What chances do metals and mining offer, Anthony Young?

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.

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We have discussed the following topics with Anthony Young:

Introduction

[00:00:01] Tilman Versch: The world is changing to a net zero carbon growth. A lot of investment is happening in 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 interesting topics in this case, so I’ve invited another expert to discuss this topic for you and also to give ideas on how to navigate this topic as an investor, enjoy the conversation.

A warm welcome to the Good Investing Talks podcast. I’m your host, Tilman Versch, 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 helped me to keep this channel free. 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 all 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.

Introducing Anthony Young

[00:01:05] Tilman Versch: 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 in LA-based and today we are also discussing a topic that I’ve already discussed with him in pre-chat, so I assume it’s the impact of the energy transition and the impact of the energy transition minerals. First of all, Anthony, how are you doing?

[00:01:31] Anthony Young: Doing well, thank you for having me.

[00:01:34] Tilman Versch: I think it’s the first time you’re on a podcast, so I hope you’re not too nervous.

[00:01:40] Anthony Young: It is my first time, so I’m excited.

[00:01:43] Tilman Versch: 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, it’s always a lot of digging you have to do. 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?

Anthony’s disclaimer

[00:02:11] Anthony Young: Yeah, absolutely. Maybe just before I start my compliance department always asks me to give some standard disclaimers. So I’m here representing my thoughts and opinions, and I know Tilman, you have a very robust disclaimer, but again, this just shouldn’t be viewed as investment advice.

Anthony’s background

[00:02:31] Anthony Young: And as far as my background goes, I started as an engineer, so an electrical engineer was working in the aerospace industry and 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, focus and finance kicked off my Wall Street career at Bear Stearns. Where I was in the metals and mining team and that was my first introduction to metals and mining and what many called the Supercycle of that 2004 to 2012 time frame. So I worked at a number of different investment banks and worked at a couple of different hedge funds before starting my own fund in 2017. Again, just focused on the energy transition.

From metals & mining to renewables

[00:03:32] Tilman Versch: It’s a very interesting 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?

[00:03:44] Anthony Young: 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 as people are looking for cleaner forms of energy, what would be next? And it’s not to say that when I started in metals and I knew that copper and aluminium 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.

Things to look out for in metals & mining

[00:04:51] Tilman Versch: What might other investors that don’t look every day into the energy transition be missing in this field?

[00:04:59] Anthony Young: I think that metals and mining are just historically 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 at the longer-term benefits and sure that there are consequences of the mining process, but because of those consequences you have or you can, 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.

I think that metals and mining are just historically 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 at the longer-term benefits and sure that there are consequences of the mining process, but because of those consequences you have or you can, 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.

The impact of decarbonization

[00:05:47] Tilman Versch: 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 decarbonising this, what does this mean for investors? What is the impact of decarbonisation of the grid, and especially, not only the grid but also heating and all the other stuff that has to be decarbonized too?

[00:06:14] Anthony Young: I think it’s a bit of a moving target because there will be government incentives and capital markets coming into play but a leading Wall Street bank has sort of indicated that the United States will require about 25 trillion. That’s what 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 you’re up just given some of the things that have occurred over the last year or so require 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, I think globally you could see that number swell to probably over 100 trillion if we’re going to go towards that net zero by 2050, which is 25, 27 years away, it’s not that far away.

Reaching net zero and the effect on the commodity business

[00:07:36] Tilman Versch: To think about 2050. It’s 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, or 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? Water energy transition like cables and wires and copper for instance like do we have the capacity for this and does this also impact like the way the business is done because if you think about like shortage capacity, it’s not commodity business anymore. It’s highly dependent on 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 its short time period?

[00:08:47] Anthony Young: 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 two 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 energy. Those renewable sources of energy on the copper side of things which 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.

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 two to 4% on an annual basis.

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 incentive for those renewables to have a base load source of power which would be wind and solar with a battery backup. So under those scenarios and a major copper company reported this morning and they indicated that they think that the world needs 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 that will likely require higher prices to incentivize that investment.

Remodeling the energy infrastructure

[00:11:10] Tilman Versch: We will jump into the copper topic later in this conversation, but maybe let’s look at the bigger picture and think about infrastructures a bit more. So I should get here. Yuria say there’s Daimler and let’s pause 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 that burns fossil fuels and like coal or gas or even waste 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 the 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 surfaces it has to cover. What do this change in the structure and the grid mean for investments and also for the infrastructure we have to remodel?

