Where are you seeing most of the investment into the industry going? I.e., different commodities, regions, anything specific. Where is the investment going right now?
Anthony Milewski:
I think that’s really a political question in a way because from my perspective, what we see is a wholesale lack of capital from the West, and tremendous investment coming out of China. It’s a really interesting moment because we could talk about the need for copper, nickel, cobalt, or lithium and it would all be true. But in terms of people writing checks and cost of capital, China is the lowest cost of capital by large. And so very little if any financing has come out of, say, the U.S. government or the Canadian government to develop their domestic mines.
Amanda Van Dyke:
I agree, China’s been preparing for the energy transition for 20 years and they have sophisticated investors and a sophisticated system of investment into the natural resources space. They’ve been scouring the globe and the government supports their large companies buying as many of those assets as possible. Take lithium, they’ve gone all over the world snapping up lithium assets.
The West has made all of these huge commitments to Net Zero and they say they’re supportive of investment in the global mining sector, but that isn’t seen. There’s a real disconnect in the public sphere in terms of understanding that if you want green technologies and energy you need metal. The transition off fossil fuels essentially means the transition onto metals, I’m not sure that that’s a well-understood thematic, anywhere other than China.
Anthony Milewski:
It’s not that it’s understood, in China, it’s the government allocating the capital. It may be vis-à-vis a state-owned company, but in the West you have the market allocating the capital and until about six or eight months ago, by and large, why would you even look at our space when you could go invest in tech, have as much liquidity as you wanted and make a lot more money? And so it’s actually just not been attractive to a generalist investor who doesn’t understand the space.
Erez Ichilov:
There is a paradox here. If you look at the supply chain upstream, midstream to downstream, usually under the fear of constraints, you’d expect the constraint to be in the link in the chain that’s most capital intense, that’s most technology intense, etc.
Everyone’s happy to announce gigafactories galore but when you go backwards and try to figure out where are these materials going to come from, and it takes 15 years to get a mine licensed, if you ever can do it. And there’s a huge, trust issue between the extractive industries and the public, especially the younger generation, which is something that we need to work on.
Amanda Van Dyke:
Things are slowly changing. With the Inflation Reduction Act, the new UK Critical Minerals legislation, and the European Critical Minerals legislation, the government has slowly figured it out. Like, oh my goodness, there is such a thing as critical minerals and the energy transition’s not possible without it. They have passed the ball. It’s been a very bad pass in saying we’ll let private investors deal with it. That won’t work forever.
Anthony Milewski:
You could own CAMICO, Freeport, or BHP, but it’s pretty darn hard for you to own a US$300M micro-cap and this cycle. And I think if we’re talking about being funded through the western capital markets, we’re really talking about that cycle, which was materially altered after the ’08, ’09 financial crisis when hedge funds restructured and really have an aversion towards illiquid semi-private investments.
Erez Ichilov:
You’re also seeing it a bit more in exploration now. At least we’re seeing that in Canada and the U.S. We are seeing quite a few explorers in lithium and in nickel funded at least for their next drilling campaign. So maybe with early stage investors, there’s a bit going on there. But with the royalty and the streams and the debt funds become the flavour of the day. We tried as you know, in Traxys, and Pallinghurst Traxys, to get a few of those going. So, we invested in Nemaska Lithium, Nouveau Monde Graphite, Cala Nickel, and Li-Cycle for recycling. But you need 100 of those type of investments and you actually probably need funds of funds and not just the typical institutional investors to log in as LPs. It’s just not enough.
Anthony Milewski:
It’s a structural thing though. There’s only so much money in the pie and these structured royalty funds have sucked all that money out of the system. And so Amanda, you might know that’s better than I do these days, but if you want to go raise US$200M for a long short commodities metals fund, it’s going to be exceptionally hard to do.
