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Tesla’s move in New Caledonia highlights just how strategic big nickel assets are likely to become

It may be that it requires a man of the stature of Elon Musk to sort out some of the mining industry’s most intractable woes. Given his profile on some other issues, his comments on twitter and elsewhere with regard to commodities aren’t always the ones that get noticed. 

But he does say a lot, and what he says can be quite influential. Some months ago, he pointed out that sources of new nickel supply were looking thin on the ground, and he urged producers not to wait until prices were sky high before developing new projects. 

The message hit home, although the hard truth is that there is more than Tesla’s supply chain to worry about when it comes to decisions about major nickel mines.

But Musk is now beginning to follow through on his talk. 

In early March it was revealed that Tesla (NASDAQ:TSLA) is to become involved in the huge nickel mining operations on New Caledonia, formerly owned and managed by Brazilian giant VALE (NYSE:VALE), but lately mired in what the jargon now terms “ESG” issues.

At the Goro mine the issues have been real, and until the arrival of the latest dispensation, apparently intractable. Now though, the mine goes back into local ownership, if you look the other way on the 19% Trafigura will hold, that is, with Tesla sitting benevolently above the fray in the role of adviser on technical and sustainability issues.

Precisely what expertise Tesla can bring in regard to sustainability in the mining industry is perhaps an open question, but it does have prestige, genuine green credentials, and is perhaps one of the few organisations in the world that can match both governments and mining companies for financial and PR firepower.

On that level, the deal looks a good one for New Caledonia.

It remains to be seen if it’s good for Tesla.

But Musk’s involvement certainly highlights not only the significance of metals and mining to the future greening of the economy, but also a real risk in the successful execution of that process, which the mining industry is only too aware of, but has barely got to grips with – the energy costs of extraction.

Nickel in particularly is likely to be increasingly difficult and expensive to mine and process as the twenty-first century continues. Yes, new technologies will be developed to help, but historically in nickel new solutions have not kept pace with the challenges provided by increasingly difficult ores.

Once-upon-a-time, it was all so easy: nickel was found in sulphide ores, you could drill and blast and then process relatively easily by smelting and refining.

But that was before all the sulphide ores got mined out. Now, there’s only a few untapped nickel sulphide deposits in the world, including among their number the Kun-Manie project of Amur Minerals (LON:AMC), and the Mount Alexander project of St George Mining (ASX:SGQ).

For the rest, nickel mining in the future will generally involve the exploitation of laterite ores, otherwise known as clays, which are notoriously difficult to process. In the past, more than one major Australian company has come unstuck trying to short-cut its way through the processing of nickel laterites, and any undertaking to do so needs the utmost care.

Goro is a laterite, and so too are some of the bigger deposits in the Philippines, Indonesia and Brazil, so it can be done. But at the same time, it’s worth noting that laterite operations produces around three times the carbon emissions that sulphide operations do. So, while one part of the global economy is going green, the trade-off is a dirtier environment elsewhere.

This is the real risk Musk is grappling with, and although Tesla’s move to New Caledonia may have caught some in the electric vehicle industry by surprise, to miners it was an obvious move. A common estimate is that Goro contains around 25% of the world’s nickel. If Tesla aspires to maintain its position as the world’s number one electric vehicle manufacturer, it has to be there, or somewhere like Goro.

And although the statement that it’s advising on ‘sustainability’ may only be window-dressing at this stage, Tesla is right to start its positioning early. Because, as the mining industry knows only to well, when you get ESG wrong, the investment rationale for your whole operation can go up in whiff of carbon-rich smoke.

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