[00:12:23] Anthony Young: I think taking things further out into 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 again taking things further away just requires more raw materials. So not only that but also they just have much larger footprints of natural gas and coal-fired facilities. 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 that to take into consideration when–

[00:13:23] Tilman Versch: Yeah, I think cats are more dangerous to most birds, I think. But yeah, please continue.

[00:13:30] Anthony Young: 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 that can’t be ignored either when you’re running these numbers.

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The volatility of renewables

[00:14:24] Tilman Versch: There is also an interesting Bill Gates video I’ve watched recently. 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. But another interesting point I wanted to ask you about is the volatility of renewables. So if you think about wind and solar, you sometimes have peaked with a lot of energy that is supplied. So we have quite an unstable supply to a certain extent. But on the man, the man is quite stable. What does this kind of mismatch may be mean?

[00:15:09] Anthony Young: Right. I mean, I think when you have the transition to wind and solar, I think for a long-time utilities we’re 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 obvious peak times from 4:00 to 9:00 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. I think that’s why you’ve seen some of the situations that you’ve seen in Texas here in the US in particular and California, particularly during the summer where you’ve had blackouts and brownouts because you wind and solar, the wind blows and the sun shines when it does, but that 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.

Material demand in the energy transition

[00:17:04] Tilman Versch: 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, and all other minerals are we talking about in this case?

[00:17:21] Anthony Young: I mean, it runs the gamut, right? As I said, I spend a lot of time on copper, but then obviously everyone likes to talk about the rare earths and uranium they play very important roles in the energy transition. Uranium is obviously for nuclear rare earths principally and 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 are other cutting-edge things that are being developed. But then I think there’s also the second tier of metal things like vanadium, and thorium. Tin is a very important metal in electrification. So I think that that there’s we only have one periodic table obviously. And there are the metals on there that play different roles and I think historically copper and aluminium were the two biggest, most important base metals, nickel to a lesser extent. But 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 under-invested in because, frankly, they haven’t been as important in the past as they will be in the future.

Other interesting metals

[00:18:47] Tilman Versch: Aside from copper, which we are talking about in a few minutes. What kind of metals is interesting to you? For instance, if you couldn’t invest in copper, what kind of metals would you invest in?

[00:19:03] Anthony Young: I like nickel as a middle I think that that is important in a number of different regards. In some manufacturers, nickel cobalt manganese 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 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 scale. I mean, you may see some one-off projects here and there over the next five years.

Then outside of that, 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 tin is a metal that has long been forgotten about. There was a tin crisis in the 1980s, which was driven by governments dispersing their tin inventories. It took a lot of folks out of the market but now as you think about it 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.

Anthony Young’s book recommendations

[00:21:15] Tilman Versch: Are there any books you could recommend when you want to dive deeper into the world of metals and mining?

[00:21:24] Anthony Young: There’s nothing comprehensive. I think an interesting book that’s timely right now is a book called The World for Sale it’s by Javier Blas. He’s a Bloomberg writer and just gets into 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, a very old book, it’s somewhat hard to find now. It’s called Grasberg and it’s about a freeports mine in Indonesia.

I think an interesting book that’s timely right now is a book called The World for Sale it’s by Javier Blas. He’s a Bloomberg writer and just gets into 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, a very old book, it’s somewhat hard to find now. It’s called Grasberg and it’s about a freeports mine in Indonesia.

And just goes through, how difficult it is to build or to develop and build a mine. So the Grasberg which now is either the world’s second or third largest copper mine, depending on where they are in their ore grades in the world’s first or second largest gold mine was discovered in the 1920s. But it took them 70 years, seven zero, 70 years to develop. And when you think about the profitability and the cash flows that are possible from having a mine of that size and scope, you think you find it and you develop it right away. But just given work, the work you have to do with governments and the infrastructure that used to go into a 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 50 or 60 miles outside of some major centre. 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.

Copper intensity

[00:23:26] Tilman Versch: 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 placing with windmills and solar. What does this mean for the copper intensity? So what kind of copper intensity, talking for instance, for this gas plant or the general replacement of plants with renewables and wind? What does this mean for the copper intensity?

[00:23:56] Anthony Young: 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 wind or solar. I think solar is slightly more copper intensive, but still, maybe solar is like 5.5, maybe copper is 4.5 say four to five times as intensive for each megawatt that you bring on. And then given their intermittent natures, when you’re talking about natural gas-fired or, say, nuclear runs about .9% of the time. So 90% of the time it’s up. For wind, that’s about .25. Maybe if you’re in a windy place maybe .3. And for solar, it’s about .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 eat 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 baseload power as you would with a nuclear or a coal baseload power system.

