Good Investing Talks - What chances do metals and mining offer, Anthony Young?

Episode Date: March 2, 2023

Following the Paris agreement, the world has to rebuild its energy system. But what does that mean in detail? I have discussed this question with Anthony Young of Edendale Capital, focusing on metals and mining.

The world is changing to a net zero carbon world. A lot of investment is happening into this direction and I think the speed of this investment will go up. What does this mean for the world? What do we need to supply this trend? I think mining and minerals are an interesting topic in this case. So I've invited another expert to discuss this topic for you and also to give ideas how to navigate this topic as an investor. Enjoy the conversation. A warm welcome to the Good Investing Talks podcast.

Good Investing Talks podcast. I'm your host, Tilman Fersh, and I'm very happy that you're discovering underfollowed investors and underfollowed companies together with me. Before we jump into this conversation, I want to thank my supporters. They help me to keep this channel free and public for everyone. Thank you very much. If you also want to join the Good Investing Supporters Club, please click on the link below. You're very welcome.

And now, one last step. Here's the disclaimer for you. all we are doing here is no advice and no recommendation please always do your own work and now enjoy the video dear viewers of good investing talks it's great to have you back at the show and today i'm having anthony young with me he's la based and today we are also discussing a topic that i've already discussed with him in pre-chats so i assume it's the impact of the energy transition and the impact of the energy transitional minerals. First of all, Anthony, how are you doing?

Doing well. Thank you for having me. I think it's the first time you're on a podcast, so I hope you're not too nervous. It is my first time, so I'm excited. I am also very excited. Before we started this conversation, we already chatted a bit about the impacts of the energy transition, especially on metals and mining. And with metals and mining is always a lot of digging you have to do. Yeah.

But before we dig into this topic, maybe let's add a bit of background information. So what did you do before you started to become a full-time investor? Yeah, absolutely. Maybe just before I start, my compliance department always asked me to give some standard disclaimers. So I'm here representing my own thoughts and opinions. And I know Tillman, you have a very robust disclaimer, but again, this just shouldn't be viewed as investment advice. And as far as my background goes, you know, I started off as an engineer. So an electrical engineer was working in the aerospace industry in the 90s.

Got both my undergrad and master's degrees in electrical engineering before I decided I didn't want to be an engineer anymore. So I went back to business school at the University of Texas, where I got my MBA, focused in finance, really kicked off my Wall Street career at Bear Stearns, where I was in the metals and mining team. And that was really my first introduction to metals and mining in what many call the super cycle of that 2004 to 2012 timeframe. So, you know, worked at a number of different investment banks, worked at a couple of different hedge funds before starting my own fund in 2017, again, just focused on the energy transition. It's a very interesting, yeah, journey you have done as an investor. So what took you from the metals and mining space to look into the energy transition and renewables? Well, I mean, truth be told, when I initially. started, I was looking at coal. And you learn a lot being a coal analyst. You learn a lot

about the grid. You learn a lot about utilities. And then as you begin to think further about how these things are going to play out, because even in the 2000s, the early 2000s, you could see the sentiment rising against coal and just beginning to think about you know, as people were looking for cleaner forms of energy, what would be next? And it's not to say that when I started in metals and mining, I knew that copper and aluminum and nickel were going to be so important for the way that the world was going. But as you dug in over the years and you begin to realize the intensity of those materials and renewable forms of energy, that's what sort of led me to this theme that we're pursuing with my current job situation.

What might other investors that don't look every day into the energy transition be missing in this field? That's a good question. I think that metals and mining are just historically have been viewed as very dirty undertakings, but still very important when you think about electrification. So I think looking beyond just the fact that dirt is being moved and deposits are being exploited, I think on some level you have to look about the longer term benefits. And sure that there are consequences of the mining process, but because of those consequences, you have, or the world can generate cleaner forms of energy for longer periods of time, I think, which somewhat offset what's being done at the moment.

So if we think about the current grid, it's highly based on hydrocarbons, oil, gas, and coal, for instance. So if you think about decarbonizing this, what does this mean for investors? like what is the impact of a decarbonization of the grid and especially not only the grid but also heating and all the other stuff that has to be decarbonized too yeah i think so i think you know it's a bit of moving target because um you know there will be government incentives and um you know capital markets coming into play but you know a leading wall street bank has sort of indicated that the United States will require about $25 trillion, that's with the T, $25 trillion over, between now and 2050, to switch to a carbon neutral grid, if you will.

And then Europe will require about $30 trillion to revamp, and I think Europe just given some of the things that have occurred over, you know, the last year or so requires slightly more, about 20% more than the United States. But, I mean, those are the numbers that we're sort of talking about. And obviously, that's before China, Japan, and other emerging markets. So, I mean, you know, I think globally, you could see that number swell to probably over 100 trillion if we're really going to go towards that net zero by 2050, which 25, 27 years away, it's not that far away.

