The challenges facing a renewable energy rush

The great renewable energy rush is proving to be more difficult, and perhaps less profitable than expected, with a combination of rising costs and consumer resistance sounding a warning bell for investors.

Most of the problems reported so far have affected big players in the renewables and critical metal sectors but small players are not immune to a reality check, especially those making the transition from explorer to producer.

The issues are not unique to lithium, copper, nickel, or the other metals which are benefiting from the shift in the way electricity is produced and stored.

An industry repricing

Every major change to an industry starts with a burst of optimism and a flow of capital seeking first mover advantage, followed by a realisation that early promises can be hard to deliver, forcing a rethink and repricing.

The repricing phase in Australia started two weeks ago when IGO (ASX: IGO) revealed an impairment charge of close to $1 billion on the Western Areas nickel business acquired last year for $1.3 billion – a 75% write-off in 12-months, perhaps a write-off record.

Investors rubbed 11% off IGO’s share price after it confessed to overpaying for Western Areas with the official explanation being that it had “reassessed the accounting value” of the Cosmos and Forrestania nickel mines to reflect higher capital and operating costs and challenges to production schedules.

Risky business and market consequences

Put another way, IGO paid too much for an asset about which it knew too little until it was too late – a perfect example of why takeovers can be risky, as BHP has discovered repeatedly.

Another big miner, South32 (ASX: S32) followed IGO into the confessional last week when it halved the value of its Hermosa zinc, lead and silver project in the US, a write down which wiped $1.9 billion off the value of the asset with management blaming high potential development costs.

Industry-wide impacts and consumer response

Other examples of mining projects not meeting the high expectations of investors and company managers can be found across the mining industry with Core Lithium (ASX: CXO) suffering a sell-off after reporting that recoveries at its Finniss lithium project had been disappointing, so far, and Pilbara Minerals (ASX: PLS) producing more lithium in the June quarter but earning less.

A star investment performer for the past three years Pilbara remains hugely profitable, just not as profitable as it once was with those early years providing the company with an impressive $3.3 billion cash balance.

But looked at on a quarter-by-quarter basis and the start of a squeeze can be seen with revenue for the June quarter totalling $800 million, down 18% on March quarter revenue of $1 billion despite a 10% increase in lithium production which was more than offset by a 33% fall in the price of spodumene (lithium ore) sold.

Meanwhile, the flipside of raw material production which is the consumption of battery and other critical metals, is also showing signs of stress caused by the same issues of rising costs that are killing project economics – which will eventually create a negative feedback loop of reduced demand for the same raw materials.

Response of renewable energy companies

In the US Orsted, a Danish wind turbine maker, has lost a bid to sell power to the Rhode Island power utility because its electricity would be too expensive, and a Spanish company, Iberdrola cancelled a wind farm off Massachusetts.

Both companies blamed high raw material prices.

A similar situation emerged in the UK where a Swedish company, Vattenfall, has withdrawn from the Norfolk Boreas wind farm, citing high construction costs and lower than budgeted future electricity prices.

Potential risks for investors

The clear warning for investors is that whatever promises your favourite company makes it is likely to suffer when it tries to turn a plan into action or, as military commanders have said repeatedly over the ages “no plan survives first contact with the enemy”.

Consumers are obviously not the enemy, but they are the people being asked to pay a price for a service and if that service is unsatisfactory or over-priced, they won’t buy it.

The fact that electric vehicle sales in most countries still depend on government subsidies should be a warning to investors because when those subsidies are removed it dampens demand for EVs which, in turn, dampens demand for lithium, graphite, copper and nickel.

Consumer reaction, though it can’t yet be called a revolt, is growing against government regulations aimed at driving petrol and diesel cars off the road with sales of internal combustion cars to be banned in some countries from 2030, a plan being revisited in the UK along with a high taxing system for inner cities which operate ultra-low emission zones in major cities.

Changes in investment plans

The changes keep rolling in with Mineral Resources (ASX: MIN), a successful operator of three core businesses (iron ore, lithium and engineering services) making a significant change to its investment plans.

MinRes has sold its minority stake in a complex lithium hydroxide plant in WA to its US partner, Albemarle, and withdrawn from plans to invest in similar Chinese projects being developed by Albemarle, to concentrate on the simple and less risky business of rock crushing and selling lithium concentrate (spodumene).

Recap of market losses

One recent study estimated that $6 billion in shareholder wealth had been written off this year on investments by ASX-listed companies exposed to critical and technology metals.

Along with the South32 and IGO write-offs (and don’t be fooled by the description because a write off is a loss by another name) there have been admissions such as that from Hastings Technology Metals (ASX: HAS) that its Yangibana rare earths project in WA had incurred a 40% cost blow-out while the Wesfarmers/SQM Covalent project could cost $300 million more than planned.

The latest “green energy” project with a problem, and it’s one that investors in Fortescue Metals Group (ASX: FMG) should note, is a hydrogen project in WA being planned by big Canadian infrastructure specialist, ATCO, which would be based on wind and solar power.

The Clean Energy Innovation Park near the mineral sands centre of Eneabba, north of Perth, has been scrapped partly because of its remote location and partly because of cost with the potential 10-megawatt electrolyser designed to produce 4.3 tonnes of hydrogen daily possibly being shifted to a site closer to essential services.

Fortescue, which has bold plans to be a globally significant producer of green hydrogen can be expected to experience problems similar to those encountered by ATCO.

Looking towards the future

In time, the renewables revolution will get back on the rails thanks to government and community pressure to rein in carbon pollution which is blamed for climate change.

But, like all revolutions, it has been moving too quickly without enough care being applied to costs, and these costs have become project killers and the enemy of mining company management and investors.

It might be time to hit the pause button and return to renewables when confession time passes and all the bad news has been aired to see who has survived what looks like an industry-wide clean-up.