Motley Fool Hidden Gems Investing - The War Below

Episode Date: February 3, 2024

Inside your cell phone, your car, even your leaf blower – there’s a collection of small, precious minerals making each one work.  Ernest Scheyder is a Reuters reporter covering the clean energy transition and author of the new book, “The War Below: Lithium, Copper, and the Global Battle to Power Our Lives.” Deidre Woollard caught up with Scheyder for a conversation about: Tradeoffs in mining, and why the U.S. is falling behind in the race for precious minerals. Tensions of the clean energy transition. The “wacky journey” of a junior mining company.  Companies mentioned: TSLA, RIO, LAC, LAAC, CVX, F, GM Host: Deidre Woollard Guest: Ernest Scheyder Producer: Ricky Mulvey, Mary Long Learn more about your ad choices. Visit megaphone.fm/adchoices

Where some see heroes and others see egos, Bloomberg sees the era of billionaire athletes. While others follow the noise, we follow the money. Learn more at Bloomberg.com. We're just used to showing up to a store and buying something without thinking through how it was made, what are the building blocks behind that. And now as we're at this point where we're changing our whole economy to move from primarily fossil fuel-based to slowly moving in the direction of being materials-based, where do we get those materials? And we're not having those discussions right now. So if we're not careful, we are going to repeat the same mistakes that we made 100, 150 years ago. I'm Mary Long, and that's Ernest Scheider, a senior correspondent

at Reuters and author of the book, The War Below, which tells the story of lithium, copper, and the minerals that power the modern world. Deidre Willard caught up with Scheider to discuss what a lowly leaf blower tells us about the supply chain, environmental pretty privilege, and a mining company that spent more than a million dollars on botanists. Just to set the table for people, why are lithium and copper so important when it comes to EVs and batteries in general? Sure. So lithium and copper really are the building blocks or the cornerstones for lithium ion batteries. And lithium ion batteries are used not just in electric vehicles, but in millions of other consumer electronic devices that now make up basically our everyday

lives, things like cell phones and many, many other devices. And those are built with lithium and copper. And so you can imagine whoever controls the production of those essential critical minerals really will control the 21st century economy. That's what's at stake here. And most of that currently is not happening in the U.S. That's right. I mean, for lithium, the biggest producer in the world right now are Australia and Chile. The biggest processor is China, though. It's the world's largest EV market, and that's really cornered the industry in recent decades. For copper, countries like Chile and Peru are big producers. China is a huge consumer, though. So whatever it and its manufacturers want in terms of buying different types of copper obviously has a huge sway over the global market. So China realized this about 10, 20, 30 years ago that the global economy was moving in this direction. And it really developed a huge focus on this area, economically speaking. And so that's why it's got so much market prowess nowadays.

And the U.S. and other Western nations are just trying to play catch up now. Yeah. And it's not for lack of us having the resources in the ground. Correct. Yeah. The United States has abundant supplies of copper, especially in the Western United States and in Alaska. And lithium is found in a lot of different places across the United States and really North America. When we think about the Inflation Reduction Act, also, there's a lot of countries with U.S. free trade deals that can get IRA credits for their metals that are allies with the United States that can partner there.

So there's a lot of potential there to produce more. One of the key themes that I explored in The War Below is just the idea of choice, though. Are we willing to make the tough choices needed if we want a green energy transition? And I hope folks grapple with that, that key question, because we're not doing it now. And that's really what led me to write this book. Yeah, yeah, that definitely is the theme that I want to talk about, because the book is so is so great on all of that. So I'm curious, though, because you went from covering fracking shale, that big boom, the way that that sort of changed economies in certain states like North Dakota. What's I mean, I can see sort of what's similar about the two beats, obviously, but but what's different? I would say, yeah, I mean, the similarities certainly sort of present themselves there. What's different, I think, is just the sheer complexity of the supply chain.