To think about 2050 is very important if you think about the energy transition and all the decarbonization issues. So if you want to go down to net zero to 2050, it's like only 26, 27 years. So it's a quite short time period. And what does this then mean for like the whole infrastructure providers that have to deliver all the stuff for the energy transition? Like cables and wires and copper, for instance, like do we really have the capacity for this? And does this also impact like the way the business is done? because if you think about like a shortage capacity,

it's not really commodity business anymore. It's highly dependent on like, yeah, the cycles, but you have this clear path to 2050. And if you optimize for it, it's not enough time to build up that much capacity and rebuild everything. So what do you think about the commodity business argument and this short time period?

Yeah, I think with respect to the commodity business, it's been dramatically under-invested in if you believe we're going to meet these goals by 2050. I think even just globally, we've probably been under-invested in if we're just going to have a standard GDP growth of 2 to 4% on an annual basis. Even in that scenario, we've been under-invested in. But if you think that we're going to completely revamp the grid and we're going to put on a tremendous amount of renewable energies. You know, those renewable sources of energies, you know, on the copper side of things,

which, you know, is where I spent a lot of my time thinking about, you know, when you're talking about wind and solar, it's four to five times as copper intensive for a megawatt. And that's onshore. If you're offshore, it's even more. intensive than that. But again, these are intermittent forms of power. So then when you think about how you translate that into a constant source of power, it's probably somewhere between 10 to 15 times as copper intensive for those renewables to have a baseload source of power, which would be

wind and solar with a battery backup. So under those scenarios and, you know, a major copper company, reported this morning. And they indicated that they think that the world would need twice as much copper by 2035 as we currently produce today. I've been in the industry since 2005. And during that time, with tremendous amounts of capital spent during the super cycle, copper production is probably only up about 40%, 35 to 40%. So for it to double in the next 12 years, and then probably another 20 to 30% in that 2050 range, there hasn't been enough investment

and it will likely require higher prices to incentivize that investment. We will jump into the copper topic later. in this conversation, but maybe let's look at the bigger picture and think about infrastructure a bit more. So I'm in Stuttgart here. Usually I say there's Daimler and there's Porsche this direction and I live in between. But today I want to say that there's also a power plant and there's a power plant and the power plants are directly in the city. They burn fossil fuels and like coal or gas or even waste at this power plant here. And yeah, they produce energy in close proximity to the cities and the demand.

But if you think about fossil like renewables, instead of fossil fuels, like wind is somewhere out there in the countryside. There's also solar has also a bit of a lower energy density and has to be installed in many houses. So there's a lot of surface. It has to cover, yeah, what does this change in the structure? and the grid mean for investment and yeah also for the infrastructure we have to remodel yeah you know i think taking things further out and to your point it comes down to energy density

and the density of wind and solar isn't as great as that of natural gas or nuclear and And, you know, again, taking things further away just requires more raw materials. So, you know, not only that, but also, you know, they just have such larger footprints than oil, or excuse me, not oil, but natural gas and coal-fired facilities until, you know, that has a cost in and of itself, I think, environmentally, whether it be, with animals or birds or obviously insects are impacted as well. So I mean, I think those are things to take into consideration. Yeah, I think cats are more dangerous to most birds, I think. But yeah, please continue. That's absolutely fair.

That's absolutely fair. I mean, cats are killing machines, if you will. But I think just taking into consideration when you're building a model on a wind farm, or a solar farm. The amount of real estate I think is just taken for granted and sometimes, but that can't be ignored either when you're running these numbers. It's time for a quick advert Tillman. Here we go. Are you looking for a beautiful and efficient way to analyze stocks?

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It's on the amount of grid that has to be built out to be suitable for renewables. I think it's twice the amount of grid that we already have that has to be built out to decarbonize and switch to renewables. Another interesting point I wanted to ask you about is the volatility of renewable. So if you think about wind and solar, you sometimes have peaks with a lot of energy that is supplied. So you have quite unstable supply to a certain extent, but on the demand, demand is quite stable. What does this kind of like mismatch maybe mean? Right. I mean, I think that when you have the transition to wind and solar, you know, I think for a long time, utilities were able to generate power, and they understood what that power profile was like.

You understood that if you were turning up a natural gas fired facility or a coal facility, it would operate at a certain level for a certain amount of time until you took it down. And then you had to respond to the demand side of things, right? So you have hot days, you have cold days, and you have obviously peak times, four to nine o'clock in the evening. So the demand side was moving around, but you had a supply side that was very stable. And now you have a supply side that moves around, and you have a demand side that moves around as well. it makes it very difficult to plan, makes it very difficult to plan. I think that's why you've seen some of the situations that you've seen in Texas here

and the U.S. in particular in California, during, you know, particularly during the summer where you've had blackouts and brownouts, because wind and solar, the wind blows, and the sun shines when it does, but the demand side of things, you can't control. And if you can't control the supply, but your demand is very constant, then it makes it difficult for utilities without just pursuing extreme robustness

in ways that they haven't had to in the past. And that means substantially overbuilding relative to what you may have done in the past. Yeah, let's jump back to the material demand, like in materials that you need for the energy transition. What kind of demand for copper, all other minerals, are we talking about in this case? I mean, it runs the gamut, right? Like I said, I spend a lot of time on copper, but then, you know, obviously everyone

likes to talk about the rare earths and uranium. They play very important roles in the energy transition. uranium, obviously, for nuclear rare earths, principally in windmills, but there are other applications that are being developed, and they're used extensively in electric motors as well, in addition to windmills, but there's other cutting-edge things that are being developed. But then I think that there's also the second tier of metals, things like vanadium, thorium, Tin is a very important metal and electrification. So I think that there's, we only have one periodic table, obviously, and, you know, there's, there's, the metals on there play different roles.