So, 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 built supply-demand models for the better part of 10 years. I would never imagine that a country once they’ve reached that certain level of industrialization would see an uptick in their demand because why would you build out more infrastructure but that infrastructure 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.

Copper intensity in housing and mobility

[00:27:28] Tilman Versch: Now let’s go away a bit from the wind and solar side, like the energy production, but also like on the 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 cars? Do you have some numbers there?

[00:27:55] Anthony Young: Yeah, cars. Electric vehicles are four times as copper-intensive as internal combustion engines, so internal combustion engines will use about 50 lbs of copper. Yeah, if you’re talking about compact SUVs, Bigger SUVs will use more, bigger trucks will use more, and 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 lbs of copper. That’s a big number, and I know that the OEMs are focused on bringing that down and maybe they bring that down three times as copper intensive but you’re still talking about triple the amount. And transportation accounts for about 25% 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.

[00:29:15] Tilman Versch: And what about houses and heating?

[00:29:17] Anthony Young: Houses are 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 when you think about 1978 or 1988, no one could envision homes that had two electric vehicles that had 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, water heaters, all being electrified at this point, you’re going to need to retrofit 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, excuse me, on the right-hand side of the bell curve of the median, because again, bringing that amount of power into your home just was never envisioned. I mean, those numbers are a little bit murkier, but I recall that there was something on the order of 500 lbs of copper in your average home and a large part of that is going to be in the pipes, but a portion of that it is certainly in the wiring and that wiring is going to need to be augmented in order to be able to service those the demand that’s going to come from electric vehicles. 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.

Comparing European and American infrastructure

[00:31:25] Tilman Versch: Yeah, you have to do a lot of retrofitting.

[00:31:27] Anthony Young: Exactly. Exactly.

[00:31:29] Tilman Versch: There’s also one thing I find interesting as a European when I compare Europe to the US, it’s the density of the infrastructure. Like in the US, you have very long strides or roads and very long distances you have to retrofit and put cables and other infrastructure in the ground if you want to economize it. And like in Europe, it’s more, it’s denser like this, this lack of density is also a bit of a challenge.

[00:31:58] Anthony Young: Yeah, I mean it’s interesting, right? It gets into a couple of other different things because, on the electricity side of things, the overhead wires that you see are aluminium, for the most part, with insulation around them but then as you get into the stations they break up those high power lines into lower power voltages that can be used in neighbourhoods and what have you that’s when you go back to copper. So the long power lines, it’s aluminium and aluminium have their own supply-demand challenges, but you will have more of a requirement for the substations and in areas that break down that power into lower voltages and that will be copper intensive as well.

Good Investing Plus – A warm invite to apply

[00:32:55] Tilman Versch: Hey, Tilman here. It’s great that you have made it that far into the video. And I think it shows a certain passion for investing in what you’re having. If you want to dive deeper and go further down the rabbit hole, you’re invited to apply to my community Good Investing Plus, it’s a place that’s very helpful to people who are ambitious about investing. It’s helpful to investment talent as well as experienced fund managers. So if you’re interested, please click on the link below and now, without further ado, enjoy the conversation.

And now, without further ado, enjoy the conversation.

Can the supply keep up?

[00:33:30] Tilman Versch: Yeah, we are now at the point where we could say, like, there’s enough growth in the demand for copper, but what does this mean for the supply side? Is there enough supply that’s coming online in the next years or is there enough?

[00:33:46] Anthony Young: You know the supply side of the equation is extremely challenged. I think that, again, on the investment side of things there are two sides to investment in mining. There is the investment into building out mines, but then there’s also the investment that goes into exploration and I think exploration has been out of favour for a long time, right? So I think 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 cancelled those programs that would feed into those types of jobs. When I came into the industry in 2005, there were a number of projects that you knew about that could be turned up in a 10 to 12-year time frame.

Now with that, 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 that has a very attractive asset and British Columbia is fairly close to ports and waterways and roads. And this guy’s been 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, we’re talking about eating double the production in 2040 and another 25% or so by 2050 to turn up that amount of capacity given the time frames it takes to even just turn up a, very straightforward. And 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 out. But, in the current market environment, we’re in with the copper price of 425. There doesn’t seem to be any urgency to get after these projects.

Working on existing mines

[00:36:33] Tilman Versch: Yeah, without prices going up, it’s hard to bring new mines online. You’ve already mentioned this, but what is it about old mines? Is there any magic that can be done if prices go up, like exploiting more, and getting more resources online?

