Critical Minerals | Rare Earths: The Security Wall That Traps Liquidity
- Anani Klutse, MBA, MASc
- Jan 20
- 5 min read
Updated: 6 days ago
By Anani Klutse, MBA, MASc, Collateral Structurer and Specialty Risk Advisor
The most expensive capital is the capital you cannot use.
Critical minerals are now at the center of Canada’s industrial strategy. The federal list includes 34 critical minerals, with six priorities that keep resurfacing in boardrooms and investment decks: lithium, graphite, nickel, cobalt, copper, and rare earth elements.
That strategy is right. But for many operators, capital will not be the constraint.
Canada’s critical minerals buildout is more likely to hit a security wall before it hits a funding wall. This is not about access to capital. It is about usable capital. Liquidity gets trapped in letters of credit, collateral postings, performance security, and counterparty terms right when the business is trying to scale.
A key shift is driving this: supply security is no longer just a policy discussion. It is being converted into contractual requirements.
What changed?
Four forces are moving at the same time.
Critical minerals are being treated like strategic infrastructure:
When governments, strategic buyers, and industrial customers care about security of supply, contracts tighten. Penalties increase, security packages get heavier, and timelines become less forgiving.
Demand now includes defence and advanced manufacturing:
For many inputs, demand is not only electrification. It also comes from defense and advanced manufacturing. When delivery matters at that level, tolerance for delays drops and counterparties push more risk into the contract through stricter obligations and more security.
Trade policies are now part of the deal:
Export controls, shifting alignment, sanctions exposure, and enforcement risk can change faster than procurement cycles. That uncertainty shows up in tighter controls, more covenants, and less flexibility.
Processing capacity is concentrated
Mining is only the first step. The real bottleneck is downstream processing and conversion. When that capacity is concentrated, the supply chain becomes fragile, and contracts harden to protect schedules. The security burden climbs.
Security requirements can scale faster than EBITDA. That is where the pressure comes from.
Where the pressure shows up first?
When the security wall starts forming, it usually appears as familiar operational symptoms:
Revolver headroom shrinks even as EBITDA improves, including for borrowers with syndicated facilities or large bilateral lines.
LCs and cash collateral expand across customers, suppliers, utilities, and government related obligations.
Bid, performance, and warranty instruments multiply across EPC scopes and long lead equipment.
Offtake agreements concentrate exposure to a small set of buyers by design.
Payment terms stretch and receivables become larger, older, and more concentrated.
None of this looks dramatic in isolation. That is why it is dangerous. It is slow, quiet, and it tightens exactly when momentum is building.
Local governments strategies, project acceleration, and infrastructure planning increase the volume of contracts and obligations. More activity means more counterparties. More counterparties means more security instruments. That is how the stack grows.
The security wall, defined
The security wall is the moment your growth plan requires more pledged security than your capital structure can comfortably support.
In practical terms, it is the combined burden of:
Letters of credit
Cash collateral
Parent guarantees
Performance security
Advance payment security
Warranty security
Concentrated receivables exposure driven by off-take structures and extended terms
You can be profitable and still run out of flexibility if too much liquidity is tied up here.
A simple test: if your required security stack is growing faster than free cash flow plus committed headroom, liquidity becomes structurally trapped, regardless of reported profitability.
Why this is a balance sheet problem for lenders?
In syndicated and bilateral facilities, this is not a critique of bank LCs. LCs are a core tool in this sector and banks will remain central to the security stack.
The issue is capital allocation and capacity management.
LC utilization is not the same as loan utilization, but it competes for the same scarce resource: committed bank capacity. When LC requirements rise, they can crowd out working capital, capex, and acquisition flexibility. They can also accelerate collateral conversations when markets tighten or timelines compress.
When security requirements expand, banking groups are often asked to carry more of the security burden than the revolver was designed for. A well designed security portfolio can preserve bank headroom, improve recoveries, and support larger, cleaner facilities with fewer last minute surprises.
The metric that predicts the wall
If you want one metric that tells you whether you are approaching the wall, track total pledged security exposure.
Treat security and terms as one combined category:
Total outstanding LCs
Cash collateral posted against obligations
Contract performance instruments (bonded, insured, or LC-backed)
Advance payment and warranty security requirements
Receivables concentration driven by offtake and extended terms
Unused LC line headroom remaining under committed facilities
This is the metric that explains why some companies execute through volatility while others are forced to slow down even with strong fundamentals.
A pattern we see repeatedly is a company that looks stronger year over year on paper, but is forced to slow execution because each new award brings incremental LCs, heavier collateral language, and longer cash conversion. The business is not underfunded. It is over-secured.
The market shift most teams miss
As critical minerals scales, risk capacity starts to behave like balance sheet capacity.
The system is asking for two things at once:
More certainty of performance and delivery
Faster growth, tighter timelines, and more cross-border complexity
That combination drives demand for risk transfer. At the same time, insurers and reinsurers manage concentration, aggregation, and longer tail exposures.
The companies that scale cleanly treat risk capacity the way they treat credit capacity: planned, stress tested, and secured early. This includes receivables risk transfer where offtake concentration is high, and performance security solutions that reduce the need to consume bank LC capacity for every obligation.
What winners do differently
The companies that keep momentum tend to do three things early.
Optimize the LC stack as part of a broader security portfolio
Use bank LCs where they are truly required or most efficient. Then target the remaining obligations with off balance sheet, unsecured surety solutions that deliver the same commercial comfort while preserving revolver headroom for both the bank and the borrower.
Make receivables risk recoverable
Off-take and buyer concentration can be rational. The key is making it financeable and defensible, with recoveries that hold up in downside scenarios. Trade credit insurance can help by converting buyer default and related commercial risks into a recoverable claim, supporting stronger credit terms and more reliable borrowing base value.
Treat security as a governed portfolio
As activity moves from single projects to multi-project programs, security becomes a portfolio that needs governance, limits, and an explicit strategy.
Where Melkios fits in the security stack?
Most large operators will continue to rely on bank LCs. The objective is not to replace banks. It is to stop LC capacity from becoming the limiting factor.
In practice, the best outcomes usually come from a blended security portfolio:
Bank LCs used where they are required or most efficient
Surety solutions used alongside the bank to support performance, warranty, advance payment, and other non-financial obligations while preserving bank headroom
Trade credit insurance used to make concentrated receivables risk more financeable and recoverable, especially under offtake and long payment terms
When structured correctly, this approach can preserve usable liquidity, reduce cash collateral drag, and improve lender comfort on recoveries.
Capital structure check
Critical minerals in Canada will not be won purely on geology, engineering, or fundraising. It will be won on execution under strict conditions, with a security stack designed before it becomes a constraint.
If you are seeing LC usage climb faster than availability, more requests for cash collateral or warranty security, EPC scopes multiplying instruments, or off-take concentration increasing lender scrutiny, you are likely nearing the wall.
Melkios helps CFOs, Treasurers, and lending teams design a security portfolio that keeps banks central while adding surety and trade credit insurance to preserve liquidity and reduce buyer concentration risk.
Last Updated: January 20, 2026