And, you know, supply chain used to be sort of a boring phrase, but I think the coronavirus pandemic really brought it to the fore for a lot of people. When we think about the critical mineral supply chain, we have to be thinking about the whole host of metals and how they're extracted from the ground and then processed. So when you think about petroleum, you think about crude oil or natural gas, I think most people have a rough understanding of putting crude oil into a refinery and then out you get diesel or gasoline or jet fuel. That sort of process is sort of maybe broadly understood by a lot of people. But how you process copper is very different than how you process lithium.

And in fact, there are several different ways you could process lithium because you get it not just from hard rock that you take out of the ground, but you can also get it from brine deposits. Brine is salty water that can be in underground reservoirs. And so that all depends on what part of the world that you're in. And how you process copper can be different than how you process nickel, for instance, which is also a key metal used in batteries. And the same thing goes for cobalt, which is primarily produced in the Democratic Republic of the Congo. And then just to add more complexity to this, there's a minor grouping of metals known as rare earths. There are 17 rare earths, and they're found all across the world. But what they're,

they're found all across the world, but rarely are they found in large enough quantities to make them economical. And when you do find a quantity that's economical to mine, there's this very, very, very specific way of processing them. And there can be radioactive waste as a byproduct. So that's just a very broad overview. And it just shows the complexity of the supply chain. And it shows also how we have to be thinking about this entire new transition in a different way than we approached it, say, 100, 150 years ago, when the petroleum-based economy was first taking off. So that's why I really, really hope that folks be thinking through this and the tough choices that we're facing. Well, let's talk about one of those choices

because like you mentioned earlier, there's this theme of what is the higher good throughout the book. So what matters more? You've got this little white rare flower called team's buckwheat. That's part of the story of the book. It just happens to be right near a giant US-based source of lithium. And so this dynamic tension you've got here as an ESG kind of investor, what kind of questions do you need to ask yourself? Yeah. I mean, one of the main questions that I was really sort of exploring here is how the investment community will react to this. So this is a company, Ioneer, which is based in Australia, but staff across the world. And it wants to develop this lithium deposit at Rhylite Ridge, which is roughly 250 miles north of

Las Vegas. And the lithium deposit sits beneath this habitat for this rare flower found nowhere else on the planet. Team's buckwheat, as you said, is what it's called. And so it brought up sort of issues of choice here. And as an investor, you obviously want to be attuned and investors are attuned to what do federal regulators think about this? How is the state reacting to the state regulators? You know, what are the paradigms in place to protect this flower? And so these are things that came up time and time again while the project was moving forward. Part of the book explores how the company spent a lot of money, more than a million dollars on greenhouses and botanists. And Deidre, I can just tell you, most mining companies don't have botanists on staff.

It's just not a thing that they do. And so that was an area for investors to sort of think through How is the company allocating resources around this very necessary area to focus on this plant? And so reporting out this book sort of led me down that journey and to say, what are the things that this company might not have expected that it had to do in order to gain the license to operate or the social license to progress in its project? I can tell you right now that the company did not expect to hire botanists or spend all of this money on greenhouses or seed propitiation or other things when it started this journey.

But that's where they are today. And so I think you'll start to see more and more situations like that come up. I mean, maybe not with building greenhouses, but taking other different avenues that investors and companies might not necessarily have expected when they started a mining journey. And I think we'll start to see more of those in the years ahead. Well, you mentioned China sort of being ahead of us. And so part of this conundrum, too, is the battle between jobs and opportunities in the U.S. for workers as well versus wanting to protect the environment. So given the last couple of years, do you feel like the attitude toward globalization has shifted dramatically? I think certainly the pandemic taught us all how much we are interconnected as a world. And I love to give the example of masks, for instance. You know, I mean, when 2020 really got underway, we all discovered that the United States doesn't make any masks or didn't at least then.