And I think historically, you know, copper and aluminum were the two biggest, most important base metals, nickel to a lesser extent. But, you know, as we go into this energy transition, you're going to see the next level of metals become more important, which in their own regard have been underinvested in because, frankly, they haven't been as important in the past as they will be in the future. Aside from copper, which we are talking about in a few minutes, what kind of metals are interesting for you? For instance, if you couldn't invest in copper, what of kind of metals would you invest into? I like nickel as a metal. I think that that is important in a number of different regards. It's, you know, in some manufacturers, that nickel-cobalt-magnes battery is the dominant battery chemistry. You've had some transition away to lithium iron phosphate, which doesn't use any nickel, doesn't use any cobalt.

But I think nickel still remains extremely important for folks like Volkswagen and BMW, Ford, and GM. Tesla has moved away from it on some level. So I think nickel is very important. Obviously lithium is very interesting. I think that every battery chemistry uses lithium. I mean, there's talk of sodium becoming more important, but I think that that is a much longer time frame. I don't think that we'll see sodium batteries before the 2030s in scale.

I mean, you may see some one-off projects here and there over the next five years. Then outside of that, you know, I think that, again, tin is a metal that's used in solder. So when you're tying electronics together, solder is the glue that holds things together. And 10 is a metal that, you know, long forgotten about. There was a 10 crisis in the 1980s, which was driven by governments dispersing their 10 inventories. put a lot of, you know, it took a lot of folks out of the market. But now, you know, as you think about, and people like to talk about semiconductors a lot as being sort of the building blocks.

But every time you have a semiconductor, you have tin somewhere in that equation as well. Are there any books you could recommend when you want to dive deeper into the world of metals and mining? So, I mean, there's nothing really comprehensive. I think a interesting book that's timely right now is a book called The World for Sale. It's by Javier Billis. He's a Bloomberg writer and really just gets into the metals trading and how it goes from the mine to the finished product. and the traders in between. I think an interesting book just on the fundamental mining side, very old book, it's somewhat

hard to find now. It's called Grassberg, and it's about Freeport's Mine in Indonesia, and just goes through how difficult it is to build or to develop and build a mine. So, you know, the Grassberg, which now is either the world's second or third largest copper mine depending on where they are in their ore grades and the world's first or second largest gold mine was discovered in the 1920s, but it took them 70 years, 70 years to develop. And, you know, when you think about the profitability and the cash flows that are possible from having a mind of that size and scope you think you find it and you develop it right away but just

given work you know the work you have to do with governments and the infrastructure that used to go into place and the permitting and raising the capital because that's the thing when you find a mine now you're typically not finding a mine you know 50 or 60 miles outside of some major center Now you're finding mines in very far-flung places which require working with indigenous people, getting permits, convincing someone to give you financing. And that time frame is just extremely long. Welcome to the copper topic. Maybe let's start talking about copper intensity. So for instance, you have this gas plant over here.

You're replacing with windmills and solar. What does this mean for the copper intensity? So what kind of copper intensity talking for, for instance, for this gas plant or the general replacement of plants with renewables and wind? What does this mean for the copper intensity? Right. You know, I think that when you think about the copper intensity, it's twofold. It's the fact that when you're tying windmills and solar farms together, to bring that copper into the city, just the additional wiring and cable, it's about four to

five times as copper intensive for, you know, wind or solar. I think solar is slightly more copper intensive, but still, you know, maybe solar is like 5.5, maybe copper's 4.5, say, four to five times as intensive for each megawatt that you bring on. And then given their intermittent natures, you know, they're, when you're talking about natural gas fired or say nuclear, nuclear runs about 0.9% of the time. So 90% of the time it's up. For wind, that's about 0.25. Maybe if you're in a windy place, maybe 0.3. And for solar, it's about .2.25, something of that nature.

