Articles

Introduction

Over the past few months, Rahul Sharma and I have interviewed dozens of experts in deep-sea mining for an upcoming paper; from business leaders, to investors, scientists, researchers and politicians.

What has astonished us is the feeling of inevitability about deep-sea mining that has cropped up across the spectrum, from Supporters through to the most adament Opponents. There's an overwhelming opinion that DSM will happen - it's more a matter of when and in what form - and therefore the discussion needs to be about regulations and approaches.

This seems very much at odds with how the media portrays deep-sea mining, and it leads me to believe that mining companies need to embrace the reality of deep-sea mining in order to survive and help shape this industry.

Why?

macroeconomic drivers + huge demand

World demand for critical minerals is growing exponentially. Demand is being driven by a number of factors, including increased adoption of electric vehicles; uptake of wind and solar energy; increased computing demands for AI; and steadily growing demand for personal electronics. The result has been massively increasing Demand.

At the same time, resources are becoming scarcer, grades are decreasing, and Supply is increasingly unable to keep up with Demand. The result is looming Supply gaps across most critical minerals:

Countries whose economies are reliant upon critical minerals for industry, production and security are therefore concerned by this threat. Japan, Taiwan, South Korea and China all have semiconductor industries which require critical minerals. US and Chinese national security and defense industries are dependent upon advanced semiconductors. San Francisco tech companies are highly reliant upon state-of-the-art GPUs for AI applications. European de-carbonization efforts and EV-driven strategies at German car manufacturers are driven by these metals.

Macroeconomic drivers of prosperity and national defence therefore mean that international governments will pursue critical minerals, with limited regard for their source.

Subsea Mineral Opportunity

enormous resources + low CapEx

71% of the world's surface is covered in water, and subsea mineral resources can be found across the world's oceans; from the mid-Pacific, to the Indian Ocean, to the Norwegian Sea and Bothnian Bay. These resource plays are huge, and whilst some are extremely remote, others are located close to key markets in the US and mainland Europe:

Deep-sea mining resource estimates are huge, and the USGS estimates that subsea mineral resources dwarf terrestrial resources by a factor of around 20x. Critical minerals are found in high abundances in subsea mineral resources, including Cobalt (206x terrestrial resources), Nickel (14x terrestrial resources) and Titanium (9x terrestrial resources).

Finally, whilst mining CapEx can be significant, the initial capital expenditure for deep-sea mining is significantly lower. This is a consequence of the reusability of production support vessels, which can sail onto and away from particular subsea mineral resources. By comparison, terrestrial mining often requires significant expanses of land to be cleared, access roads to be built, accomodation and offices to be constructed, and for overburden to be removed.

Impact on Mining

widescale disruption + significant price movement

Based upon our simple projections of polymetallic nodule production, it is likely that metal production from deep-sea mining will ramp up significantly from 2030 onwards. The vast majority of metal produced will be Manganese (4.9Mt/yr by 2034, equal to 25% of current worldwide production), along with significant volumes of Cobalt (54kt/yr by 2034, equal to 28% of current worldwide production) and Nickel (201kt/yr by 2034, equal to 6% of current worldwide production):

These figures are intentionally conservative and solely estimate production of polymetallic nodules from the Clarion-Clipperton Zone and the Cook Islands EEZ. For example, they do not account for production in the Norwegian EEZ (rich in Copper and Zinc) nor from the Japanese EEZ / Minamitorishima.

The impact on terrestrial miners is likely to be significant. Manganese markets will be flooded with a mineral that is essentially a by-product of deep-sea mining. Modest price inelasticity means that Manganese prices are likely to drop significantly, putting Manganese producers out of business.

Global Cobalt demand is significant and rising rapidly due to demand for EV batteries, use in alloys, and as oxidation catalysts. The Democratic Republic of Congo produces 68% of the world's Cobalt (USGS 2022 figures), with widespread concerns about human rights abuses, child labor and damage to the environment.

Deep-sea mining resources are typically rich in Cobalt, with grades of 0.2% (CCZ) to 0.4% (Cook Islands and Minamitorishima). Given the relatively low cost of production and large volumes produced, it is likely that deep-sea mining production of Cobalt will displace many artisinal and high-cost producers of Cobalt.

Finally, although projections of Copper production from deep-sea mining are minimal compared to global demand (around 0.7%) the nominal cost curve of nodule production nonetheless threatens high-cost producers of Copper. However, given the huge, looming Copper deficit we do not believe that this presents a risk to any Copper producers, even those at the top of the cost curve.

History Repeating? How Big Oil Missed the Frac Boom

dismissing new trends leads to missed opportunities

In 2008 the US was a net oil importer, and domestic oil production was rapidly declining. Zoom forwards to today, and the United States is the world's largest oil producer, exceeding even Russia and Saudia Arabia in production of crude oil and condensate. The difference has been the "shale revolution" and the exponential growth of hydraulic fracturing in the continental US.

Fracking had been used since the 1960s to improve well productivity, but it saw rapid adoption in the Barnett Shale from 2002 onwards, when it was used by small, independent, private-equity backed operators like EOG Resources, Chesapeake, Continental, Pioneer and Devon.

This "revolution" caught the oil majors by surprise. Whilst these small operators grew rapidly and profitably, virtually all of the supermajors (e.g. Chevron, Exxon, Shell, BP) had ignored what they regarded as a niche technology and found themselves with neither the acreage nor the expertise. A spate of expensive acquisitions and consolidations occurred from 2018 onwards, as the supermajors scrabbled to catch up.

Clay Christensen of Harvard Business School refered to this phenomenon as "disruption theory" in his book "The Innovator's Dilemma". Oil Majors, with massive resources and capabilities, ignored the new, small, "niche" opportunity of fracking and instead poured money into increasingly complex mega-projects like deepwater drilling and floating LNG plants. By contrast, small operators were able to take this simple concept, scale it massively (both in terms of the number of well fracked, and the length of well), and develop huge companies that began to threaten the Majors.

Summary

hubris and ignorance cause innovative new niches to be overlooked

Conventional mining companies are in a difficult place. Demand for minerals is growing rapidly, but Supply is limited because "easy" deposits have been exploited, and what is left is more difficult to produce, is less accessible, and is of lower grades.

Deep-sea mining has been around for decades, and has spent much of that time being derided as a scientific novelty. Fracking was the same. However, overwhelming macroeconomic drivers combined with insurmountable Demand mean that deep-sea mining is now likely, if not inevitable.

Mining companies need to embrace this opportunity. They have decades of experience running large projects safely and effectively, they are well capitalized, and they bring critical processing and refining expertise. If not, they may find themselves like Exxon Mobil paying $59bn for Pioneer Resources; a costly and avoidable mistake.