And I think it reinforced to people these extremely long supply chains. And so do we want that for globalization? When you put climate change on top of that, I think it leads to more questions. So think about it. Think about the example of lithium. If it's produced in if it's extracted from the ground in northern Chile right now, then it's sent to the coast and then it's shipped across the Pacific Ocean to Asia where it's put into a cathode and then put into a battery pack and then maybe shipped to a different part of Asia where it's put into a larger battery and then shipped back across the Pacific Ocean to, say, Tesla's Gigafactory in Nevada and then shipped to, say, a dealership in Florida just to paint a hypothetical. You can see the huge, long supply chain there. Not only are you having extremely large emissions from the shipping, but you're also exposing yourself to potential supply cutoffs due to any number of factors. And so if we want a green energy transition, if we think that this is one way to address

climate change and also to help boost transportation and other sectors, should we be producing that more domestically or at least more regionally in North America? And I think many officials would say, yes, the answer is yes. many investors, many companies would say yes. So therein lies the tension point that I was really exploring. A lot of people want to have not only electric vehicles, but many other gadgets that are powered by lithium-ion batteries. But what are the choices we're willing to actually make? Are we willing to have a, quote, mine in our backyard, quote, unquote? And people aren't having that discussion right now. I think they just show up to an Apple store and buy an iPhone,

but the copper inside that iPhone comes from somewhere, as does all the other minerals used to make that device. Yeah. And I think you made a good point there too, that it's not just EVs, it's phones, it's the move toward home batteries and home storage as people wrestle with grid transition. So there's a lot at stake here. Exactly. One of the chapters in the book, I had a lot of fun writing, was about leaf blowers. And that sounds kind of innocuous on its surface, but I became really curious with this idea, as you were saying, about what more parts of our everyday lives are going to be touched by batteries that aren't already. It's not just electric vehicles. And so a few years ago, I got a house, I got a backyard,

I decided, you know, I'm going to get a lawnmower myself. So I decided to go all electric. I got an electric lawnmower, an electric weed whacker, and yes, an electric leaf blower. And that led me down this rabbit hole of where did the lithium and the copper inside that battery come from? Was the cobalt inside that battery mined by a seven-year-old in the Democratic Republic of the Congo? Did the copper come out of northern Peru where farmers have bitterly complained that the copper trucks that supply these mines kick up dust that pollute their crops? Did the lithium come from Western Australia and then be processed in China? I don't know. I went down this huge investigative search for the progeny of those metals and I couldn't figure it out. And that was just for my lowly leaf blower. Now, when you amplify that across the entire global economy and you look at the implications for us all, if we are truly to go green, you start to see really interesting questions about where things are produced or

where we don't know things are produced. And so I think increasingly consumers are going to ask this. And I think companies and their investors are going to have to be thinking through that as well. People are going to want to know that the products that they buy weren't built with materials that were produced at low labor standards or at shoddy environmental standards. They're going to want to know that if they're buying a product they think is helping the environment, it's actually helping the environment. Yeah. And it's interesting because we've started to have some of that transparency with food and with fast fashion and things like that, but it is nowhere even close when it comes to electronics.

Exactly. Exactly. I want to talk a little bit, too, about the miners in general, because you've got the big players, the expected players like Rio Tinto or some of the other big ones. Then you've also got these new kind of upstart companies. You mentioned Ioneer. There's also Lithium Americas. So this one is kind of fascinating. You share a little bit about the kind of wacky journey of that company and where it's going now. Sure. Yeah. So Lithium Americas started out as many junior mining companies typically do. It was actually two different companies, one focused on South America and then one focused in the Western United States. And what they decided to do was join forces.

The company focused on South America was known as Lithium Americas, and it was bought by its company known as Western Lithium, which was focused on the Western United States. And so you got this company that was focused on two different wildly distant areas, this project in Argentina that was going to be a brine project. And then this project in northern Nevada on the Oregon border that was going to extract lithium from clay. And so both projects were being developed in tandem. And the company started to find, though, that there was a lot of opposition in the United States from some quarters to this project in Nevada. At the time, the company became a huge darling of a lot of investors on Wall Street who were really, really bullish about

lithium and where it's going. And so what I track in the book is the history of the company and the deposit itself. The deposit actually was once owned by Chevron, the oil giant. So then we track the history of the company and the opposition that it was facing from some local indigenous groups, as well as from some conservationists that raised some interesting questions about de-industrialization. Should we, as a way to fight climate change, just get rid of all electronics, de-industrialized our entire global economy as a way to basically stop carbon emissions. And so this is a group that gained a lot of power. They ended up being on the front page of the New York Times. And so they used that to a huge benefit for their cause. The court case,