Amanda Van Dyke:
I think you’re both right. But I do think this is an evolution and the market is changing. Our fund was specifically set up to write those checks and part of our issues, and we have found that there’s a pool of capital. So, the big western private capital comes from pension funds, endowment funds, that’s where all this money is coming from. That’s who private equity funds go to.
Anthony Milewski:
The other part about private equities is, historically, it’s leveraged. You would be crazy to leverage up an investment that’s not going to produce for eight years. And then the other thing is the way private equity works for the audience, is it’s this mark to market return profile and when it’s private they can market within a range. There’s a level 1, 2, 3 marking process, at least if it’s a U.S. registered fund.
But if it’s publicly traded, you’re marked at the market and let’s be clear, these things can trade up to a dollar down to a nickel on US$50,000 of volume. And that creates a huge performance looking issue for these companies because then they can no longer market privately, they have to market at the public mark.
Amanda Van Dyke:
I don’t think I agree. I don’t think junior mining belongs in a hedge fund, period. That’s not the right place for it. But because it’s public, it’s had trouble within private equity. If you’re going to fund these things, you do need private equity style investing, whether that comes from a private equity fund or anything else, but it is a hybrid model.
How do we combat the trust issue in the mining industry?
Erez Ichilov:
It has to do with transparency and educating the public. One thing that could help here in terms of long-term creation of trust is as much as possible integration between the products and renewable energy. If you can mine and process using as much renewable energy as possible, you’re demonstrating that there’s a cause and effect, everything is connected, the materials that you’re mining are the ones that will enable and it keeps going in an iterative process back and forth. And on top of that there’s all the other aspects, the social aspects of dealing with the communities and creating a park and bike routes and things like that around the mine. So as you plan it, you’re already thinking about the rehabilitation. So this is an example, and I’m sure there’s more, of a holistic approach that from the beginning, from the planning stage, makes choices that are just greener, that are more communal and social.
We need to do a lot more rehabilitation and reprocessing tailings, dumps, and dams type of projects. Primary processing wasn’t very efficient at the time. We have a lot of mountains, hills, and ponds that contain a lot of the materials that at the time were rejected because they were not the primary materials. A lot of the tin mines have lithium in the tailings and there’s a lot of other examples. Of course copper mines have cobalt in them.
So one of the things I think that we could do is across the industry and across the private equity as well, is try to focus as much as possible on these type of projects because you’re creating a visible, meaningful rehabilitation that hopefully is also economical and that’s where the governments can help.
Amanda Van Dyke:
I echo exactly what Erez is saying. We put in environmental and social action plans that are optimized for every investment that we make.
Sustainable development is a very big word, but it’s absolutely not that expensive. It’s possible and it can be transparently communicated to the market, both the general public and the investing market. I think the problem is it hasn’t been done well in the past and there’s a lack of trust. There’s a real perception out there that mining is dirty, in large part due to some high profile mistakes and often artisanal type mining and often unfair because the truth is, the majority of miners I know that I’ve known for the majority of my career do things really well.
Erez Ichilov:
This is also one of the causes of the delays of the long time it takes from discovery to commissioning of an upstream. A lot of it has to do with trust. We’re being gassed for much longer baselines than you really need because there’s always a suspicion that maybe you haven’t monitored it correctly, let’s do it for another year, for another six months, provide additional information. So you needed an honest broker to manage things. We still don’t really have that here. So, the onus just keeps growing and growing on the entrepreneurs, on the companies, that they’re doing things properly.
Do you think it makes an impact to the mining industry overall to have investors that have ESG requirements getting involved with companies?
Amanda Van Dyke:
So we run what we call a Sustainable Resources Fund. So we have a heavier bias on ESG and my experience is that the investment community is very aware of ESG but they don’t understand and can’t understand unless you’re a mining specialist. And green-washing has turned ESG into a box ticking exercise and that really doesn’t work. Sustainability is about a very holistic approach to how you operate businesses and I think that investors, they’re very sceptical about companies that say, “Oh I’m green, I’m ESG compliant.” I think like all of these things, it’s a show me story, do it right and give an example, be extremely transparent about it and you have to show them how it’s done.
