Why are base and energy metals so fundamental to the energy transition? And Sonia, what is BHP Xplor doing in terms of helping to bring new supply into the system?
Sonia Scarselli:
Over the past few years, there has been a significant acceleration into the energy transition and renewable energy. And if you think about solar etc., all these new sources of energy require much more underpinning of mineral resources than in the past, especially resources such as copper, nickel, and lithium. We’re going to need four times the amount of nickel that we have used in the past 30 years for the next 10 to 20 years, to really reach the ambition of the 2030 and 2050 Net-Zero targets. This is not easy to do.
We need to find resources in areas and places that we haven’t thought about in the past, and fast. There is a sense of urgency that didn’t exist a few years ago. The BHP Xplor programme recognizes that there is a need and an opportunity to finance investment in a more nimble and agile way, to bring forward new exploration and resources. What BHP Xplor does, is take early-stage exploration companies that are pre-IPO or at the IPO initial phase, that have new ideas and new concepts, but they lack the financial and professional support from a bigger company like BHP (ASX: BHP). We just launched the programme at the beginning of September, and we are open for applications right now. Our goal is every year to get at least eight to 10 companies.
Alex, let’s talk about some of these mega-trends that are defining the case for the energy transition metals. What are some of the dynamics that are creating this demand now?
Alex Tsukernik:
Well it’s a fundamental change in how we live. When we started Nova Royalty (TSXV: NOVR) in 2018, we thought about it much more holistically. The world is going to live differently, you’re going to power your car differently, etc. We saw a fundamental change in terms of where copper stood in the world. And although copper was already a large industrial metal, we thought it would change to a strategic commodity. For instance, if you look at Anglo-American (LSE: AAL), they just built Quellaveco in Peru, which is one of the largest copper mines in the world now. And they said two things that stood out.
They said that the world will need 60 new Quellavecos by 2040. Crudely, that’s an average of three to four per year in an industry that builds less than one on average per year. And even for BHP, which is truly one of the great companies of the world, building a big copper mine is a huge, huge in investment of people’s time, capital, and reputation. I don’t think people in the investment community really give proper credence to what it takes. And people look at the numbers and they think they can do the Capex and the Opex, oh it looks good. Then you have to actually go do it, which takes five to seven years, oftentimes multiple administrations, sometimes multiple CEOs, and you get into a situation which is much more complex.
What Sonia is doing with exploration companies makes a tonne of sense because you need so many things to come together to build a mine. The importance of our sector is bound to increase because it is fulfilling the needs of the original energy transition imperative, which is environmental, and we all know the geopolitical issues at hand today. Basic energy supply cannot be counted on in the same way that it was in 2020. And when you look at our industry and where it sits in the world, we think that it sits at the epicentre of a lot of what is going to happen.
That creates a great opportunity for those people that understand that concept and focus on the quality deposits, because although the demand is high, the threshold for getting through is higher than ever. The operating risks and the challenges are greater than they’ve ever been. We are literally sitting at the first innings of something that’ll be very fundamental and challenging but also creates phenomenal opportunities.
Some of the issues over the past decade, since the last cycle, have been around enough capital coming into the sector to develop projects. Is this the future of financing now to find a major or a royalties model because the equity markets and conventional financing just isn’t there in sufficient volume at the moment?
Sonia Scarselli:
From our point of view, BHP can provide them with a different way of financing. You create a partnership for the future but also remove something that I call the treadmill of exploration, where a smaller junior is constantly on the treadmill to raise a little bit of incremental capital to go and do a little bit more of activity, it’s a cycle. I think it’s not an efficient way to do exploration. We think that with Xplor, we are providing a game changer in how those companies operate.
Can you talk us through some of the capabilities that BHP Xplor is bringing to junior companies?
Sonia Scarselli:
The programme itself is a three to six-month programme, is flexible in time, and depending on the maturity of each of the company, we wanted to be very founder friendly. Within the programme, we offer a curriculum of three main pillars. There is a technical support, operational support, and then there is more of a business support depending again what each company needs. And within these three curricula we offer advice, mentors, and a connection to our internal and external ecosystem and network.
It’s going to be tailored on what the individual company needs, but it’s quite a broad spectrum. Each company will also receive a stipend of US$500,000, in order to prepare to pitch for investment for a larger capital of investment at the end of the programme.
We are looking for candidates from all over. Some come from academia or from not the usual mining sector, because we wanted to get a very large spectrum of ideas and concepts globally. We are also looking for more experienced explorationists, as well as creatives. Creatives might have the concept, but have never run a company. In fact we can accommodate other disciplines as well, we have received applications from people chemistry backgrounds, or even oil and gas, who are moving into the mining sector.
This is a sector that always has plenty of money, it just goes to the wrong places
Alex, let’s talk about some of the capital that you provide with the royalties model? What’s succeeding about that in this environment, specifically for copper and nickel juniors?
Alex Tsukernik:
I think what Sonia is doing is a great thing because the scarce element in our industry is not capital, it’s vision. This is a sector that always has plenty of money, it just goes to the wrong places. When you look at what is often missing, you can have a team of very good geologists but they really don’t know anything else about running a company. If you can provide an infrastructure in the beginning with the right fundamentals, people can think about the business. I remember Western Mining used to be a university of sorts, almost like an academia structure where geologists could take shots and work for years on something that didn’t have to yield short-term results. And there was a reason this was by far the most successful explorer of the 70s and 80s because they gave talented people time and leeway to actually get things done.