[00:36:54] Anthony Young: I think even just make sure I understood your question. You’re asking if what impact higher prices would have on the acceleration of development.

[00:37:05] Tilman Versch: In existing mines, so if you already have permission to drill and dig for copper. Are there any measures that can be done with these mines if prices go up?

[00:37:22] Anthony Young: Yeah, that’s part of it. 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.

[00:37:49] Tilman Versch: Maybe you can plain explain open pit a bit, so then people can get an idea of what open pit means.

[00:37:55] Anthony Young: 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 Komatsu trucks that are taking the earth from one point in the grounds to the processing facility somewhere else. But in these open pit mines, 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, and 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 are 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 ways that mining companies can increase production by 5 to 10%. From existing operations, installing equipment, gaining efficiencies, and incremental improvements, but oftentimes those alone are offset by the decreasing ore grade that you experience every year when you’re operating the mine.

Outlook on future copper harvest

[00:39:38] Tilman Versch: If you think about copper like harvesting. Are there low-hanging fruits in the copper space already picked or are there a lot of low-hanging fruits globally out there that can be harvested in the copper space?

[00:39:53] Anthony Young: So that’s the challenge. I was thinking 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. We had problems politically in Chile in the 70s. Push some exploration to Peru and there’s obviously a tremendous amount going on in the US and Canada as well. But now if you’re looking for those next large deposits, you’re having to go to far-flung places a major gold company announced about three months ago. I believe that they’re going to Pakistan for a copper mine that 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 there are some deposits in Afghanistan as well. I think there are some deposits in Iran, but 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.

Ore grades

[00:42:01] Tilman Versch: In our pre-talks, we chatted about ore grades and what this means for the production of mines. So you said that the ore grade was at one or above one a few decades ago and now it’s 0.50, 0.7 for many mines, and that’s seen as a good ore grade.

What does this mean for copper production?

[00:42:27] Anthony Young: 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 ore grade first. And that gives you the highest cash flow in the earliest years of your mine. And then over time you harvest the rest, obviously, you’re constantly going after the highest ore grade. But just using round numbers, if your ore grade is in your first day is at 1%. And your ore grade at year 15 is .5%. It’s probably about twice as expensive to operate that mine in year 15 as it was in year one because, in 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 if you have just there are 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 .5% ore grade in Arizona, it may be cheaper in Arizona because the infrastructure is necessary, but if they’re right next to each other, you would always go with the highest ore grade first. So 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 grades 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.

[00:44:45] Tilman Versch: So there’s no magic reserve where some have kept their highest grade to eat them latest maybe?

[00:44:52] Anthony Young: No, no. So I think that 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 an activist and possibly lose their jobs if they aren’t generating that 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 Grasberg, for example in the ‘90s. Maybe all you told boy more recently is 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 for many, many years.

[00:46:15] Tilman Versch: Like how rational is the industry? Like if you talk about the mining industry and commodities, you hear crazy stories about a wild deal 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?

[00:46:34] Anthony Young: I think that it’s gotten better. There still are companies and 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, 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 instead, they’re paying dividends and buying back shares. On some level, buying dividends or 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. That’s not viewed as favourably 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.

Counter arguments

[00:48:15] Tilman Versch: Could 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 are the counterarguments to the arguments we are making here or you are making here?

[00:48:34] Anthony Young: I think there is. I think that you had to tweet from Elon Musk last week, that was saying the world doesn’t require any more copper. He’s more focused on lithium and it just depends on how you view the energy transition. If you view 2050 as being sacrosanct then we need a lot more copper than what we are currently producing. 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 and there may be other offsetting technologies that we’re just not aware of. So I think a portion of it comes down to how quickly this energy transition will happen and that’s something that I think no one is completely certain about. I think that the 2050 number is it’s a good target, right? And I think that using that target, you come to the conclusion that I’ve come to on the demand that we’ll 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 if 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 that requirement won’t be as large as I’m currently thinking about.

The impact of the copper price on the energy transition

[00:50:50] Tilman Versch: 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 copper also be a hurdle for the energy transition?

