The following is an edited transcript of a recent 121 Group Panel Discussion. Topics covered include the outlook on the commodity sector over the next decade, various capital streams, the role of cobalt, and whether or not mining companies are generally undervalued at present.
Adam Thompson, 121 Group
James Hayter, Fund Manager, Baker Steel Capital Management
Will Smith, CIO, Westbeck Capital Management
Simon Gardner-Bond, CTO, TechMet Ltd
Michael Insulan, Vice President Commercial, First Cobalt Corp.
Adam: James, I wanted to ask what the energy transition means to you as an investor focused on the metals and mining sector?
James: We set up the Electrum fund two years ago as an appropriate vehicle to take advantage of the major secular changes that we’re seeing in the global economy, namely, the push to decarbonization. It’s been very successful both in terms of returns and managing to grow its AUM. And we think there’s a strong future in that sector over the coming decades. In terms of how we see the sector developing overall, well, I think everything’s happening a lot faster than we thought it was going to a year ago. COVID-19 has really pressed the accelerator button on EVs and also renewable energy, and really the world has a chance here to build back better. And it seems to be grasping it, particularly in the U.S.
The amount of stimulus that we’ve seen there, it has definitely been a surprise, and it’s accelerated our own projections on where demand is going. We were certainly on the bullish end of those forecasts a year ago. So, this has always been an exciting space. But I think that the speed of that transition has really accelerated and that has profound implications for the metals markets because, suddenly, that becomes a bottleneck, particularly when we talk about the capital that is needed. And at least, the time that’s needed to bring some of these metals and some of these mines to market. So particularly around copper, which is, probably, the most well-known. You’re looking at it with 10 years to bring a lot of these major mines to market and we’ve seen a reflection in the price action. But I think there are also a number of smaller metals that people have really overlooked and where that supply constraint could become critical in the coming years, if not months. We could be in for a really interesting ride over the coming decade.
Adam: Will, you’ve been in the space looking to capitalize on the energy transition for a while. And as far as I understand, you look at more than just the mining companies, you invest across the value chain. Is that right?
Will: Yes, we invest across the value chain. But clearly, we’ve got a very large weighting, over 50%, into the critical materials. What we actually see as being one of the major constraints to the energy transition, the availability of these materials. And I think as everybody knows, we’re not dealing with the likes of iron ore here that you just dig up, wash, and put on a boat. These materials have to be concentrated and refined to within an inch of their life before they enter into a car battery, or a wind turbine, etc. This all adds to the complexity and the difficulty and the cost of producing these materials. It is a very different type of resource investing. And indeed, it probably is a speciality material investment that we’re dealing with here.
At Volta, we look at all aspects of the value chain. And for the first six months of the fund’s life, we were short the raw material stock simply because prices are still falling, and a lot of companies were going through that difficult time of commissioning. That was over two years ago, the funds been going for over two years now. But clearly right now, post-COVID. We are broadly bullish the wider commodity sector, which hasn’t looked better than it has done for a while, I’d say over 10 years now.
You’ve got these coordinated stimulus packages around the world as the policymakers try to recover from the shock of the pandemic. And at the same time, you have seen, over the last 10 years, enforced discipline on mining companies, which were very busy in the first decade of this century building new capacity. We have not seen that for the last 10 years.
Now, I think to the joy of all resource brokers everywhere, this year are seeing the ability of resource companies to also raise capital, but it is nothing like the amount that the end users are able to raise. And in many cases, this capital is being raised to finish studies, to do exploration. So much of it is not yet going into new, productive capability. So, this is where we still think that there’s a real possibility of some seriously higher prices amongst these metals and not just copper or lithium, but also across the wide range from nickel to cobalt. We’re going to see some real demand shocks here. And I think it’s one of the big issues for the energy transition, but capital has got to be diverted into this speciality material sector.
Adam: Michael if I could switch to you. What’s your view based here in Europe? Is the capital starting to come through? Are there broader conversations, a wider recognition, from new investors at all?
Michael: There is a strong increase in interest in particular, if you look at potential production from areas in the Atlantic region, so where we see the increase in EV production and battery cell manufacturing. It’s really China, of course, and South Korea and Japan. But they are pretty well financed already, while we don’t have as well financed projects as in the Atlantic region, Europe, and North America. I think that even in the short term, the European and North American precursor makers and cathode makers and battery makers and EV makers, to some extent, probably want to have the supply chain localized in North America or Europe or the Atlantic region, in general.
