It’s been quite a momentous week – we’ve just had the US elections and it looks like Biden has won. We have also just had the news that Pfizer successfully completed their trials for a COVID-19 vaccine. How have these momentous news items played out in the mining and metals markets?
This is a big question to start with. I will say that I’m thankful the US elections are only every four years. I started with a full head of hair a few months ago, and now look what I look like. It has been interesting times to say the least. Waking to the news that Biden is going to be president clearly changes the landscape for the metals space.
The news that Pfizer had a breakthrough with their testing certainly got the market moving with regards to a rotation more towards those stocks which have lagged, the cyclical stocks. It has been an interesting time, no doubt, but we are feeling positive about the way the landscape is starting to play out before us, certainly with regard to the demand for commodities.
If there is a vaccine that proves to have a high degree of efficacy, that will play well for oil stocks. We feel pretty positive about the background for oil, certainly in a world where real interest rates remain very low. We also think there is a pretty good backdrop for gold as it plays out.
We saw gold fall a little bit after the news of the Pfizer results, but it has started to recover a bit. What is your actual outlook for the gold price?
We obviously had a very good run towards $2000 an ounce, and it certainly has pulled back a bit from there, but the price seems to be solidifying now as the market stands back and realizes that the backdrop for gold still remains positive.
If we end up with a deadlock in the US Congress – if the Republicans are able to maintain control of the Senate – that will actually lead to a slower roll out of the fiscal stimulus that Biden was originally planning. Stating that monetary policy has to do a lot of heavy lifting would imply that that landscape of low real interest rates or indeed negative real interest rates is probably here to stay. When you continue to see central bank balance sheets expand, this ends up playing out well for gold.
We think that the market remains underweight in broader generalist investor portfolios towards gold and silver for that matter, and valuations for gold equities still look very attractive on a long-term basis. So we are still positively exposed towards gold and think there’s still quite reasonable upside to be generated from an investment in gold.
Do you think this pullback has come at a good time before cost started to creep up in the gold mining space? (Where gold is still at a reasonable price and costs haven’t caught up yet)
As you rightly point out, one tends to follow the other. Partly because with the higher commodity price, miners tend to be able to pursue lower grade material and make some money out of material they would perhaps not otherwise have mined.
But cash flows are very strong at the moment. We’re seeing free cash yields for senior gold producers. And if you annualize Newmont, for example, on their quarterly, their free cash generation was massive. And if you annualize their third quarter free cash generation for the calendar year, you end up with a free cash yield of something approaching 10%, which is not a common occurrence. They’ve announced a dividend policy which is very attractive, but it is also very much needed to generate the interest or bring back that interest from generalist investors who have clearly been otherwise distracted by the bright, shiny things of the tech sector. So they need to have a pretty good story to bring them back.
It is only really the tech sector who might have outperformed the miners. 10% compares very favorably with some other sectors that people could be investing into.
Absolutely. Just look at some of the moves that have occurred post-election. When it went from a Trump victory to a Biden victory, you saw some massive moves in the tech stocks and that is endemic of where a lot of the flood of money has been for quite some time now. There has clearly been an expansion in valuations in the tech sector as well, which we think potentially plays out well for the mining sector, as that cyclical rotation typically comes back towards companies that have struggled to generate a decent amount of free cash flow through the cycle.
But there seems to have been a bit of a come-to-Jesus moment for them over the last few years as balance sheets have improved and they have paid down debt. Some of our positions are targeting that shift in terms of that enterprise value from the debt providers to the equity providers, as that free cash generation goes towards debt pay-down and a potential dividend return. So that’s a real theme I think we’ll see continue to play out over the coming 12 or 24 months.
How do you think the Biden victory is going to play in terms of reigniting interest in the renewables and electric vehicle space?
That was a theme or at least a platform that he really carried through this election cycle – that push towards the decarbonization of the US economy and towards renewable energy and electric vehicles. This is very interesting for us as there are huge amounts of base metals and rare earths that go into each and every one of these electric vehicles. Today only a small component of the overall demand for copper, for example, comes from electric vehicles. As we go towards the 2050 targeted net zero carbon emissions environment, if you look at the statistics and the huge incentives that have been provided for renewable energy, the demand on some of these base metals like copper and nickel is going to be quite extraordinary.
If we just look out to 2030, we see demand for copper for electric vehicles going up some 10 or 12 times. To explain a bit: the amount of copper that goes into an electric vehicle is three or four times the amount of copper that goes into an internal combustion engine driven vehicle. The amount of copper that goes into a wind turbine is about four tons for a typical three-megawatt wind turbine. So all these factors lead to quite extraordinary shifts in the demand structure for copper.
