Miners welcome clarity from 'foreign entity of concern' rules, seek more answers

Miners and automakers alike are pleased that the US federal government finally provided some clarity on sourcing battery materials from some foreign entities, but they still have questions.

The Dec. 1 guidance provided some definition on how companies will be considered under the control of China, Russia, North Korea or Iran. Electric vehicle buyers are barred from accessing US Inflation Reduction Act tax credits worth up to $7,500 per car if certain critical minerals or battery components within a given vehicle are sourced from "foreign entities of concern" (FEOC). The proposal, which has been in the works for months, and a lack of information have been a thorn in the side of EV manufacturers. Previous guidance stipulated percentages of critical minerals and battery components that will have to be produced in the US or one of its free trade agreement partners for the EV to be credit-eligible.

The draft language includes set thresholds for FEOC control of companies and other terms from the US Energy Department. Separate but related guidance from the US Treasury Department and IRS features some implementation and due diligence language for FEOC limitations on tax credit-eligible battery materials sourcing. Companies are still waiting to see how the rules will affect some existing relationships and how they could influence US trade agreements like the one being negotiated with Indonesia. Indonesia has plentiful nickel but its producers are in partnership with Chinese companies.

"I think what a lot of folks were happy to see was that the guidance reflects a very deep understanding of the complexity of the supply chain ... in a way that took ... the multiple goals of the Inflation Reduction Act very seriously," Albert Gore, executive director of the Zero Emission Transportation Association, a trade group, told S&P Global Commodity Insights.

Clarity welcomed

A key element of the latest guidance is the outlining of direct and indirect control and ownership thresholds to determine if a company is subject to FEOC limitations.

Those thresholds set a standard for tax credit implementation that echoes restrictions put on the semiconductor industry by the US Chips and Science Act, experts told Commodity Insights.

"The DOE and Treasury proposals are strong rules that incentivize the production of battery materials and components in the US and allied countries," Alex Fitzsimmons, head of government affairs at battery material producer Sila Nanotechnologies Inc., said in an email. "We know that FEOCs will try to game the system through complex business arrangements, so it is encouraging to see these rules closely examine ownership structures and weed out FEOCs that exert indirect and effective control over projects."

The proposed rules could be a boost for companies advancing US projects. General Motors Co. has a $650 million equity investment in Lithium Nevada owner Lithium Americas Corp., and a spokesperson expressed confidence in the company's ability to produce tax credit-eligible EVs.

"We are reviewing the new Treasury guidance now," the GM spokesperson said in an email. "Due to GM's historic investments in the US and efforts to build more secure and resilient supply chains, we believe GM is well positioned to maintain the consumer purchase incentive for many of our EVs in 2024 and beyond."

The guidance may also boost metals producers in Canada and Latin America, where the US has a free trade agreement with key lithium producer Chile.

"From a Canadian context, I think it will be positive [and] probably increase the demand for our minerals and metals, which I think is no surprise in terms of how much is needed to be able to achieve the energy transition," Photinie Koutsavlis, vice president for economic affairs and climate change at the Mining Association of Canada, a trade association, told Commodity Insights. "I think this just further solidifies the US' intention of sourcing from reliable, sustainable suppliers that they have trade agreements with and trading partners."

Impact on some deals unclear

Some of the world's major miners of battery minerals, including those within countries that have free trade agreements with the US, have a degree of their shares or board positions held by entities in China.

For example, material from Chile-based Sociedad Química y Minera de Chile SA (SQM), the world's second-largest lithium producer in 2022, might be expected to help the buyer of a US-made EV qualify for the tax credit. But SQM has 22.2% of its common shares outstanding held by China-based Tianqi Lithium Corp. as of Sept. 30, according to S&P Global Market Intelligence data. SQM has lithium supply agreements with companies including EV-maker Ford Motor Co. and South Korea-based battery producer LG Energy Solution Ltd., which in turn has a major battery supply agreement with Toyota Motor Corp. subsidiary Toyota Motor North America Inc.

It is also unclear whether EV batteries produced at a $3.5 billion plant under construction in Michigan would qualify for US tax credits under the latest guidance, as it is jointly supported by Ford and Chinese battery-maker Contemporary Amperex Technology Co. Ltd. (CATL). Republicans including Sen. Marco Rubio (R-Fla.) have said the project should not receive any federal funds due to CATL's involvement. Ford paused work on the plant in September before announcing a scaled-back restart in November.

"It depends on the nature of the agreement," Gore said. "Based on forward statements, they [Ford and CATL] seem to believe that it falls on the right side of the line."

Ford declined to comment, and SQM and CATL did not reply to requests for comment.

More to come

The rules could affect ongoing limited free trade agreement negotiations, notably with rising nickel giant Indonesia. A deal with the South Pacific nation could allow its nickel to be used in tax credit-eligible EVs. But significant investment by Chinese companies in Indonesia could complicate trade negotiations.

"These rules and the guard rails they provide are an important step forward in beginning to address America's China-specific problem, but far more needs to be done to address our broader mineral supply chain vulnerability and build the secure, reliable mineral supply chains our economic and national security demand; we simply need vastly more domestic mining and processing," Conor Bernstein, vice president of communications at the National Mining Association, an industry group, said in an email. "Overreliance on ambiguous interpretations of free trade agreements to solve our minerals challenge is no solution at all."

The latest guidance does not define a list of low value "non-traceable battery materials" that manufacturers will not be required to provide FEOC-compliant tracking information on to federal agencies. And the Treasury and Energy departments, along with the IRS, are considering whether certain critical minerals contained in electrolyte salts, electrode binders and electrolyte additives will qualify for the list.

The DOE is accepting comments on the guidance until Jan. 3, while the Treasury Department and IRS guidance is open for public comment until Jan. 18.

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