So you need four to five times as much of those generating operations to mimic a conventional power source or a carbon-based power source. So when you take into consideration, it's four times as much for just the additional cable and wiring. And then you need four times as many or each four times the build to get to the same reliability. You very quickly get 10 to 15 times as much copper intensity for every megawatt to have that sort of base load power as you would with a nuclear or a coal. base load power system. So, you know, I think we're already seeing it in some countries where typically when you're industrializing, you become more and more copper intensive as you build out just the things that make your society work. But then once you get to a certain per capita GDP, that copper intensity flattens out. What we're seeing now in some developed countries,

particularly in Europe, is we're starting to see the copper intensity of those societies start to tick up again as they install more wind and solar, just given the copper intensity of those applications in their grid. I think that, you know, I built supply demand models for the better part of 10 years. I would never imagine that a country, you know, once they've reached that certain level of industrialization that you would see an uptick in their demand because, you know, why would you build out more infrastructure? But that infrastructure really is, you know, the green energy applications, which I think it surprised a lot of folks on the demand side of things over the next 10 to 15 years.

now let's go away a bit from the wind and solar side like the energy production but also like on a decarbonization side what does decarbonization mean in housing and cars and all the other spaces we have to decarbonize for the copper intensity so how does the copper intensity change in houses with the cars do you have some numbers there yeah you know um Cars, they're about four times as copper intensive as, or, excuse me, electric vehicles are four times as copper intensive as internal combustion engines. So an internal combustion engine will use about 50 pounds of copper. If you're talking about, you know, compact SUV, bigger SUVs will use more, bigger trucks will use more. Smaller cars, we'll use less. But if you have that same sort of compact SUV, I guess, on. the electric vehicle side of things. It'll probably use about 200 pounds of copper. That's a big number. And I know that, you know, the OEMs are focused on bringing that down. And maybe they

bring that down to three times on that the copper that as copper intensive, but you're still talking about triple the amount. And transportation accounts for about 25, percent of copper demand. So if you're tripling the amount of copper that goes into electric vehicles over time, and as sales move in that direction, it's going to have an impact on the demand equation pretty quickly. And what about houses? Houses is difficult, right? I was looking here recently and the average home in the United States is about 45 years old and the median home is about 35 years old and you know when you think about when you think back to 1978 or 1988 no one could have envisioned homes that had two electric vehicles that had um you know

So on some level, you can envision air conditioning systems and what have you. But running all these things at the same time, two electric vehicles, air conditioning heater, hot water heater, all being electrified at this point. You're going to need retrofit of many homes, particularly the ones that are on the other side, on the left-hand side of that bell curve of 35 years on the median. or excuse me, on the right-hand side of the bell curve of the median. Because, you know, again, bringing that amount of power into your home just was never envisioned. So, you know, I mean, those numbers are a little bit murkier, but I recall that there was something on the order of 500 pounds of copper in your average home. And a large part of that is going to be in the pipes.

but a portion of that is certainly in the wiring and that wiring is going to be need to be augmented in order to be able to service those the demand that's going to come from electric vehicles you know obviously if people go from natural gas furnaces have already been outlawed here in California starting in 2030 if you're going to go to heat pumps instead of natural gas-fired heating, just the power requirement will be substantial. Yeah, you have to do a lot of retrofitting. Exactly, exactly.

There's also one thing I find interesting as a European, when I compare Europe to the US, that's the density of the infrastructure, like in the US. You have very long stroats or roads and very long distances. is you have to retrofit and put cables and other infrastructure in the ground if you want to decommanize it. And like in Europe, it's more, it's denser like this, this lack of density is also a bit of a challenge. Yeah, I mean, it's interesting, right?

And it gets into a couple of other different things because on the electricity side of things, the overhead wires that you see are aluminum for the most part, with, insulation around them. But then as you get into the stations that breaks up those high power lines into lower power voltages that can be used, you know, in neighborhoods and what have you, that's when you go back to copper. So, you know, the long power lines, it's aluminum and aluminum has its own supply demand challenges, but you will have more of a requirement for the substations and areas that break down that power into lower voltages, and that will be copper-intensive as well.

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conversation. Yeah, we are now at the point where we could say like there's enough growth in the demand copper. But what does this mean for the supply side? Is there enough supply that's coming online in next years? Or we, yeah, is there enough? You know, the supply side of the equation is extremely challenged. You know, I think that, again, on the investment side of things, that there's two sides of investment into mining, there is the investment into building out mines. But then there's There's also the investment that goes into exploration, and I think exploration has been out of favor for a long time, right? So I think, you know, if you go back in time, 60s and 70s, being an exploration geologist was a career that was pretty interesting and in vogue, if you will, now many universities have canceled.

They're, you know, canceled those programs that would feed into those types of jobs. So you don't have the, you know, when I came into the industry in 2005, there were a number of projects that you knew about that can be turned up in a 10 to 12 year time frame. Now that bench of Greenfield projects just isn't as deep as it was. And it's also taking longer to turn these projects up. So if you go back 10 or 15 years, it probably took something on the order of 12 to 15 years to turn up a project. I had a conversation with a management team has a very attractive asset in British Columbia. fairly close to ports and waterways and roads. And this guy's been out at 24 years.