[00:51:14] Anthony Young: Just a question, I think that the US government puts out solar data on a monthly basis and you’ve seen the cost of production for a solar cell steadily decrease, since as far as the data goes back to 1991, 1992, something of that nature. But we’ve started to see that flat and 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 polysilicon that we’re getting from China and this is just from the solar side of things but I think that Copper prices would probably need to go 50 to 60% higher before they would start to impact the overall solar equation if you will because we’ve already seen prices go from $2 to $4 from 2006 to 2023 and that hasn’t impacted the price, the steady price declines in solar cells. Maybe if prices went as I said, 50 or 60% higher from here that would start to impact their prices. But solar systems are so many different parts and there are so many different engineers focused on it until, on the sell side of things, they keep on making improvements, maybe it won’t have as large an impact as I’m thinking.

China’s demand

[00:53:08] Tilman Versch: So what role in the equation does China play 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 in housing and stuff like this. Could this also be a thesis breaker for this kind of change made in China?

[00:53:36] Anthony Young: China is the largest consumer of copper and probably since about 2013 they’ve consumed 50% or larger of the world’s copper consumption. I think that the Chinese housing market is definitely a concern that rolls over and the Chinese population, I think is something we have to constantly think about. So 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 we have a pretty good understanding of end markets and also the supply side of things where things are coming from. 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 are always concerns when you’re talking about Chinese demand. Just given the size of that country and everyone’s demand models. But I think their puts and takes on how that may ultimately play out.

The dark sides of the industry

[00:55:16] Tilman Versch: I’m not that typical investor into metals and mining and I’m coming to the space with curiosity and the outside view and the more interested in energy transition and what this means. 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 project somewhere in the mountains in Chile or something like this and you have also these conferences that have interesting characters there on the speaker panels and it feels a bit like sometimes a bit like fraudsters by 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 avoid access to the industry so to say?

[00:56:20] Anthony Young: Yeah. What I would say is for investors that are interested in basic materials. You want to start off very simply, and right in the middle of the fairway, if you will, and there’s– I don’t have positions in any of these names, but you think about the big guys first, your BHP, your Rio Tinto, your Valley, 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 once you’re comfortable and understand those names, if you’re looking for smaller names, you sort of, my recommendation would be that companies that have producing mines. There are probably 25 to 30 companies out there that 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 and companies that have producing assets. Then companies that are your exploration and development companies. And I think if you’ve talked to management teams and you’ve gone through feasibility studies which are the studies that these companies without regarding assets and you want to get more involved in some of the smaller cap exploration and development plays. You know 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 companies.

Yeah. What I would say is for investors that are interested in basic materials. You want to start off very simply, and right in the middle of the fairway, if you will, and there’s– I don’t have positions in any of these names, but you think about the big guys first, your BHP, your Rio Tinto, your Valley, 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 once you’re comfortable and understand those names, if you’re looking for smaller names, you sort of, my recommendation would be that companies that have producing mines.

[00:58:38] Tilman Versch: Where do you feel comfortable investing with your fund?

[00:58:43] Anthony Young: I’m typically looking at those names that have one or two producing assets. And typically just produce one or two commodities, as you produce copper from a copper deposit, you also get gold and silver. Sometimes you get molybdenum as well, but just focusing on companies that produce– I’m not looking for a big diversified mining company. I’m looking at companies that run deposits, run deposits while maybe having a development deposit that they’re working on that may come into production at some point over the next five to seven years. There’s a sort of growth to that story, but just looking at companies that are extremely focused on producing cash flow from an existing deposit. So I’m not even looking at companies that are in the process of building out new production, just looking for producers that stand to benefit. The upcycle that we see in the basic materials.

Factors to consider when investing

[01:00:02] Tilman Versch: Are there any hacks to find a good investment in this space like you always have to do hard work in your due diligence, but like, is there anything to invest in a certain management team or a certain tier and 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?

[01:00:28] Anthony Young: Yeah, I think you have a point on the management teams. I think management teams and cash flows are two of the most important things. A company’s ability to generate cash flow through the cycle, so we’ve had some extremely challenging years and 2008 through 2010, maybe 2008, 2009, 2015, and 2016 were 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 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 this is the new thing that they’re working on. Those are typically pretty good management teams to follow. I mean that would be where I would start and then also you want to be careful about where the deposit is located. So I mean, there are not 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 most public companies are operating in fairly benign jurisdictions. But certainly, there are places in Africa which there are places in, I mean, even Chile try to change their constitution to increase the taxes and royalties that they’re going to charge mining companies, but historically think of Chile as being very safe.

[01:02:40] Tilman Versch: I’ve also heard about a polished copper company that is, if it’s profitable, the Polish state gets interested in taking away some of the profits with taxes. I’m not having started this case myself, but a friend who’s an investor told me about this.

