Scarcity, Politics, & Processing: The New Rules of Mining Investment

Key Concepts

• Mining Industry Dynamics: Scarcity of growth opportunities, large-cap companies seeking critical minerals, sovereign wealth fund interest, bull market progression.
• Commodity Markets: Copper, gold, platinum, battery metals (lithium, nickel, graphite, rare earths), electrification demand.
• Investment Strategies: Identifying future trends, understanding supply chains, risk tolerance, taking advantage of mispricings.
• Geopolitical Factors: Political risk in West Africa, onshoring policies, trade bans.
• Technological Advancements: Processing capabilities, battery chemistries (LFP vs. NMC), grid storage.
• Company-Specific News: BHP/Anglo-American saga, Ivanhoe Mines, Snowline Gold, Barrick Gold, West Point Gold, The Metals Company, Elemental Royalties.

Mining Industry Dynamics and Investment Opportunities

The discussion begins by addressing the ongoing saga between BHP and Anglo American, noting that rumors of a new bid from BHP were quickly denied, with Anglo again rejecting the offer. The vote on the deal is scheduled for December 9th. This situation highlights a broader trend: large-cap mining companies are actively pursuing near pure-play critical mineral assets due to the scarcity of such opportunities for aggressive growth.

Sam Plus emphasizes that while BHP has growth potential with its Vuna district, it's a long-term prospect (potentially operational by 2035). He argues that assets capable of moving the needle for giants like BHP and Rio Tinto are rare and typically held by other major companies like Teck or Anglo American. Glencore is also mentioned as a potential player, though its valuation hasn't historically supported such moves. A key observation is that many world-scale assets in Chile are joint-ventured among these large companies, leading to consolidation.

A significant point is the need for companies to "build something," and the largest companies are best positioned to do so. This leads to a discussion of Robert Friedland and Ivanhoe Mines, who are presented as not being afraid to build. Ivanhoe's success in the DRC with its Kamoa-Kakula deposit, coupled with a major discovery and development through a challenging market, is highlighted.

Ivanhoe Mines and Sovereign Wealth Fund Interest

Recent news from Ivanhoe Mines is seen as a perfect illustration of the scarcity theme. The Qatar Investment Authority (QIA) has signed an MOU with Ivanhoe to support its growth in the Congo, focusing on critical minerals exploration and the development of new areas. This is framed as a natural transition from Chinese investment in tier-one African assets to Middle Eastern sovereign wealth funds seeking similar exposure. The QIA's interest mirrors BHP's attraction to Anglo American, driven by the reduced number of scalable investment opportunities. The speakers anticipate more such deals and increased attention to companies with scarce opportunities, especially in the context of a potential new bull market for commodities, particularly those linked to electrification and global electricity consumption growth.

Derek McFersonen reiterates that scarcity is a known factor in the mining industry, explaining why bull markets are profitable: a large influx of capital into a small pool of investable assets. He uses the analogy of "pouring a bottle of whiskey into a shot glass." Early bull markets see good companies perform well, followed by capital flowing to companies that have been starved, and eventually, capital "spilling out," leading to wasted capital. While gold equities have already seen good companies run, critical metals are still in the "early innings."

Gold Equities and Generalist Investor Interest

The conversation shifts to the gold space, noting the progression of investor interest. Last year, there was initial interest from generalists, followed by flows into ETFs like the GDX over the summer. The current stage is marked by a gold company being pitched at a large-cap, generalist investor conference.

Snowline Gold Pitch at the Song Conference

The pitching of Snowline Gold by Muddy Waters at the Song conference is highlighted as a notable event. Muddy Waters, typically associated with short-selling, has specific mining investments and an advisor in the space. The fact that such an entity pitched a C$2 billion company (considered small for the Song conference) at a generalist conference signifies a significant step forward for gold equities. Snowline is described as a fantastic company with a spectacular deposit in the Yukon, Canada, despite not currently being an investment for the speakers. This event is seen as a precursor to further flows into the gold space.

A key observation is that Snowline is a pre-revenue company. Historically, generalists have avoided the developer space due to its cash-burn nature. However, the recent performance of unprofitable tech companies and their valuations may be making generalist investors more willing to consider pre-revenue mining companies.

Scott Nerdall, CEO of Snowline, is commended for his proactive approach in reaching out to investors, regardless of their capital size, emphasizing the importance of telling the story to anyone willing to listen. The success of Snowline is attributed to a father-son prospecting team, representing decades of work.

West Africa and Political Risk

The discussion touches upon Barrick Gold resolving its issues in Mali, which is seen as a positive for the space but doesn't alter the speakers' view on West Africa. The resolution removed a significant overhang for Barrick and other operators. However, when asked if this would immediately lead to renewed interest in development projects in Mali or Burkina Faso, the answer is a resounding "no."

From the perspective of large companies looking for acquisition targets, there is limited interest in West African assets, with a few exceptions for well-established companies. A director of a large Canadian gold producer unequivocally stated they would not incorporate the political risk associated with West Africa into their operations. While bull markets generally increase tolerance for political risk as the cycle progresses, the speakers maintain a longer-term view and believe the political risk in West Africa is too high, citing the potential for nationalization. While acknowledging that some countries like Côte d'Ivoire (where Montage is located) are in better political standing, they are not actively pursuing African assets in general.