And it seems like it's going to be at least another 10 years before it turns up. So 34 years to turn up a mine, as you can see, you know, we're talking about needing double the production in 2040 and another 25% or so by 2050. to turn up that amount of capacity, given the timeframes it takes to even just turn up a very straightforward mine, you start to scratch your head and wonder how this is going to all come together outside of pricing going substantially higher, which when prices go higher, people figure it out. But in the current market environment that we're in, with copper price of 425, there doesn't seem to be any urgency to really get after these projects.

Yeah. Without prices going up, it's hard to bring new mines online. You've already mentioned this, but what is about like old mines? Is there any magic that can be done if prices go up, like exploit more, get more resources online? You know, I think, and let me just make sure I understood your question. You're asking what impact higher prices would have on the acceleration of development? In existing mines, so if you already have the permission to drill and dig for copper, is there any magic that can be done with this mines if prices go up? Yeah, that's part of it.

You know, I think that on the Brownfield developments, if you will, that will certainly give companies an incentive to make investments in near mine production. But that's fairly limited in and of itself, right? Because as you think about a mine and again, just using an open pit mine as an example. you can explain open pit a bit, then people can get an idea what open pit means. So those are the open cuts in the earth that you can sometimes see when you're flying if you're in the air. It's just a big hole in the ground that you have the caterpillar trucks or the Kamatsu trucks that are taking the earth from one point in the ground to the processing

facility somewhere else. But, you know, these open pit mines, you know, when you lay out your design, you're laying out your design for 25 or 30 years. And then once the ore grades or once the ore has been exhausted, that's it. You reclaim it. You sometimes fill the pit back in. You know, you put in vegetation into place, what have you. Now, if prices go high and you say, oh, I want to build out further, I want to make this pit bigger, I want to make it deeper, there's consequences around that. It's easy to say, but when you're moving billions of pounds or billions of tons of dirt, it takes a lot of planning and logistics to make that happen.

And so, I mean, there are, you know, there are ways that mining companies can increase production 5 to 10% from existing operations, installing equipment, gaining efficiencies, you know, incremental improvements. But oftentimes those alone are offset by the decreasing ore grade that you experience every year when you're operating a mine. Yeah, if you think about copper like harvesting, are the low-hanging fruits in the copper space already picked, or is there a lot of low-hanging fruits globally out there that can be harvested in the copper space? So that's the challenge. I would say the low-hanging fruit has been harvested. I think that the true low-hanging fruit was in Chile in the 50s and 60s, even before that they were mining copper in Chile. You had problems politically in Chile in the 70s, pushed some exploration to Peru, and there's obviously tremendous amount going on in the U.S. and Canada as well.

But now, you know, if you're looking for those next large deposits, you're having to go to far-flung places. You know, a major gold company announced about three months ago, I believe, that they're going to Pakistan for a copper mine that they, it's been known about for a long time, but just given the political uncertainty of operating in Pakistan, no one was willing to go after that deposit. I think that there are some deposits in Afghanistan as well. I think there are some deposits in Iran. But, you know, again, you need a higher copper price to offset the risk that you're taking on. If you invest a dollar in Arizona or Nevada in the United States, you have a certain return profile that a mining company would expect. If they're going to invest a dollar

in Pakistan or in some regions of Africa, you need a higher return on that investment to justify that. So I guess the short answer is the low-hanging fruit has been found from a political stability perspective. There may be other low-hanging fruit out there, but it's going to be in much riskier places than where mining companies have been comfortable operating historically. In our re-talks, we chatted about all grades and like what this means for the production of mines. So you said that like the all grade was at one or above one a few decades ago and now it's it's

0.5, 0.7 for many mines and that's seen as good all grade. What does this mean? mean for copper production? Yeah, when you're operating a mine and when you build, when you build a mine, you're trying to generate the highest possible return that you can. So that means you harvest or you mine the highest or grade first, and that gives you the highest cash flow in your earliest years of your mine, and then over time you harvest the rest. Obviously, you're constantly going after the highest or grade.

But, you know, just using round numbers, if your ore grade is in your first day is at 1%, and your org grade at year 15 is 0.5%. It's, you know, you've effectively, it's probably about twice as expensive to operate that mine in year 15 as it was in year 1. because the operation of a mine, the ore grade is the most important metric that there is. Obviously, you have infrastructure considerations to get to that ore grade. So, you know, if you have just, there's no deposits that I'm aware of in Antarctica, but if you had a copper mine that had a 2% ore grade in Antarctica,

and then you had a copper or you had a copper deposit that had a 0.5, percent ore grade in Arizona, it may be cheaper in Arizona because the infrastructure that's necessary. But if they're right next to each other, you would always go with the highest or grade first. So, you know, I think that just on a global basis, companies being returned seeking, all of the mining companies have been going after the highest ore grades. It's not something new in the industry, if you will. I think it's just. the way that mining companies operate. But given that fact, globally, you've seen

ore grade steadily decline over the last 20 years, and I think that they will continue to decline for as long as people are requiring these minerals for consumption. So there's no magic reserve where some have kept the highest grade to eat them latest? Maybe? No, no. So I think that, you know, there's a number of folks out there that follow the mining industry. And if a company is producing at below their average ore grade, management teams get questions. And I think that's a very easy way for a management team to draw in an accurate.

activists and possibly lose their jobs if they aren't generating the highest and best returns as quickly as possible. So I don't think that there's sort of any deposit out there that is going to dramatically shift the direction of the copper markets globally, certainly not for a sustained period of time. I think that you've had these deposits that have come on that, you know, Grassberg, for example, in the 90s, maybe Oyu Togoy, more recently, that they shift the global ore grade a little bit higher for a very short period of time, but then it resumes its fall as it has, you know, for many, many years.