excuse me, the group fought the mine in court and it wound its way through many, many court hearings. And so the company itself, as probably your investors know, excuse me, your listeners There's no split last year. And so now it's actually two companies, one focused specifically on Argentina and then the one focused just in the United States. And so that whole history there, as well as the opposition, is baked into this chapter. And I had a chance while reporting this book to actually go to the site in Nevada known as Thacker Pass, beautiful place, and really got to see it through the eyes of some of

the people that are opposed to the project. And for me, it was really important to show the human side of this issue and to not really denigrate one side or the other or any of the sides, but to really show everyone the tough choices here and the human side of all of this. Because I think there's a huge interest in certainly lithium production, as well as I think the many different sides of this coming from not only the conservation circles, but also the indigenous rights circles as well. And I'm excited to share this because I think for investors as well, thinking through what some of the other side thinks is really important because this is not just sort of a black and white issue. You know, there's humans on all sides. And I was really excited to share their perspectives in this book. Yeah. And it's not a it's not a clear green or not green issue, which I think is what makes it so complicated. You mentioned earlier the brine aspect of things. And one of the reasons I was excited to read the book and to talk to you is I get to ask

you about one of my favorite places, which is probably nobody's favorite place, the Salton Sea. So it's this ecological nightmare. It's this inland sea in the middle of nowhere in Southern California. And it just happens to have this huge store of lithium, kind of, if we can figure out how to access it. And so this isn't this isn't a not great place to visit, but you go to some you go to some other places in the book that are that are really beautiful. And one of the questions I was curious about is this idea of do we only protect the places where where people go or where people find attractive?

Because you talk in the book about boundary waters in Minnesota, pebble in Alaska. So is there sort of almost like a pretty privilege in terms of where we consider where we wanted where we want to start digging? That's a really interesting question, Deirdre. And I was at pains when I was writing the book to sort of step back and sort of use myself almost as a mirror for the reader to experience for her or himself, not only the beauty of the place, that places that I visited, but also the choices that we face. Like, do we think that just because a place is physically beautiful, but it has a ton of the metals we might need to fight climate change, should that be completely off, you know, off guard and we should not be touching it at all? I mean, I think we're not having that discussion right now. And I think we need to be having those discussions, not only in the investment community, but in the regulatory community, you know, at Thanksgiving tables, you know, as families, we should be having this discussion. And we were talking earlier about the parallels with the oil and gas industry. I mean, one thing about oil and gas is you put a straw on the ground and you suck it out. With mining, you have giant holes that can be a mile across or almost a mile deep and have huge impacts.

They scar the landscape for generations. And so it's much more visually changing than an oil or gas operation, certainly. And so we need to be having these discussions. Are we willing to make these tough choices? Are there some places where we're just going to say no, like the boundary waters? The concern there is that if the copper and nickel and cobalt deposit were mined, would be an underground mine. It's underneath a waterway that eventually feeds the Great Lakes. and the rock that this copper and cobalt and nickel is in has been known to basically turn

to acid when exposed to water. So you can think of rain or even, you know, you're in a watershed already. And the company that wants to develop this mine is very certain that it would not leak acid into the waterway. But, you know, if you pollute the Great Lakes, you can just sort of think about the entire North American water infrastructure, really the Great Lakes sort of being the heart, really, of all the waterways across the continent. And so therein sort of lies the choice and the tough things that we have to think through. And I had the great opportunity to go up to northern Minnesota for a few days and meet with folks that are for and against this project, both for very earnest reasons, and sort of talk through and really hear their stories.