In terms of what we do, we are a royalty company and we focus on copper and nickel. But these are very specific sectors because of the scale required for a successful project. We actually began our business focusing acquiring existing royalties, because if you want to get access to world class deposits, which is really what you have to do in these sectors, you can only go by the existing royalties, which are really held by the families of the original prospectors.
Fundamentally, though, it comes down to the team. The project matters, of course, but in the right hands things can work and the wrong hands they can’t. You should focus on the experience, background, vision, and capital backing from the original people that are there. And we probably see more opportunities on the private side in terms of royalty origination than we do on the public side because again this is a sector which always has plenty of capital.
Public equity markets, even in stress times, can provide capital to companies. And I think that from a royalty perspective, we want to be a partner. If you look at the royalties we’ve bought, a lot of the people we bought them from, they become shareholders of the company because they believe in the vision. And I think if we partner with an emerging producer, that needs our capital on the private side, it makes more sense because we can provide something more flexible and friendly.
Within the criteria that you’ve laid out, do you find there are enough projects out there? Are you struggling to find interesting new royalty streams to add to your portfolio?
Alex Tsukernik:
Everything is a function of time. The more time you can invest, the more time you can wait, the better deals you’ll get. And when we started the company, we spent the first year just scoping everything out and we only did a deal at the end of the first year. We have a great network of relationships and we’ve done business with multiple people, multiple times. We have a great stream opportunities coming our way, but I think it always takes time to get comfortable with things you really want to do.
Sonia, what’s your view on the assets that are out there? You’ve spoken a lot about encouraging the right teams, getting a broad catchment of expertise coming in for your programme, but in terms of actual resources in the ground, you’ve got a global view. But do you think there are enough good projects out there?
Sonia Scarselli:
Yes, I think there are enough good projects and there are enough bad projects. It’s all about the selection of them.
I think as an industry, especially on exploration, we tend to not to take the right risk. When I say risk, I mean a technical risk and we’re focusing on assets and opportunities that are a little bit more well-known. That’s why our programme accommodates taking a little bit more risk, because we’re not looking at a one-off opportunity, we’re looking from a portfolio point of view, and from a portfolio point of view, we can spread the technical risk in a more balanced way.
Regarding technologies coming into this space, do you look at how these are changing? Do you have any insights on how copper and nickel are developing in that way at all?
Alex Tsukernik:
When you look at the mining sector, it moves at the speed of technological change. Copper deposits weren’t mainstream until people figured out how to discover and mine them. And that wasn’t something that everyone just did naturally. When you look at the really successful mining companies of the last couple of hundred years, technology was an essential part of their success. If you can extract more from existing ore bodies, then that’s a big focus for a lot of people. The industry still doesn’t have anything like the equivalent of seismic, which oil and gas does, because mining is harder and there’re a lot more things to look through.
Sonia Scarselli:
To add to that, I think what we haven’t seen so far is something disruptive from a technology point of view. Something like seismic is missing in the exploration space, but it will not be seismic. And I think we haven’t challenge ourselves as an industry to define those technologies, partly because we tend to adopt other industry technologies, which is not the solution.
What I think is missing, and oil and gas does that very well, is an industry approach. The way the seismic technology came and improved has been an industry approach. Right now we’re still focusing on each individual company’s approach. That’s not going to solve the problem.
How is inflation impacting the groundwork or some of the exploration work that you are conducting now? And how as a bigger organization can you help shield against that for some of the smaller companies?
Alex Tsukernik:
I don’t think the royalty model is impacted by inflation, but only if you pick really good projects. If you have tier-one projects, or even really good tier-twos, I think you’re in excellent shape because those mines will find a way to keep running or get developed. But the threshold for development has gone. Everyone in that sector has been impacted by inflation. You must be that much more selective in the projects you choose and make sure you’re putting yourself in the right position.
Sonia Scarselli:
Similar for us, the approach that we are taking, is a long-term approach. We are trying not to be too cyclical. On our own exploration team, we have a consistent budget through the years because we’re looking at the next 10 to 20 years of a project. The portfolio is like a conveyor belt, you can’t just stop and start it, it must keep going. With Xplor, there is a very similar concept. Our focus is to find the best opportunity globally in the hopes one will fit our portfolio criteria and then become a part of BHP.
Regarding technology, what has to be done with the pressure of the demand side today? What has to be done to make management teams adopt things quicker and be more efficient?
Alex Tsukernik:
New management. When the opportunity comes, you get a different type of person entering the sector, and I think you’re just in the beginning of that. I’ve been in this industry now for 18 years, and it has a way of recycling people. The energy transition is not just a mining phenomenon, it’s a global phenomenon which impacts every corner of the world. I think you’re going to get a lot more people with vision and desire to actually get something done rather than recycle the old approach.
Sonia Scarselli:
We are normally a very slow organization; we have the luxury of being slow and we never needed to be fast. But you need change, you need to support from the top down to create something that is disruptive. The programme I’m running, Xplor, it is disruptive for my company and it’s moving very fast. We got approved to go ahead in June, and by September we had built the structure and we were ready for applications. By the end of the year, we are going to have people coming into the programme. We are moving very fast for what we’ve seen at BHP. It requires constant internal engagement. It requires time, commitment, and effort.