Like how rational is the industry? Like if you talk about the mining industry and commodity, You hear crazy stories about while the deals on the top of the cycle for high multiples and stuff like this. Has this changed? Has the industry become more rational with the younger generation? You know, I think that it's gotten better. There still are companies, they're companies that do questionable deals all the time. And I think in every industry.

And I think that given the risks that you take. on with mining on some level it's worse because of the cyclicality of the business but mining companies have gotten better over the last 10 years you know and it's very similar to what you're seeing in the oil and gas side of things right the oil and gas companies are beginning to get complaints about why aren't they exploring for more oil and gas and just instead they're they're paying dividends and buying back shares. On some level, paying dividends and buying back shares is much easier to understand for investors than to say, hey, I'm going to this far-flung area, whether it be Greenland

or Africa or the middle of Australia. and I'm going to spend $5 billion and hopefully I can generate a return. You know, that's not viewed as favorably as it was in the past. Now investors are much more focused on, hey, let's get the cash flow back to us and we'll make the decisions on whether we want to be in an exploration company or a producing company. could it be that we are wrong and like for copper a lot of the supply shortage is already priced in and like that our arguments here are wrong or what is the counter arguments to the arguments we are making here or you are making here you know i think there is um i think that um you know

you had a tweet from Elon Musk last week that was saying the world doesn't require any more copper. He's more focused on lithium. And, you know, it just depends on how you view the energy transition. You know, if you view 2050 as being sacrosynct, then we need a lot more copper than what we are currently producing. You know, if you think the energy transition is going to last until 2100, 2150, there's still going to be a lot of demand, but it's just going to come in a further out period. There may be other offsetting technologies that, you know,

we're just not aware of. So I think, you know, a portion of it really comes down to how quickly this energy transition will happen. And, you know, that's something that I think no one is completely certain on. I think that the 2050 number is a good target, right? And I think that using that target, you come to the conclusions that I've come to on the demand that will be there for copper. If that gets dragged out, and it has to get dragged out a substantial, amount of time, right? If it's going to happen in 2060, 2070, those while sounding very far away

in the mining industry, when you're talking about developing the deposits, it's like I said, I've been talking to a guy that has been at it for 24 years and he probably thinks that he has 10, which may bleed to be into 15 to 20 more years for his deposit to develop. But again, If the energy transition bleeds out into 2100 in that sort of scenario, maybe the requirements won't be as large as I'm currently thinking about. When thinking about the energy transition or the units of the energy transition like solar plants or wind turbines, what kind of share of the price of them does copper make? So if the copper price doubles and quadruples and whatever goes to the moon, could the increase in the copper price also be a hurdle for the energy transition? So it's a good question. I think that the U.S. government puts out solar data on a monthly basis.

And, you know, you've seen the cost of production. for a solar cell, steadily decrease, you know, since as far as the data goes back, 1991, 1992, something of that nature. But we've started to see that flatten out in just the last six months or so. I think a portion of that is more just related to inflation, broadly speaking, and then some backup in the polysilica that we're getting from from china and this is just on the solar side of things but um i think that copper prices would probably need to go you know 50 to 60 percent higher before they would start to impact the overall um you know solar equation if you

will because we've already seen prices go from um two dollars to four dollars um from 2006 to 2023 and that really hasn't impacted the price the steady price declines in solar cells you know maybe if prices went like I said 50 or 60 percent higher from here that would start to impact the prices but it's you know the solar systems are so many different parts and there's so many different engineers focused on it until on the cell side of things they keep on making improvements maybe it won't have as large an impact as i'm thinking so what role in the equation does china play like if you think about the history of the copper growth in demand a lot of it came from china and i think they're still demanding a lot of copper so if you think about the demographic shift

in China and like maybe their expansion and housing and stuff like this, could this also be a thesis breaker, this kind of change in the mat in China? Yeah, you know, copper is, or excuse me, China is the largest consumer of copper. And, you know, probably since about 2013, they've consumed 50% or larger of the world's copper consumption. I think that, you know, the Chinese housing market's definitely concerned. The rollover and the Chinese population, I think, is something we have to constantly think about.