Adam: Yeah, absolutely. A tough question here, but around the evolving battery mix, do you see it fragmenting and cobalt still having a significant part to play within certain battery mixes within electric vehicles, as opposed to it going down one route whereby a certain metal or commodity will be substituted out and that will be the new industry standard, for instance?
Michael: I think there are a handful of different battery chemistries that can be used in electric vehicles. Its NCA is a variety of NCM batteries and LFP, and then there is a variety of LMO or LMNO or LNO batteries. Now, the ones that don’t contain cobalt, there’s the LFP and potentially some variants of the LMO batteries. There’s no problem applying these in cars if you want a shorter-range vehicle. They will be cheaper, but they don’t apply everywhere. And if you look at the Tesla Battery Day or the Volkswagen Power Day, they did stress that they will still use high nickel and cobalt batteries in a variety of vehicles. So, I think the industry will essentially segment. There’s a place for every battery out there. But the fact is that the sheer volume of new electric vehicles they we’ll see on the roads over the next decades, is just going to lift most of these battery materials.
Adam: Simon, how do you see capital coming into the sector as both a financier and someone who works very closely with the mining companies that you finance?
Simon: The interest level has picked up, but I still think that the capital markets, the public capital markets for mining in general, and even this space, are going to be very difficult. Generalist investors just haven’t needed to have any exposure. In last supercycle, if you didn’t have exposure to resources, as a generalist, you were in trouble because many basis points of your index were generally going to be resources. And so if you didn’t at least cover yourself, you were going to underperform whether you liked it or not.
So you were bound to show an interest in, at least, the majors. Even if they haven’t done terribly over the last few years, since the supercycle, the resources sector has recovered, everything else has done so amazingly well. But if you’re looking at the public markets, I think, they’re still going to struggle. Yes, the rhetoric and the news flow is a lot more than it was a year or two ago. But there is still a huge amount of skepticism around natural resources. And that’s essentially what these projects are.
Adam: James, as a shareholder, have you been happy with the sort of growth to returning cash balance at the moment?
James: I think in the gold sector, yes, we have been happy. We’d like that increased focus on shareholder returns. That’s important to us within the strategic metal sector, as well. It’s just that, that’s the end of the market that we focus on as a fund. I would say, though, that the increases in demand that we’re seeing and these technology metals, make development stage projects there a lot more attractive. And certainly, the return that you could expect on a lot of these projects, we’d be supportive of some of the majors developing them. So that there’s obviously numerous examples we can talk about and the lithium space where we’ve been supportive of expansions in the nickel space, likewise. However, I think that we are quickly going to run into bottlenecks, and there just isn’t time in a number of these methods to bring these to market.
This isn’t a few billion we’re going to need; we’re talking hundreds of billions to be spent on mining projects
The scale of what needs to happen longer term means we need to think about the bigger picture if we’re moving towards net-zero over the coming decades. This isn’t a few billion we’re going to need; we’re talking hundreds of billions to be spent on mining projects. I mean, it’s phenomenal the amount of capital that really needs to be spent in this sector to do this properly. And we need a real change in outlook overall, and we can be part of it and other specialist resource investors can be part of it. Generalists need to come in, but there needs to be recognition throughout the supply chain of what needs to happen here. So battery manufacturers need to come in, car OEMs needs to come in, utility companies need to come in, and other financing agencies need to come in. And green bonds will probably play a role as well.
Adam: Within battery metals, are mining companies good value at the moment? Are they presenting good value to investors, given this demand outlook that we’re seeing for most of the battery and transition metals? Obviously, you got to look under the hood of the how a company functions but, generally, are they undervalued?
James: There’s a clear distinction in my mind between the long-term pricing of a lot of these commodities, and the volume. I think we’re all agreed that there’s a terrific amount of demand coming, but the way the different commodity markets will react depends upon the scarcity of the metals, the ease of bringing them to market. So certainly like lithium, there’s a lot of lithium around there. You can quite clearly see a pathway to market provided there’s enough capital that can be allocated towards it. And maybe long-term prices are multiples of where they are today.
But that doesn’t mean that companies can’t see exceptional top and bottom-line growth through increasing their production. Something like vanadium, however, if we do get a big uptake of vanadium redox batteries, where is that primary supply going to come from is really hard to tell because there just aren’t the primary deposits identified. So those potentially large demand burst can see huge shortages and big price waves, just like we’ve seen in the past, in vanadium, itself, as well as other commodities. So again, I think there’s a clear distinction within this overall changing demand paradigm, which is how the miners can react through the relative scarcity of the metals themselves.