The federal government is testing a novel financing approach to break China’s grip on the graphite market: offering a price guarantee for a portion of the output from a proposed mine in Quebec. Under the arrangement, announced last week, Ottawa will pay a minimum price of around US$1,500 per tonne for thousands of tonnes per year of graphite from Nouveau Monde Graphite Inc. over seven years, according to Eric Desaulniers, the company’s chief executive. It means Nouveau Monde, which has spent years trying to build a mine in Saint-Michel-des-Saints, Que., may now be able to raise the $550 million in capital it needs to get its mine built. The deal, part of a wave of critical mineral policies announced during the G7 Energy and Environment Ministers meeting in Toronto last week, shows the federal government is willing to move beyond grants and basic funding announcements to unlock Canadian critical minerals projects . It also announced a similar offtake agreement for scandium oxide — a critical mineral used in aerospace and other applications — with Australia’s Rio Tinto LLC, which is designed to help the company build a scandium plant in Quebec. Despite years of talk about how important critical minerals projects are to Canada’s future economy and national security, raising capital to build the projects remains a formidable challenge, executives say, because investors recognize that China’s dominance over various commodities means it can single-handedly change global supply levels to crater or elevate prices. “We can produce a lot of minerals cheaper than (China) can,” said Mark Selby, chief executive of Toronto-based Canada Nickel Co. “The problem is, and this applies across all critical minerals, today’s price environment doesn’t necessarily generate the financial return that investors want to provide the upfront capital.” He described it is as a chicken and egg problem: To break China’s dominance of critical mineral supply chains, Canada needs to build more mines. But building new mines requires investment, and investors are wary of such projects as long as China controls enough of the supply chain that it can flood the market with product and depress prices. The federal government’s deal with Nouveau Monde aims to break this cycle by guaranteeing it will pay a minimum price for its graphite. And instead of having to take possession of the graphite and stockpile it, the deal allows for Nouveau Monde to sells some or all of the backstopped tonnes — at the government’s discretion — to customers who are willing to pay more than US$1,500 per tonne. In those cases, the federal government is entitled to 50 per cent of the profit above the agreed price, net of any losses it has incurred, Desaulniers said. “I really believe the government will make money out of this,” he said. “It’s a very smart instrument. It makes us attractive for capital market investors and it creates some downside protection.” But the deal is contingent on Nouveau Monde, and the Canadian government, finding allied countries or strategic buyers to take 15,000 tonnes per year on substantially the same terms, Desaulniers said. He expressed confidence this would occur, saying the government is already in advanced negotiations with allies. Desaulniers said that the price of graphite varies. For large flake graphite, which is used in niche applications, it sits around US$1,500 per tonne but for small flake graphite, used in batteries for EVs, it may be half that amount, around US$800 per tonne. Part of the impetus for the deal is to create more visibility and stability in the graphite market, which remains just a fraction of the size of the nickel and copper markets. Unlike those base metals, the London Metal Exchange — often regarded as an arbiter for metal prices in the western hemisphere — does not trade futures or other options for graphite and many other critical minerals. Another layer of the deal says that Nouveau Monde will set aside roughly one-third of the total 30,000 tonnes — which includes the 15,000 tonnes backstopped by the Canadian government plus the 15,000 backstopped by allies and strategic buyers — for use in batteries, he added. For that amount, the guaranteed price would be closer to US$800 per tonne, he said. Back of the envelope math would peg the government’s financial commitment at around US$133 million, but Desaulniers said it will be substantially less than that, for a number of reasons, primarily that the government designed the policy so that investors have confidence that Nouveau Monde will be able to sell its graphite to buyers willing to pay more than US$1,500 — not so that the government can buy the entire offtake amount. There are many “mineral-hungry countries” that lack geologic assets and have expressed interest in offtakes, Desaulniers added. “There’s countries that need our product, and don’t like to be reliant on China only for everything,” he said. ‘You don’t care if you win a trade negotiation’ Mining executives and industry analysts have spent years advocating for such policies, saying they could help jumpstart investment in North American critical minerals projects. Now as trade tensions with China are escalating, the deals are starting to take shape. In July, the U.S. government marked its own foray into such territory, by taking a 15 per cent stake in MP Materials Inc. , a company that controls the largest rare earths mine in the Western hemisphere — located in Southern California — and agreeing to buy its rare earth magnets. China currently controls an estimated 90 per cent of the world’s rare earth magnets, which are used in industrial applications from automobiles to energy, as well as defence and medical applications. At the same time that MP Materials announced its deal with the U.S. government, it also announced investments from Apple Computers Inc., JPMorgan Chase Funding Inc. and Goldman Sachs Bank USA. “This is the right tool because it addresses a market failure and gives investors confidence,” said Bentley Allan, a professor of political science at Johns Hopkins University, and a principal at the Transition Accelerator, a Canadian non-profit. In recent months, China has used its dominance of rare earths as leverage in trade negotiations with the U.S., imposing a series of restrictions on exports. Even in the latest China-U.S. deal announced in late October, China only partially lifted some of those restrictions, pausing its expansion of rare earth export controls for one year. But breaking China’s control of commodity supply chains will be valuable when it comes time to finalize trade deals , Allan said. “Even if the MP deal ends up costing the U.S. government US$4 or US$5 billion, you don’t care if you win a trade negotiation with China,” he