What kind of role do you see for governments and other types of regulators playing to push domestic mining and investment and the broader supply chain domestically? Is it the role of the government to maintain this push? What role do investors play?
Anthony Milewski:
It just depends on who you want to control the industry. If you believe it’s important for the West to have operating mines, then probably you’re going to have to have Canada or the U.S. step in. But if you think that it’s going to be the free market that dictates it, I don’t see how you’re going to compete with the cost of capital out of Asia anytime soon. We’re in a decade now and of de-globalization and re-industrialization of America in particular, but also the West in general. And so you will see different forms of financing emerge, which are not necessarily market linked in order to build mines in Utah and Colorado and these places. Otherwise it just isn’t happening.
Amanda Van Dyke:
The Inflation Reduction Act makes reference to both critical mineral supply being important and how important helping to finance supply chains is. But I haven’t seen any sort of proof of what that’s going to look like. The truth is you need a lot of infrastructure to make supply chains work. An industrial infrastructure has been ignored in the West for decades. China started building up the industrial infrastructure for this 20 years ago and there’s a real harmony between state companies and private companies and the state in China. We don’t have that system here.
Erez Ichilov:
Although we’re not necessarily preaching for a command economy or being extremely red, it is very clear that just acting as the board of directors, which is the western approach of governance, is probably not going to be enough here. We need to identify the various bottlenecks which the invisible arm is not able to unclog on its own. Anthony was alluding to cost of capital for these projects. There is a bit of a plan for DOE loans now, that there are a couple of billions that are allocated to that and there’s actually a few of the advanced development stage lithium companies that have applied and are looking to hopefully be approved in the next few months in the U.S. But that’s a drop in the ocean if you actually look at the huge materials gap that we have here.
But we do want the government to on infrastructure level, provide support. We need to support infrastructure for charging for EVs, we need to support infrastructure for transmission, because if we’re going to electrify the transmission lines that were built during the new deal are probably not going to be enough in the U.S. And potentially as one of the things that we do see in these type of supply chains that the midstream, the conversion is a big bottleneck that’s pressing down and holding a glass ceiling over the upstream.
And as part of domesticating our supply chains we have to be creative, we have to find ways to unclog as many of these bottlenecks as possible so that wherever there’s a segment that the private sector can actually fund and develop on its own, if it’s properly motivated it can fit in. But now we do have a lot of fragmentation. There’s so many gigafactories and cell manufacturers announced, but so little, even if you sum up the sigma of all the planned and maybes, there’s a huge gap in terms of providing material that will go into all these machines and DSS batteries and so on.
We’ve also reached a point now where in theory if we could start producing only electric cars, we wouldn’t have any marketing issues whatsoever, even without the cash rebates and all the demand side type of support that we’re getting. So, the support should be to the supply side, not to the demand side anymore.
Amanda Van Dyke:
I think anyone who could buy an EV today would buy one, but the truth is you can’t. In most places, of course there’s year long wait for an e-vehicle and they’re going up way more than inflation in terms of cost because it’s not like smartphones. We had enough metal to make smartphones. We don’t have enough metal for the whole world to be driving NMC electric vehicles.
Everyone wants an EV, but we do not have enough metals to go into them. What’s the way forward?
Erez Ichilov:
There’s not one solution. First of all, LFP is back, which is something that will already take some of the pressure away from NMC. LFP is fantastic. It’s safer, it’s cheaper, no issues whatsoever. For the heavy lifting, we’ll probably have hydrogen fuel cells. Within all these technologies there’s a lot of incremental improvement. Over time we will also have more recycling so some of the materials will come back and to some extent at least offset the need for new materials. As much as possible we should be creating hybrid solutions like connecting renewables and mining. There is no one answer. It’s an approach.