Where the copper comes from is now quite a big issue. Supply of copper has been challenged for a number of years now, not least because it’s coming from more difficult terrain in the High Andes and in Chile or Peru. We have a situation where these very significant mines in Chile, which have been operating for some time, are trying to grow but are struggling because their grade profile is declining.
The ESG perspective is becoming more and more front and center and community engagement in the development of new mines is only going to grow. Also, the use of fresh water is a challenge. It is very difficult these days to permit a large new mine. So the world’s supply is going to be challenged to keep up with the rate of demand increase that will come from the renewable and decarbonization theme over what we think will be many years to come.
Nickel is the other one, which we are very favorably exposed to. Nickel goes into batteries because it is a metal that will assist in the density of the battery. As expectations for electric vehicles grows, certainly in terms of performance and range, you need a high capacity battery with higher density. And that invariably comes from nickel. So as new battery technologies are rolled out, they invariably require more and more nickel. But where do you get your nickel? There is a very short list of nickel producers around the world that you can actually get your primary nickel from. So that is the space where we think there is going to be quite a nice catch-up within the nickel producers that can be exposed to this huge demand for nickel as well.
Several ASX companies have opportunities in those spaces. With America, one would expect a Biden administration to be more stringent on environmental regulations, so you might expect projects in places like Alaska, to potentially not go ahead. You also mentioned the challenges of mining in the high Andes. So, is Australia a natural destination for finding new copper and nickel projects?
Potentially, yes. Just ask BHP about nickel. When they spun out South 32, they didn’t want to impose their Nickel West assets on them. They thought it would be too much of a yoke around their necks, which is quite ironic given that it is now one of the most attractive assets in the BHP portfolio, and they’re clearly looking to grow. So how the worm has turned for nickel.
Australia is a friendly mining jurisdiction for most commodities. And Australia is well positioned on a global scale of places where you can safely invest with some confidence in your tenure and the fiscal regime.
And then of course, with a shift in the US towards a Biden administration, I would expect the rhetoric to perhaps change. Clearly the relationship between the US and Australia has been, I think it’s fair to say, despite our politicians assertions more strained under the Trump administration. And we would expect that to perhaps settle, as the next four years rolls out, whether the US continues to have its issues with China is a point of debate.
I don’t think the ‘America first’ platform that Trump promoted will change a whole lot. But the rhetoric will. And the way that deals are done between the US and various other jurisdictions will possibly change. The nice advantage we have down here is that we are a stable jurisdiction with a stable form of government, and we have mining expertise here. So that, in itself, will lend very favorably towards more mining, certainly for these quite difficult to find metals.
How do you think the US China trade dispute will play out under Biden?
As I touched on already, I think the platform on which Biden will run is not going to change a whole lot in terms of putting America first. At the end of the day, all countries try to put themselves first. So, it’s not an unusual stance to take. That said, I think the rhetoric changes, and so the negotiations will perhaps shift. I have no doubt that the US will continue to try and drive a strategic metals approach and to really encourage the pursuit of strategic metals within their own borders.
The issue they will continue to face though, is that some of these metals are just not prevalent or are not as easy to extract in their own backyard. So, I think the idea of a trade war disappears in terms of the aggressive rhetoric. I think the ability to undertake trade more globally between the US and others will continue to expand, which is only going to be good for commodity demand and specifically base metals.
Comparing the beginning of last week to this week, how much more optimistic are you feeling about the outlook for the world and for global trade and metals and mining?
We obviously went into last week and into Tuesday’s election with a bunch of scenarios that we were trying to plan for. Biden coming out as president-elect leads to an interesting next couple of months. But the conclusion we came to before the election is that regardless of the outcome, there is going to be a big push towards economic stimulus. The size is the question and how well it gets through the US Congress is the question.
But the reality is that both parties have more stable footing now, with some of the more explosive rhetoric out of the way. We would certainly be leaning strongly towards a fairly bullish environment for base metals.
One commodity we haven’t touched on is uranium, which is another commodity we think in the longer term plays quite positively towards that renewables and decarbonization story, simply because it can be a very considerable baseload provider in a decarbonized world. Now there are obviously some ‘not in my backyard’ arguments against nuclear power, but in an environment where coal-fired power is very much not the flavor of the month, nuclear potentially has a very significant part to play. You only have to look so far as some of the European nations where nuclear is a significant part of their power makeup and their steps towards a decarbonized future looks very positive. So last week to this week, we are positive. We think it actually plays very well.
Clearly the next few months are potentially going to be volatile, as we get some resolution, whether Trump fights his way out of town or goes quietly. The reality is we’re now on the back of the US election and both parties will be pushing forward with the hope of a vaccine and economic growth that will come from a continued bounce away from what’s been a pretty tough year.
I think the ability to undertake trade more globally between the US and others will continue to expand, which is only going to be good for commodity demand and specifically base metals