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A new private equity firm is betting more than half a billion dollars on the messy business of mining critical minerals, which are in growing demand from electric vehicle battery makers.
Toronto-based Kinterra Capital plans to invest mainly in the US, Canada and Australia, partly in an effort to shift EV battery-chemical production away from China, which hosts a majority of the world's minerals processing capacity.
The firm just raised $565 million for its first fund, making it the industry's second PE vehicle launched this year focused on minerals and mining, according to PitchBook data.
In a time of adversity for raising debut funds, Kinterra won over investors by tying its story to the cause of energy transition, said Cheryl Brandon, Kinterra's co-managing partner and co-founder.
"It was definitely a challenging fundraising environment," Brandon said. "LPs are doing their due diligence. They are really taking the time to pick the best managers."
Kinterra plans to take controlling stakes in projects and companies that produce, refine or process lithium, cobalt, nickel and other metals that go into lithium-ion batteries used to power electric vehicles.
The fund allows Kinterra to devote technical know-how and the hundreds of millions of dollars needed to develop new mines, an endeavor that many cash-strapped publicly traded mining companies have shied away from in recent years, said co-managing partner Kamal Toor, another co-founder.
"This is happening at a time in which we have probably the most significant secular, fundamental downstream demand for those minerals, and that's really the thing that's creating the compelling investment opportunity," Toor said.
Brandon and Toor were previously founding partners at Waterton Global, another Toronto-based metals- and mining-focused PE firm founded in 2009.
Kinterra is entering the mining investment scene close on the heels of established firm Appian Capital Advisory raising a fresh round of capital for a similar strategy. In October, Appian closed on just over $2 billion for its third fund to make private equity and credit investments in mining. Since 2011, the London-based firm has made 26 investments and opened nine mines producing gold, graphite, nickel, copper, cobalt, potash, zinc, lead, silver and other minerals.
Broad underinvestment in upstream production has pushed down valuations for the assets they're targeting, Brandon said.
"Our objective is really to identify high-quality projects at discounted valuations and crowd in capital," she added.
Kinterra's strategy coincides with a broader effort to reduce reliance on China, the world's No. 1 processor of some minerals needed for EV batteries.
The firm says some of its projects could also benefit from recent government incentives such as tax credits introduced under the US Inflation Reduction Act.
"The strategy around developing that conversion capacity in stable jurisdictions benefits from a lot of policy incentives," Brandon said.
Kinterra could also receive support via equity commitments from downstream users of battery metals who want to secure long-term supply.
In July, the firm acquired a 66% interest in a joint venture with Highland Copper Company that controls the White Pine North copper project in Michigan, which the firm said at the time had significant expansion opportunities.
Kinterra plans to hold most of its investments for three to four years. Potential buyers for its future mines include legacy mining companies, which need to replenish their portfolios of cash-flowing mines as older projects wind down. Assets could also be sold to mining companies without roots in critical minerals that are looking to expand their portfolios, Brandon said.
Beyond Kinterra, limited partners' capital is also filtering into venture capital investments in startups that aim to recycle battery metals—with the hope of supplementing, if not eliminating, the need for virgin mineral production. VC investment in metals recycling totaled over $211 million in Q2, an all-time high for a single quarter, according to a spotlight in PitchBook's Carbon & Emissions Tech Report.
But for near-term lithium-ion battery production, recycled material isn't yet a scalable option, according to Kinterra.
"It's going to take time to scale and for costs to come down," Toor said. "And one of the key issues in that business of recycling is feedstock availability. It could take 10 to 12 years for a generation of batteries to dispense and for there to be sufficient feedstock needed for recycling."
Correction: This story has been updated to reflect that Kinterra Capital invests in critical minerals, not rare-earth metals. (Nov. 30, 2023)
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This article originally appeared on PitchBook News