Treasurer Jim Chalmers' unprecedented Federal Court action against Chinese-linked investors could signal a new era of resource nationalism - but who's going to fund Australia's critical minerals boom as selective foreign capital gets the boot?
Azzet’s Mission Critical is a weekly column that lays out the ebbs and flows around the critical minerals supply chains - from pricing, production, refinement and mergers & acquisitions, to manufacturing and consumer products.
The Northern Minerals debarcle isn't just about regulatory compliance. It's about the contradiction at the heart of Australia's critical minerals strategy: demanding supply chain diversification whilst simultaneously restricting the very capital needed to build it.
As China tightens its stranglehold on critical mineral exports and investment momentum in critical mineral development weakens dramatically, Australia faces an uncomfortable question - is national security theatre undermining the economic reality of getting projects off the ground?
Capital gap exposed
Wu Tao's proxy scheme through Yuxiao Fund and its network of British Virgin Islands and UAE entities revealed something more troubling than foreign interference - it exposed the chronic undercapitalisation of Australia's critical minerals sector.
When Australian authorities blocked Yuxiao Fund from increasing its stake to 19.9% in 2023, the subsequent proxy accumulation through four associated entities highlighted a stark reality - Northern Minerals needed capital and Chinese investors were willing to provide it.
When Chalmers ordered divestment by September 2024 and Indian Ocean International ignored the instruction, it exposed not just regulatory defiance, but the vacuum of alternative funding sources for Australia's strategic mineral assets.
But where are the domestic institutional investors?
Despite rhetoric about critical minerals being essential for national security, investment momentum collapsed in 2024, with spending growing just 5% compared to 14% in 2023.
Adjusted for inflation, real investment growth was a paltry 2%.
Mind you, it doesn't help that lithium prices have cratered over 80% since 2023 and cobalt has dropped 74% from its 2022 peak.
For Australian developers, it's the perfect storm for projects forced to put on the brakes: falling commodity prices, restricted foreign investment, and domestic capital markets that remain sceptical of long-term resource plays.
Liontown Resources (ASX: LTR) exemplifies the challenge - despite entering production at Kathleen Valley in mid-2024, the company ended March 2025 with just $170 million in cash after burning through capital.
Macquarie's subsequent neutral rating reflects that even with solid production, liquidity management remains a "near-term focus" as lithium prices stay subdued.
The double-edged sword of foreign investment in Australia
Australia's critical minerals dilemma is somewhat black and white. As the government demands supply chain diversification away from China, that move simultaneously restricts the capital flows needed to achieve it.
We've talked about it before. China's April 2025 export controls on seven rare earth elements - including dysprosium and terbium that Northern Minerals' Browns Range produces - demonstrate Beijing's willingness to weaponise mineral supplies.
Find out more: Mission Critical: The gravity of China's rare earths bans
But if Australia blocks Chinese investment in response, where does replacement capital come from?
Despite lithium demand rising nearly 30% in 2024, exploration activity plateaued last year and start-up funding dried up.
Lack of domestic interest
The glaring absence in Australia's critical minerals equation is patient domestic capital.
Super funds, despite managing $3.5 trillion in assets, remain largely absent from early-stage resource development.
And sovereign wealth funds that could bridge the gap between private markets and national security imperatives don't exist - unless you count the Northern Australia Infrastructure Facility (NAIF).
Meanwhile, the United States pursues coordinated infrastructure investment through Oklahoma's emerging hub, hosting America's only nickel refinery and largest lithium refinery.
President Trump's April 2025 executive order on offshore critical minerals demonstrates state-sponsored support for strategic industries on a level similar to China's past.
Australia's approach, however, appears reactive - blocking problematic foreign investment without creating viable domestic alternatives.
Keeping heads above water
The harsh math of mining economics suggest only the strongest can survive the current downturn.
Cost positioning determines everything. Pilbara Minerals' 30th percentile position and minimal leverage provides survivability and Mineral Resources (ASX: MIN) benefits from iron ore diversification.
As companies in higher cost quartiles face genuine existential risk without capital support, the question is: does Australia want these projects to survive under foreign ownership, or die under domestic capital constraints?
Global EV sales surging 50% year-on-year support long-term demand fundamentals, but timing matters - projects that fail to secure capital during the current downturn won't benefit from an eventual recovery.
The Northern Minerals case crystallises a running theme - legitimate national security concerns clash with the practical reality that domestic capital isn't stepping up.
Goldman Sachs notes the emergence of "resource nationalism" globally, but these jurisdictions typically couple restrictions with state investment. So far, Australia restricts without replacing.
A way forward?
The Australian Strategic Policy Institute (ASPI) says Chalmers' move to block was warranted.
“If we fail to enforce foreign investment directives, we send a clear signal to Beijing and the world that we’re unwilling to defend our economic and national security,” ASPI wrote earlier this week.
“Worse, we risk undermining the very alliances and partnerships we’re cultivating to create a supply of critical minerals that China cannot throttle at will.
"Australia must now demonstrate that its sovereignty isn’t for sale. Beyond legal action, this means accelerating investment in domestic processing and refining capacity.
"It means supporting partner countries through establishing joint ventures and strategic stocks.
“Chalmers' Federal Court action sends the right signal about compliance, but raises uncomfortable questions about Australia's critical minerals strategy.”
As it stands though, blocking Chinese capital while failing to mobilise domestic alternatives risks creating the worst of both worlds - projects that die from undercapitalisation while China maintains its processing monopoly.
And the concentration of global refining capacity in China continues increasing, rising from 82% in 2020 to 86% in 2024.
Australia's mining assets become meaningless if they can't secure capital for development; yet for investors, only the lowest-cost, best-capitalised producers will survive.
Companies like Pilbara Minerals with strong balance sheets are the safest bets, but if Australia wants genuine supply chain diversification, it needs to solve the capital equation, not just the foreign ownership problem.
National security goals and the economic reality must align - or ultimately, neither objective may be achieved.
The views expressed are those of the author and do not constitute investment advice. Investors should conduct their own research before making investment decisions.
