Mining manganese nodules on the seafloor may prove unprofitable due to high capital costs, cost overruns and financing difficulties. This is the conclusion reached by environmental consultancy Koinon after stress-testing the business model of two projects by The Metals Company (TMC).
The analysis was based on TMC’s investment prospectus. The study was supported by five non-governmental organizations and foundations opposed to the accelerated commercialization of deep-sea mining. Analysts conducted 10,000 simulations accounting for typical budget overruns in large-scale infrastructure projects.
In 60% of the scenarios, the net cash flow from operating the collector remained negative every year, meaning there was no internal rate of return. In cases where the project did generate a positive return, its median value was 4%.
Koinon estimates the probability of a loss for the project at 83%. The median net present value at an 8% discount rate is minus $5 billion. By comparison, according to TMC’s own forecast, the two projects are expected to generate $23 billion.
The initial cost of the nodule collection system was the main factor determining profitability. Koinon estimated that, accounting for typical cost overruns in emerging industries, the average cost of such a system could be approximately 1.9 times higher than TMC’s expectations. In the sensitivity analysis, changes in capital expenditures alone could affect returns by more than $8 billion.
Financing remains an additional risk. As the consultancy notes, dozens of banks, insurers and industrial metals buyers have publicly stated that they will not work with deep-sea mineral producers. This could increase the cost of raising capital and raise the discount rate.
Koinon also concluded that the required return for a viable project could be 25–30%, higher than the figures for the institutional segment of the private market with which such a project could be compared.
The consultants separately assessed potential tax revenues. In their view, the net benefit for national governments, including project-sponsoring states, will be limited. Revenues of the International Seabed Authority from royalties could be offset by lower tax revenues from land-based mining projects due to increased supply and falling prices for nickel, cobalt, copper and manganese.
The Metals Company believes that the environmental risks of deep-sea mining can be managed. The company says its first projects could achieve a post-tax internal rate of return of 27%, and that mining manganese nodules could provide a source of industrial metals with less environmental impact than land-based projects.
Opponents of the industry point out that the long-term environmental consequences of such activity remain unknown. Potential risks include sediment plumes in the water column, prolonged changes to habitats and an increased likelihood of vulnerable species becoming extinct.
GLOAPM.COM