So, you know, the unfortunate thing about China is it's a bit of a black box relative to some of the other countries where data is very transparent. and you have a pretty good understanding on end markets and also on the supply side of things where things are coming from, you know, you just see the copper concentrate go into China and you have a pretty good understanding that a lot of it is going into that residential market. But then also you have the fact that China is one of the most aggressive, countries on the electric vehicle side of things. So it's a bit of a black box and there's always concerns when you're talking about Chinese

demand just given the size of that country in everyone's demand models. But I think they're puts and takes on how that may ultimately play out. I'm really not the typical investor into metals and mining and I'm coming to the space with curiosity and an outside view and the more an interest in energy transition what this means. And when I observe the industry, it feels a bit like it's Wild West, especially the exploration space where you need a lot of retail to finance, interesting projects somewhere in the mountains in G-layer or something like this. And you have also these conferences that have interesting characters there on speaker panels and it feels a bit like sometimes a bit like fraudstery

this industry and i don't want to use anything of anyone of anything but it's like a bit of a wild west place and so it boils down to a question what is your way of playing copper intelligently what are ways where you award the dark sides of the industry so to say yeah yeah what What I would say is for investors that are interested in basic materials, you know, you want to start off very simply and, you know, right down the middle of the fairway, if you will. And there's, you know, I don't have positions in any of these names, but, you know, you think about the big guys first, your BHP, your Rio Tinto, your Valet, Glencore, Freeport. Those are commodity producing companies. On some level, they're almost like commodity

ETFs because they'll move around with the price of the underlying commodities that they produce. And, you know, once you're comfortable and understand those names, if you're looking for smaller names, you know, you sort of, my recommendation would be that companies that have producing mines, you know, there's probably 25 to 30 companies out there that, you know, they produce, has one or two producing mines that if you like copper, you can buy this as a copper name. If you like zinc, you can buy this as a zinc name. If you like iron ore, you can buy that as an iron ore name. Typically, you get into less dodgy situations in companies that have producing assets than companies that are really your exploration and development companies. And, you know,

I think if you've talked to management teams and, you know, you've gone through feasibility studies, which are the studies that these companies put out regarding assets, and you want to get more involved in some of the smaller cap exploration and development plays. Those names are out there for you as well. But again, as you say, that is where things are a little bit more of the Wild West than the larger cap names. Where do you feel comfortable to invest with your fund? So I'm typically looking at those names that have one or two producing assets and typically just produce one or two commodities. You know, as you produce copper from a copper deposit, you also get gold and silver.

Sometimes you get molybdenum as well. But really just focusing on companies that produce, you know, I'm not looking. looking for a big diversified mining company. I'm really looking at companies that, you know, run deposits, run deposits well, you know, maybe have a development company that, or excuse me, a development deposit that they're working on that may come into production at some point over the next five to seven years is sort of their growth to that story. But really just looking at, you know, companies that are extremely focused on producing cash flows. from an existing deposit.

So I'm not even really looking at companies that are in the process of building out new production, really just looking for producers that stand to benefit from the up cycle that we see in the basic materials. Are there any hacks to find good investment in this space? You always have to do hard work and you own due diligence, But like, is there anything to invest in a certain management team or a certain firm that has a good track record to do this or to invest around the corner, like into a certain holding that's super interesting? Is there anything that comes to mind for you?

Yeah, I think you have a good point on the management teams. I think management teams and cash flows are two of the most important things, you know, a company's ability to generate cash flow through the cycle. So, you know, we've had some extremely challenging years in, you know, 2008 through 2010, maybe 2008, 2009, really 2015, 2016, or some challenging times in the mining space. If they're able to generate cash flow through those points in time, you have a pretty good feeling that they're not going to run out of capital or have some sort of crunch on their balance sheet. The first thing I'd look for. The second thing is, again, the management team, like you said. So if a management team has performed well in this company, particularly if they've

performed well in a previous company, maybe they sold that company. And, you know, this is their new thing that they're working on. Those are typically pretty good management teams, too. to follow. I mean, that would be where I would start. And then also, you really want to be careful on where the deposit is located. So, I mean, there's not really any deposits in Venezuela anymore, for example. I mean, there were a couple of deposits in Venezuela when I started in the industry, and the government took those away from the companies that were operating those or developing those projects, you want to be careful in the jurisdictions that you go into. So, you know, most of the companies are operating and most of the public companies are operating

in fairly benign jurisdictions, but, you know, certainly there are places in Africa, which, you know, there's places in, I mean, even Chile tried to change their constitution to increase the taxes and royalties that they were going to charge mining companies. So you historically think of Chile as being a very safe. Yeah, I've also heard about a Polish copper company that is, if it's really profitable, the Polish state gets interested into taking away some of the profits with Texas. I haven't studied this case myself, but a friend who's an investor told me about this. Yeah, no, that's right.

That's right. that stories out there for sure. I mean, that's the challenge of mining, right? When prices are high, governments want more taxes. Typically, when prices are low is when you're in a recession and the governments also want you to increase your employment, despite the fact that makes your cost of operations higher if you have more employees. So you get squeeze on both sides. It's a challenge. I think that the mining industry will have to have. has had and it will continue to have, particularly if prices go up in that fashion that we think they will. So how do you think about energy input in the ratio to get out a certain product?

