Mining Finance Alternative: The Inflation Reduction Act Insights

Nearly 18 months after the Inflation Reduction Act (IRA) was implemented by the Biden Administration, critical mineral producers and investors are exploring ways to capitalize on the IRA tax credits and loan guarantees for financing new or existing mining projects. Mining companies are applying for a 10% tax credit under Section 45X or the tax credit under Section 48C, or turning to the loan guarantee programs under the Title 17 Clean Energy Program. Despite the rush, many questions about qualifying criteria for these incentives remain unanswered by the Internal Revenue Service and the Department of Treasury.

Historically, initial financing for mining projects and subsequent capital maintenance were sourced from a combination of investor equity, project financing from financial institutions, royalty agreements, or streaming agreements. However, the IRA tax credits and loan incentives present an alternative financing and capital maintenance option for mining projects at different stages.

Section 45X (Advanced Manufacturing Production Credit)

Section 45X provides tax credits for energy component producers that sell to unrelated persons, encompassing eligible components produced in the US using critical minerals such as graphite, cobalt, lithium, and nickel. Although the tax credit amount is based on the produced eligible component, it also applies to certain mineral producers and processors, and can be as much as 10% of the cost of the critical mineral produced. Section 45X remains attractive to mining companies despite some disappointment over the recent guidance from Treasury and the IRS, which suggested that the extraction costs of raw material can’t be included in this 10%. There is a strong recommendation for those affected by this exclusion to work with their legal teams and submit their comments to the IRS.

Section 48C Qualifying Advanced Energy Project Credit Program

Originally established in 2009, the Qualifying Advanced Energy Project Credit Program was expanded under the IRA so that up to $10 billion is available for tax credits for eligible projects. The credit under Section 48C can account for up to 30% of qualified investment costs for a selected project if it meets prevailing wage and apprenticeship requirements. The Section 48C tax credit is aimed at projects that reequip, expand, or establish industrial facilities to produce or recycle specified advanced energy property, or reduce greenhouse gas emissions by at least 20%. Note that companies that received the Section 48C tax credit cannot also claim Section 45X tax credit for property produced at the same facility benefiting from the Section 45X tax credit.

Title 17 Clean Energy Financing Program

Created by the Energy Policy Act of 2005, Title 17 is a Department of Energy program that guarantees loans for innovative projects. It now includes four financing programs for US projects, including innovative energy projects, innovative supply chain projects, state energy financing institution projects, and energy infrastructure reinvestment. Although securing a loan guarantee under Title 17 can be competitive, it can account for up to 80% of a project’s eligible costs.

The IRA is providing significant financial incentives to mining companies, with the aim of strengthening the US supply chain for critical minerals and advancing our net zero goals. However, the specifics of these tax incentives and loan programs are still in the process of being clarified, and in some cases, are under serious debate.

¹  All “Section” references are to the Internal Revenue Code of 1986, as amended (Code) or the Income Tax Regulations (26 CFR part 1).

2  See Notice of Proposed Rulemaking, 2023-27498

3  See Miners, EV Makers: Climate law must apply to digging up materials, February 5, 2024, Hannah Northey.

4  Section 1.45X-3(f)(3).

5  See 48C Qualified Advanced Energy Project Tax Credit: One Year into the Inflation Reduction Act, October 8, 2023, Jim Lane.