Exploration and Development in Gold

West Point Gold's Impressive Drill Hole

The conversation turns to West Point Gold, a junior company in Arizona that has released a very impressive drill hole. The hole, measuring 250 gram-meter, demonstrates the continuity of mineralization at depth, approximately 70 meters below the most recent high-grade hit. This is the deepest high-grade intercept drilled to date on the property, with grades potentially higher than exploration targets. The specific results mentioned are 36.6 meters at 7.35 grams per ton gold from a depth of about 175 meters. This follows up on high-grade holes from Q2 and adds to the company's exploration target of 19 to 30 million tons at 2 to 3 grams per ton. The visualization of West Point's press releases is praised for its clarity and effectiveness in communicating technical information to a non-geological audience.

Future Commodity Trends and Processing Challenges

The speakers emphasize their strategy of looking ahead to where the "puck is going" rather than chasing current hot commodities. This approach has positioned them well for the gold market and they have good copper exposure, believing copper is next. They also have platinum exposure, with that market also set to move.

Benchmark Minerals Conference Insights

Derek attended the Benchmark Minerals conference in Los Angeles, which is described as an industry conference rather than a typical investor conference. Attendees included venture capital from Toyota, processing technology companies, battery precursor manufacturers, and OEM car manufacturers. This diverse group creates a different atmosphere and provides valuable learning opportunities. While attendance appeared down from two years prior, possibly due to the focus on lithium and nickel in North America, key takeaways were significant.

Processing as the Bottleneck

The most significant issue identified across the entire battery metal supply chain, from traditional base metals to rare earths, lithium, and graphite, is processing. Even if minerals are mined in North America, they often need to be sent to China for processing into battery precursors and then into batteries, despite the presence of Gigafactories in North America. This is particularly problematic for rare earths.

Rare Earths: Processing is Key

While rare earths are not inherently rare, the ability to process them economically and refine them into permanent magnets is what is scarce. A buyer for Lucid highlighted how rare earth restrictions impact OEMs. The reality is that China exports refined magnets, not just raw rare earths or oxides. The quality of these magnets is crucial. The Western world is described as being more than a decade behind China in processing.

For investors in rare earth projects, understanding their path in the supply chain and their path to production is critical. The quality of the deposit also matters; China's main rare earth mine is noted for its thorium waste issues, which is why it's located there. This pattern of exporting pollution and importing finished products is seen as a benefit for China.

The processing challenge extends beyond rare earths to lithium and graphite. China's export ban on graphite two years ago is cited as an example of potential future trade restrictions. Therefore, processing capability and integration into the supply chain are paramount for rare earth projects. Even with government support for companies like MP Materials, the lack of magnet manufacturing in the Western world remains a hurdle.

Deep Sea Mining and Asteroid Mining

Derek's view on deep sea mining has evolved. Previously grouping it with asteroid mining as unfeasible, he met with The Metals Company, a deep sea mining company focused on collecting nodules from the seafloor. This approach is described as having low disturbance and being in a deep, relatively stable area. With administrative support, Derek expects this venture to be permitted and proceed, acknowledging that he needs to further assess the economics. This experience corrected his previous assumptions, highlighting the value of meeting with companies and challenging historical paradigms.

Grid Storage vs. EVs

A significant observation from the conference was the consensus that grid storage (ESS) will experience more material growth than Electric Vehicles (EVs). Grid storage serves as large power backups for data centers, helps stabilize grids during inclement weather, and supports grids with high reliance on renewables. There is a natural economic demand for these systems.

The preferred battery chemistry for grid storage appears to be Lithium Iron Phosphate (LFP), a chemistry mastered by China. This contrasts with North American EVs, which tend to use Nickel Manganese Cobalt (NMC) chemistry. Therefore, demand growth for commodities is expected to be stronger in LFP chemistry.

Elemental Royalties Merger and Market Mispricing

Elemental Royalties has completed its merger with EMX. Last week, there was significant trading volume, and the stock price collapsed. This is attributed to EMX being a US-listed company, and due to a US government shutdown, necessary paperwork for listing in Toronto was delayed. The company is expected to resume trading on November 25th.

This event is seen as an occasional moment of specific mispricing in the stock market that can be taken advantage of. The speakers disclosed that they increased their position in Elemental due to this temporary mispricing, which they believe is a result of mistimed government shutdowns and potential forced selling by some brokerages. The volume chart for Elemental is cited as evidence of unwarranted trading activity.

Conclusion: Doing the Work and Knowing When to Act

The discussion concludes by emphasizing the importance of "doing the work" – knowing your stocks and understanding what you like. Equally crucial is knowing when to get in and taking advantage of opportunities, especially when fundamental aspects of a company haven't changed. The speakers reiterate their commitment to doing the work, particularly in understanding the battery metals space, which is currently out of favor. They aim to identify where money will be made in this sector, cautioning that simply having "Rare Earth" in a company's name does not guarantee a good investment.