So if you think about, for instance, open pit mine, you need a lot of energy to get out product. You have to crush a lot of stones to get the copier out. So how do you think about this ratio of energy input and output of product in your analysis? Yeah, I mean, the cost of diesel is a significant input in the mining equation. The good thing is a lot of mining companies are electrifying in their own right. So, you know, the battery technology isn't really there yet to move one of these big trucks around. But what they can do is they can have. overhead wiring. That's very similar to what you would see in cable cars in some places in the

world. And the trucks will attach on to those cables and then be electrified to get pulled into the mill typically. But you can't do that all the way, just given the way that the mine is constantly changing in that open pit configuration. But that being said, you know, most mines are, um, use a tremendous amount of diesel and, um, high energy prices. And we've seen this, despite the fact that prices are high for, um, commodities right now, some companies in the last quarter, just given the inputs, um, explosives, employees, the diesel, um, the electricity operate the mine, the steel balls, um, that they use for crushing. margins were very thin for some of these companies in the fourth quarter of last year.

So, you know, I can't really think of a situation where high diesel prices has put a company out of business, if you will, but certainly it could create pressure on margins for them. And another topic we have discussed in our pre-talks, but I don't want to touch into too much depth in this interview, is uranium. Maybe you want to use the chance to add something on your use in this space? Yeah. Absolutely. I think that uranium and the nuclear buildout that's going to occur probably more so internationally

than in the United States, you know, uranium and nuclear power has long been viewed as the cleanest base load power that's out there, obviously always on. But I think that, you know, as we go through the next 10 years here, you see a tremendous buildout in places like China, even places in the Middle East where power is, is not power, but energy is fairly cheap. They're turning to nuclear, just given the fact that, you know, these nuclear assets, once they're built, they're 50, 60, 70 year assets that you sort of know how much it's going to cost for you to produce power, even in a higher uranium price environment. So it gives you some stability, I think, to your grid that, again,

And I think most countries are investing very aggressively in wind and solar, but having that stable base load of nuclear power provides you a lot of flexibility that is hard to come by without going towards those fossil fuels. Another topic we haven't discussed, but we discussed in our pre-talks is the topic of knee-shoring and reshoring. so a lot of like we have this economic tensions we have real war in the world or europe again so a lot of industries try to reshore and near shore what does this mean especially for businesses we might consider as boring and commodity like in your eyes yeah i mean i think that the the reshoring and near shoring um it's going to create a tremendous demand for um you know steel in particular there are other commodities that it will be important for as well but steel in particular on some level maybe aluminum but you know as you think about the u.s and europe

and japan building out capabilities and capacities and all sorts of you know all sorts of medical applications. One, it's inflationary, but two, to have all these redundancies across the globe is going to create a tremendous demand for the infrastructure that's required to have this productive capability. So as you think about the world right now, obviously a lot of stuff is built in emerging markets, particularly in China, Southeast Asia, what have you. yeah like half of my room here exactly exactly but now you're going to have that capability in possibly three four maybe five different regions of the world it's going to make the world more commodity intensive than it has been in the past again that will be inflationary in its own

right but it's it's good for the demand side of things of basic materials for the end of our interview I always give my guest a chance to add something so is there anything you want to add especially on the renewables and energy transition side is there anything I mean I think that it's an exciting time for basic materials you know I think that basic materials have gotten a bad reputation just given some of the deals that have happened in the past that have destroyed shareholder value it's really scared a whole class of folks away from the industry for the better part of 10 years. And then not just the investor

class, but also, you know, folks who may be interested in working in the industry, I think that, you know, going to work in a zinc mine in a far-flung place or going to work in a lithium mine was really not viewed. It was sort of viewed as a dead-end career, if you will. But I think that the industry is coming back in many ways that will make it very important, not only as investments, but having careers beyond, I think, Wall Street or finance, certainly over the next 30 to 40 years. Yeah, that's another very interesting aspect. I think there's a lack of talent in this space and also the working conditions are hard. Yeah, I mean, there was one study that was put out that had said the average mine

worker is 55, so 5-5. And you can obviously imagine them retiring it somewhere around 60, 62. And that's the average. There's probably a lot of guys that are out there that are 65 and 70 and just love what they do and have kept on doing it. But really a dearth of talent, you know, Many colleges don't offer mining engineering programs, obviously. I think a lot of colleges have cut back on even geology programs, if you will.

And I think that, you know, it's had somewhat of a bad connotation because you think about, you know, geology and a lot of those folks go into the oil and gas industry or historically have. So I think there have been cutbacks in that area, just given people's focus on a energy transition or having greener sources of power. But you've also really cut away the pipeline for folks in the mining industry as well. So, yeah, I think there will be a lot of opportunity there. Thank you very much for your insights. and thank you very much for answering all my questions. I think this is a lot of food for it. For the listeners, listeners that stay till here.

So thank you for saying till here and bye-bye.