Action on a small Pacific island off the coast of Australia may be an indicator of the future for electric vehicle manufacturers and the mining sector.

Vale SA reportedly plans to sell its Goro nickel-cobalt operations in the French Pacific territory of New Caledonia to provincial and local authorities, with commodity group Trafigura Pte. Ltd. holding 19% of the property and electric car company Tesla Inc. listed as a technical and industrial partner. Tesla also aims to source metal produced from the mine for its batteries.

This deal and other recent agreements between Tesla and battery metal producers show how automotive companies are being pressured to deal directly with mining companies to get pricing power amid expectations of a significant demand ramp-up, Benchmark Mineral Intelligence head of strategic advisory Andy Leyland said in an interview.

Purchasing directly from a mine through an off-take agreement with a conditional discount can give mine developers momentum when attracting financing, Leyland said.

"I think it's the norm for this industry, but it's not the way most commodity markets work," Leyland said. The high consumption of lithium, cobalt and nickel necessary to achieve EV expansion plans needs "a lot more engagement from the off-takers, the consumers of the material," Leyland said. "[The automotive companies] don't want to finance the mines themselves, but they do want to make sure there's enough supply for the investment plans they have on electrification."

Global primary nickel demand is forecast to increase 9.3% year over year in 2021, after a 2.9% decrease in 2020, according to S&P Global Market Intelligence data.

The Goro mine was ranked 28th of the top 50 global nickel-producing mines in 2019 and 19th of the top 50 cobalt-producing mines for that year, while New Caledonia was the fourth-largest producer of mined nickel in 2020, Market Intelligence data shows. The deal included plans for the mine to become carbon neutral by 2040 and for stronger environmental protections, which falls in line with Tesla's goal of securing cleaner inputs within its supply chain.

But the asset, which uses acid leach mining, has historically been rife with environmental and social risk. A 2014 acid spill at the site tainted a local river, killing aquaculture and triggering violent protests. Other protests over plans to sell the mine halted its production plans in late 2020.

Jason Sappor, a commodity analyst with Market Intelligence's Metals and Mining Research team, said in an interview that Tesla's intervention with Goro fell in line with plans for vertical integration that the company outlined during its 2020 Battery Day.

"They want to reduce costs. It's easier to source this material if it's something you have some kind of interest in. They want to be able to make the production costs cheaper so they can sell EVs to the public at lower prices," Sappor said.

READ MORE: Sign up for our weekly ESG newsletter here, read our latest coverage of environmental, social and governance issues here and listen to our ESG podcast on SoundCloud, Spotify and Apple podcasts.

The risks linked to the property are typical of other high-pressure acid leaching plants that produce battery-grade nickel for the EV sector due to outstanding questions about waste disposal and energy generation, according to Sappor.

"It seems like a lot of the main options that are arising, there are environmental concerns related to them. There's a potential contradiction there where you've got a clean EV but its imports aren't necessarily clean, "Sappor said. "I don't think ESG investors, if they find out that the battery is arisen through nonclean means, are going to be particularly happy about that."