It's a beautiful place. It's stunning. And a lot of people that are for this project say, why are we relying on China to build all of these electronic devices that we need? Why are we relying on the Democratic Republic of the Congo, which uses child labor in some cases to produce cobalt? Why can't we do it here in the United States at the high ESG standards that we have here? And so these are the things that I think things, these are the things that I hope people think through because we can't just put our heads in the sand anymore. I mean, one of the reasons I focus specifically on mostly US projects is because I think for too long, especially in the United States, we're just used to showing up to a store and buying something without thinking

through how it was made, what are the building blocks behind that. And now as we're at this point where we're changing our whole economy to move from primarily fossil fuel-based to slowly moving in the direction of being materials-based, where do we get those materials? And we're not having those discussions right now. So if we're not careful, we are going to repeat the same mistakes that we made 100, 150 years ago. What do we get out of that? We got climate change. We got several wars. We got a giant cartel that controls a lot of the petroleum production in the world. And many consultancies and analysts have warned that if we're not careful, we're going to replicate the same situation with copper and with lithium. Already, the world's largest copper producer is

owned by the Chilean government, which is, you know, friendly to the United States and other Western nations. But, you know, it's hugely, there's a lot of business, of course, with China and others. We've already got several presidents across Latin America saying they want to form a lithium OPEC. The president of Bolivia wants to do that. So what would that mean for Albemarle and Arcadium, which are two of the huge privately held, publicly traded, I should say, but, you know, not controlled by any government, lithium producers in the world. So there's really implications here for the investment community as well to be thinking through. And at the same time, you've got both the legacy car makers and Tesla sort of figuring out how

they're going to solve this problem and sort of making announcements without necessarily anything behind them, certainly in Tesla's case. But you've got Tesla, Ford, and GM, they're all trying to figure out how to get kind of into that supply chain. But it's been tricky so far. So do you think that you're going to, we're going to see more investment there? I know that both Ford and GM sort of, they got into battery production. They've sort of scaled it back a little bit. It seems like there's something happening there with, with the attitude around EVs too. What are you seeing? Yeah, I think, you know, certainly the past few weeks, we have definitely seen some blips in the EV market. And I think, so I would say sort of two points to respond to

your question. I think there's definitely been blips in the EV market in recent weeks. And part of that is due to oversupply concerns, mostly coming out of China. And we think that that will iron itself out because certainly when you look at EV penetration versus 12, 18, 24 months ago, the numbers certainly are higher. And the demand projections in the long term are moving in the upward position. Will we have blips in the near term? I think what we're seeing certainly that there are blips right now. For lithium and copper and other critical minerals, it's just even beyond EVs. And so, you know, there's so many of these other devices that are out there. And so I think we'll start to see certainly demand continue to rise for those specific metals. For the automakers,

you know, Deirdre, I don't, you know, it was a different muscle for a lot of these companies to have to use when they thought about going directly to the mines. You know, this sort of goes back to Henry Ford and the rubber plantations, you know, from 100 years ago, you know, for a long time, the automakers had been used to having folks between them and a lot of the suppliers, you know, I mean, if you needed to get, you know, figure out the plastic that went into a seat, you know, you're not talking to an oil company, for instance, but here you've had a lot of the oil, excuse me, a lot of the auto giants having to say, go directly to an Ionier or a Lithium Americas and negotiate directly with them for supply.

You know, one of the things I talk about in the book that's a bit of a reveal is Elon Musk going directly to a U.S. lithium project and having his staff negotiate directly with them. And this was a project that was very, very nascent, but it just showed that Elon Musk took it so seriously enough, the supply of lithium, that he had his staff go directly to a junior miner and have them negotiate for a supply. And so it's things like that that I think we'll start to see a lot more. I mean, we've already seen a lot of it. You know, Ford, General Motors have thrown around a lot of money here because they know that the supply is really constrained by various factors, especially this opposition that we've been talking about, whether it's from conservationists or the indigenous communities. And so that's why I think it's so important for investors to fully understand the whole

ecosphere of the challenges faced by this industry, because they're not going to be to produce the lithium that people think is needed by 2030 due to a host of factors. And so that's why when I say whoever controls lithium and copper in this century will have a huge leg up on many other people. As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Mary Long. Thanks for listening. We'll see you tomorrow. Thank you.