Lithium Australia Chairman George Bauk. Source: George Bauk

➤ Consultation closed Aug. 31 on Australian government reforms proposing new measures for its Foreign Investment Review Board to vet investments around "sensitive national security business."

➤ Western Australia's lithium sector wants to be treated as a "special case" because supply chains, and therefore opportunities for off-takes, lie largely in China.

➤ George Bauk, ex-CEO of rare earths producer Northern Minerals Ltd., can see both industry and government sides to the issue but says a backup plan will be needed if essential Chinese investment is vetoed.

Bauk was part of a 2019 Australian government delegation to Washington to discuss critical minerals collaboration with the U.S., before a A$20 million investment in Northern Minerals by Chinese group Baogang Group Investments (Australia) Pty. Ltd. was rejected by the Australian government in April 2020.

S&P Global Market Intelligence: As nonexecutive chairman of Lithium Australia NL and nonexecutive director of graphite explorer BlackEarth Minerals NL, how do you see the balancing act that industry and government need to perform between national security and necessary foreign investment in critical minerals?

George Bauk: There's no question that there are a lot of things going on that we don't see between Australia and China at government level, and it's not going to be an easy solution. Australia's government has been pretty dogged in its approach and is making a "second lane" of U.S. investment to ensure everyone's not stuck in the "China lane."

We must always remember that the [Foreign Investment Review Board, or FIRB] process is very much about the foreign proponent and the Australian government.

Australian companies being invested in generally don't get involved in the FIRB process because if someone's looking to get FIRB approval to invest, it's not always done in an amicable process. The Northern Minerals process I was involved in with Baogang was one the company and the proponent worked together on so it was slightly different in that the board approved the transaction and Baogang sought approval with the federal government.

It's always going to be tough for government to give exemptions for industry bodies. You need to remember that the Australian government set up a critical minerals facilitation office in January 2020, including rare earths, lithium and many other industrial commodities.

Northern Minerals' processing plant at the Browns Range project in Western Australia. Source: Northern Minerals

How did the Australian government rejecting Baogang's investment in Northern Minerals impact the company?

At the time, we were strapped for cash. The company has since seen its way through it, but we had a transaction priced a lot higher than the prevailing share price, so any transaction we came up with after was quite dilutive.

The Baogang transaction was 6.2 Australian cents per share; we ended up raising the money to offset that loss at 2 cents. So the impact on Northern Minerals had a dilution of about 700 million shares, which is quite significant. You're talking about 20% of the capital being diluted because we couldn't proceed with the Baogang transaction.

I acknowledge the government has its reasons to make these decisions, and you have to allow the government to do that. The most frustrating thing was that once the federal government made its call, what's its plan B? What alternative funding strategies or capabilities does the government have to offset the loss of a funding source — and when I say funding source, I mean the generic Chinese investment potential.

I imagine the government's answer to that would be the Critical Minerals Facilitation Office?

Last November, former federal Mines Minister Matthew Canavan, Defense Minister Linda Reynolds, and Trade Minister Simon Birmingham said they'd come up with a facilitation of potential government support for critical minerals through use of a defense fund coupled with a facilitation office. These things need to hit the ground running. The problem with most critical minerals is, it's an opaque market and China dominates it. So how do you break the price cycle?

China subsidizes a lot of these industries, and companies around the world aren't necessarily signing up to their country's political position. People talk about the intergovernment issues between China and Japan, but that doesn't necessarily precipitate down to the corporate level. So sometimes we can take it to a level a bit too high up to realize that what's at play is not necessarily being set at policy level from a government perspective.

One of the great sayings of Linda Reynolds at a conference last year was, you have such a fragmented buyer market. It's not like one particular car company or defense contractor will say they'll bankroll a new rare earths mine just because they need a big amount of product.

The problem is, you have a significant amount of companies that all need a little bit, which means the power is with the producer and not in the consumer.

Having been on the board of lithium, graphite and rare earths companies, are you sympathetic to where the sector is coming from in requesting 'special case' status to foreign investment law reforms?

I just hope that with particular preference to rare earths that have been highlighted as being of strategic importance, that they're putting measures in place to support an undeveloped non-Chinese market.

While a company not going to take money from China would make perfect sense to the layman, the equity markets aren't 'playing normal' here because you don't have a normalized business in rare earths.

Part of the reason is, you have a manipulated product price. For the rest of the world to say 'we're not going to play with Chinese pricing' is complex to do because if China dominates a particular supply chain, it will affect end-user pricing such as electric vehicles.

We just need governments to walk the walk, to do what they say they're going to do. It doesn't help with COVID-19 — governments have their own challenges with funding and sorting out bigger issues.

READ MORE: Sign up for our weekly coronavirus newsletter here, and read our latest coverage on the crisis here.

Do you agree with Association of Mining and Exploration Companies CEO Warren Pearce that with multiple supply chain points in multiple countries, critical minerals miners need greater support?

Rare earths have hit the radar because of some of the defense applications, but the supply chain is the biggest issue with critical minerals. You see reports saying lithium is just over-supplied, but which part? It may look like there's a lot of spodumene concentrate or brines coming to market into an intermediate product, but where are the hydroxide and carbonate producers? There are instances where they all end up in China.

We've got to ensure that if we're trying to get alternate supply chains that we work out a way to get all of it out of the country. Coordinating all those factors is complex, let alone price issues. It's only a country like China with their political system that's been able to coordinate this because they can put it all together without worrying about return on capital.

They can build an entire supply chain, and if it's not functioning properly for a little while, they don't really care as they know they'll get the end outcome; but when you put private money in place, people aren't willing to wait five years because they've built a hydroxide plant and there's no supply to it.

I often tell people, if you try to build an entire rare earths supply, that could take you a lifetime, you might not ever achieve it, because the market moves fast, and often.