said. The new policy approach comes after governments spent years doling out grants — often worth less than $25 million — seeking to help companies advance their mining projects to the construction phase. More recently, the U.S. government has turned to tariffs on Chinese materials, including on steel, aluminum, copper as well as critical minerals such as cobalt and graphite. Canada has followed suit and erected tariffs on steel and aluminum too and, in its 2024 Fall Economic Statement, signalled its intent to slap tariffs on graphite in 2026 . Similar to rare earths, China controls much of the world’s graphite production, including 95 per cent of the world’s battery-grade graphite supply. The only active graphite mine in North America is located in Quebec, and is operated by Northern Graphite Corp. Graphite is considered a key mineral because of its high temperature resistance and natural lubricating process, which lends itself to a number of industrial applications, from battery anodes to various defence and medical applications. Ground beef and filet mignon Despite the numerous uses for graphite, Desaulniers said his company faced a challenge that locked it into selling primarily into one market: batteries for electric vehicles. That’s because when he sought financing to build his mine, lenders always insisted that the company obtain long-term offtake agreements for the graphite it hopes to produce, he said. The only potential buyers willing to commit to long-term, large-scale offtake agreements were battery corporations and automakers, he said. Hence, the company signed agreements with General Motors Co. and Panasonic Corp. that could account for approximately 55,000 tonnes of graphite concentrate, out of an estimated 106,000 tonnes of total annual output. Both still have details pending. Nouveau Monde must obtain the financing to build its mine, for example, under the deal with Panasonic. Also as part of the Panasonic deal, Nouveau Monde will scale down and accelerate its plans to construct a modular refinery in Bécancour, Que. “The margins on the lithium-ion battery are much, much thinner because we compete head to head with the Chinese,” he said. It represents another version of the chicken and egg dilemma, Desaulniers said. He would have preferred to sell as much as possible into niche applications that command higher margins, such as rocket nozzles and refractory bricks. By his estimate, there are 150 niche buyers in Canada, who each require anywhere from 10 tonnes to a couple hundred tonnes annually. Individually, none create enough demand to sign an offtake agreement, and they are too diverse to be united into a coalition. He compared the situation to a cattle farmer who can’t sell the most valuable cuts of beef. “It’s like the ground beef and the filet mignon,” said Desaulniers. “You can use filet mignon to make ground beef, but that’s a pity.” The government deal is designed to create breathing room for Nouveau Monde to tap into such markets. Every year, Desaulniers said he will report to the government about potential deals Nouveau Monde has lined up to sell graphite from the 15,000 tonnes that are backstopped. In turn, the government can decide whether to greenlight a deal or can choose to pay for the tonnes and stockpile the graphite or put it towards its own uses. He said the US$1,500 per tonne price floor set by the government represents a basket price that Nouveau Monde negotiated based on numerous data points, including prices set by Benchmark Mineral Intelligence, a research firm, as well as publicly available information about the price that Northern Graphite generally receives for graphite from its mine in Quebec. “We made a compilation of the public information on that mine, and it shows that, on average, they always sell above US$1,500,” Desaulniers said. Meanwhile, another 15,000 tonnes will be set aside for allies and strategic buyers. In those cases, he said a foreign government would likely backstop a certain quantity of graphite offtake including setting a price floor, and then trading houses in that country would make a commission by selling the graphite to end users there. Or the government could stockpile the graphite. There are other additional layers to the deal, including that some of the 30,000 tonnes must be set aside for use in the battery supply chain, said Desaulniers. The company simultaneously announced that Traxys North America LLC, a critical minerals trading house, could secure up to 20,000 tonnes of concentrate, which would not need to be refined into anode material at the company’s proposed Bécancour plant. Traxys would only be obligated to take or pay for 10,000 tonnes — all of which would be for the refractory market, a fast-growing US$45 billion market for graphite that can withstand high temperatures, which is used in the steel, cement and other sectors. That deal remains subject to Traxys board approval, according to the press release. Altogether, the deals would account for 105,000 tonnes of their estimated 106,000 tonnes of annual mine production. The company is hoping to begin construction next year, and start producing its first graphite in 2028. Allan and others said they expect to see more similar deals in the future as the U.S. and Canada become more serious about challenging China’s dominance of minerals and metals. Could the world's next big diamond mine be in Saskatchewan?Uranium industry backers converge on Saskatoon touting the resurgence of nuclear power Allan, for example, noted that the copper market is expected to enter a structural deficit in five years, in which demand outstrips supply. But few investors are willing to bet on what could happen in the future, whereas Chinese planners can already start to ramp up production plans because they are less beholden to market pressures. He emphasized that these deals could allow governments to share in the upside of breaking China’s dominance, and give them more leverage at trade negotiating tables. “We’re getting things moving in the right direction,” he said. “We have the right deal template now, but we’ve got to deploy it at scale if we’re actually going to solve this problem.” For executives, the prospect of more government offtake agreements and price floors comes as a relief after spending years raising money for projects, without being able to start construction, let alone production. “The rhetoric is that we’re in a critical minerals war with China,” said Selby. “But we didn’t spend three years in World War II talking about what kind of equipment we need. We just got on with it. If you’re in a war, you don’t calculate what the IRR (internal rate of return) on a tank or a plane is, you just build it.” • Email: gfriedman@postmedia.com