How to Reform the DFC to Meet U.S. Critical Minerals Security Needs

The U.S. government has prioritized reducing its reliance on China for critical minerals needed for national, economic, and energy security. China developed an advantage in mineral production because of decades of focused industrial policy and state support for domestic processing, manufacturing offtake, and global extraction. It succeeded at building strong supply chains by securing supply both domestically and internationally, particularly from emerging markets. For example, as of 2020, Chinese-backed companies own or have an equity stake in 15 of the 19 cobalt mines in the Democratic Republic of Congo.

To compete, the United States should create a resilient pipeline of supply from other countries given it has less than 1 percent of the world’s graphite, nickel, and cobalt and 1.3 percent of its rare earths. It has turned to the International Development Finance Corporation (DFC)—a state-owned development finance institution—for financing its minerals security needs abroad. But the DFC has had limited success—just 12 of 1,008 projects—or 1.2 percent of DFC’s list of active projects—are in the mining and quarrying sector. This includes a $105 million equity stake in TechMet, which has assets that produce, process, and recycle metals required for electric vehicles and a $150 million loan to a graphite mine in Mozambique. However, there is a need to significantly increase financing for minerals projects if the United States is to create resilient supply chains independent of Chinese control.

The DFC was initially created through the Better Utilization of Investments Leading to Development (BUILD) Act of 2018. It was created to support private investment in low and lower middle-income countries that advances economic development. The DFC uses debt issuance, debt guarantees, risk insurance, equity investments and technical assistance to achieve this.

With the reauthorization for the DFC around the corner in 2025, Congress should revise legislation to make equity investments in critical minerals projects easier. Equity has two benefits. First, it is a powerful signal to both companies and countries. Government equity can make it significantly easier to attract other private equity while also supporting government-to-government cooperation and negotiations.  At present, TechMet is the only mining company that the DFC has an equity stake in—demonstrating a clear area for improvement. In a fireside chat at CSIS, TechMet CEO Brian Menell noted that the DFC equity was “universally perceived as positive” given the credentials that it provides since producer countries want U.S. engagement to balance China’s dominant position, particularly in emerging markets.

Second, while DFC equity is earmarked for projects in emerging markets, it also frees up capital to invest in projects that are ineligible for DFC support but important for U.S. critical minerals security. DFC’s equity in TechMet has been ringfenced for a rare earths recovery project in South Africa and a nickel mine in Brazil, The latter has been key to countering China’s dominance in Indonesian nickel production, which has depressed prices and forced other companies to close. The equity has freed up capital for TechMet to invest in projects in the United States, including a lithium extraction project, lithium recycling project, vanadium extraction project, and cathode manufacturing project. In Europe it has a lithium project and a rare earths separation and processing project.

In the longer term, Congress should create an institution that is better fit for purpose. The DFC’s current mandate and parameters for financing leaves it misaligned with minerals security needs. The first limitation is that the DFC’s mandate prioritizes investments in low-income and lower-middle income countries. Investments in upper-middle income countries can be “considered” and require a special waiver while high-income countries are excluded. A special waiver requires showing both that a project would both advance U.S. foreign policy interests and have a significant development impact.

Many prospective mining projects are in countries that do not fit these parameters. For example, the income classification requirements means that no investments can be made in lithium projects in Chile (35.8 percent), Australia (23.8 percent), or Canada (3.6 percent), making 63.2 percent of the world’s lithium ineligible for DFC support, while Argentina, which holds 10.4 percent of the world’s lithium, requires a special waiver.

Similarly, for graphite, the two countries with the world’s largest reserves—Turkey (27.3 percent) and Brazil (22.4 percent), require special waivers. For nickel, the countries with the largest reserves either require exemptions or are ineligible—projects in Indonesia (21 percent) and Brazil (16 percent) require special waivers while projects in Australia (21 percent) are ineligible for DFC support. Indonesia currently produces roughly half of the world’s nickel—but in the absence of Western companies with responsible mining practices, has been dominated by Chinese companies, which are causing significant and irreversible environmental damage.

While the DFC has made some progress on advancing U.S. critical minerals security, it is not designed to meet the challenges at hand. Ultimately, the fundamental mission of the DFC is not in minerals access. It is a development agency. Mixing critical minerals security and development mandates mean neither is done properly.

This is already evident. The European Energy Security and Diversification Act of 2019 authorized the DFC to finance European energy projects to reduce reliance on Russia. This allowed the DFC to finance energy projects in high-income countries such as the Netherlands, Belgium, Germany, and the United Kingdom. The DFC provided Poland, a high-income country, with a $500 million loan guarantee for a liquified natural gas project. If true to its original mandate, this financing would have been better utilized to reduce energy poverty in low and lower-middle-income African countries, where nearly 600 million people lack access to energy.

The upcoming reauthorization in 2025 presents an opportunity for reforms that will improve the ability of the DFC to advance U.S. mineral security ambitions. In the longer term, Congress should consider of a new institution that is better fit for purpose.