIRB seeks to balance:

  • the need to progress the goals of the Strategy (and by extension broader climate initiatives) through granting approval to foreign investment proposals from international partners that align their investment with Australia’s national interests and seek to diversify supply chains; and
  • protecting Australia’s national interest through the imposition of conditions such as limiting a foreign investor’s right to control entities operating in Australia or limiting the sale of product internationally.

FIRB maintains that it is and has always been, supportive of foreign investment. Notwithstanding this, the very public limits placed on certain investment in this sector suggest that FIRB will be increasingly used by the Treasurer as one of the tools to funnel preferred investment into this critical sector.

This is an article from our 2024 Edition of Emerging Issues for the Australian Energy and Resources Industry. To read more from this publication, click here.