[01:02:58] Anthony Young: That’s right. That’s 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 government also wants you to increase your employment despite the fact that makes your cost of operations higher if you have more employees. So you could squeeze on both sides, it’s a challenge, I think that the mining industry will have had and will continue to have. Particularly if prices go up in the fashion that we think they will.

Energy input

[01:03:36] Tilman Versch: So what do you think about energy input in the ratio to get out a certain product so you think about, for instance, open pit mine? You need a lot of energy to get out the product you have to crush a lot of stones to get the copper out. So what do you think about this ratio of energy input and output of product in your analysis?

[01:03:59] Anthony Young: 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 on their own, right? So the battery technology isn’t 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 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 and that open pit configuration. But that being said, most mines use a tremendous amount of diesel and high energy prices and we’ve seen this despite the fact that prices are high for commodities right now. Some companies in the last quarter just give any inputs, explosives, employees, diesel, the electricity to operate the mine, and the steel balls that they use for crushing. Margins were very thin for some of these companies in the fourth quarter of last year, so I can’t think of a situation where high diesel prices have put a company out of business if you will but certainly it could create pressure on margins for them.

Anthony Young’s thoughts on uranium

[01:05:54] Tilman Versch: And another topic we have discussed in our brief 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 to your use in this space.

[01:06:08] Anthony Young: Yeah, absolutely. I think that uranium and the nuclear build-out that is going to occur probably more so internationally than in the United States. Uranium and nuclear power have long been viewed as the cleanest baseload power that’s out there. It’s on, but I think that as we go through the next 10 years here you see a tremendous build-out in places like China, even places in the Middle East where power is not power, but energy is fairly cheap. They’re turning to nuclear just given the fact that these nuclear assets once they’re built there are 50, 60, 70-year assets that you sort of know how much it’s going to cost for you to produce power, even at a higher uranium price environment. So it gives you some stability I think to your grid again, I think most countries are investing very aggressively in wind and solar, but having that stable base load of nuclear power provides you with a lot of flexibility that is hard to come by without going towards those fossil fuels.

Nearshoring & reshoring

[01:07:40] Tilman Versch: Another topic we haven’t discussed, but we discussed in our pre-talks is the topic of nearshoring and reshoring. So a lot of like we have these economic tensions. We have a real war in the world or in Europe again. So a lot of industries tried reshoring and nearshoring. What does this mean, especially for businesses we might consider as boring and commodity-like in your eyes?

[01:08:05] Anthony Young: I think that the reshoring and nearshoring. It’s going to create a tremendous demand for steel in particular. There are other commodities that it will be important for as well, but steel in particular on some level may be aluminium. But as you think about the US and Europe and Japan building out capabilities and capacities and all sorts of semiconductors and medical applications. One, it’s inflationary. But two, to have all these redundancies across the globe, it’s going to create a tremendous demand for the infrastructure that’s required to have this production capability. So as you think about the world right now a lot of stuff is built in emerging markets, particularly in China, Southeast Asia, and what have you.

[01:09:14] Tilman Versch: Yeah, like half of my room here.

[01:09:18] Anthony Young: Exactly, exactly. But now you’re going to have that capability in possibly three to 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 good for the demand side of things of basic materials.

Anthony Young’s closing thoughts

[01:09:45] Tilman Versch: For the end of our interview, I always give my guests the chance to add something. So is there anything you want to add, especially on the renewables and energy transition side? Is there anything?

[01:09:56] Anthony Young: I think that it’s an exciting time for basic materials. I think that basic materials have gotten a bad reputation just given some of the deals that had happened in the past that has destroyed shareholder value. It 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 folks who may be interested in working in the industry. I think that going to work in a zinc mine in a far-flung place or going to work in a lithium mine was 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 an investment but having careers beyond. I think Wall Street or finance certainly be over the next 30 to 40 years.

[01:11:05] Tilman Versch: 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.

[01:11:12] Anthony Young: There’s one study that was put out that had said the average mine worker is 55, so 55 and you can imagine them retiring at somewhere around 60, 62. And that’s the average. There are 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. Many colleges don’t offer mining engineering programs. I think a lot of colleges have cut back on even geology programs if you will, and I think that it had somewhat of a bad connotation because you think about geology and a lot of those folks will 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 an energy transition or having greener sources of power. But you’ve also cut away the pipeline for folks in the mining industry as well. Yeah, I think there be a lot of opportunity there.

Thank you

[01:12:32] Tilman Versch: 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 the listeners that stay ‘til here. So thank you for staying ‘til here and bye-bye.

[01:12:41] Anthony Young: Thanks for having me.