Legends Abridged - Paul Gait
Paul Gait is my favorite analyst. His ideas are well thought out and well presented, with direct implications to natural resource investors.
Transcripts are slightly edited for clarity. Please watch the original if you want all the "umm" and "sort of" and similar verbal artifacts.
September 20, 2024 Benchmark Interview
Coal & ESG
11:38 Do you think that's changing at all I mean we've recently seen Glen core say they're actually going to stick with their their coal assets that that investors now back them to to do that do you think we're seeing a change at all?
Yeah world's least surprising announcement from Glencore there. We've seen in the past focus on ESG metrics in a way has hampered investors from getting involved in the mining sector.
Do you think now after we've seen this big backlash against ESG that that's going to change at all?
It's a really interesting Dynamic isn't it? If I look back over the last few years there used to be the sense that ESG, I mean I hate to use the term sort of greenwashing or virtue signaling or or so on and so forth but in a certain sense that's kind of the sense you got right; you knew if we set these ambitions we set these targets and we make these statements that this will somehow translate into a lower cost of capital or higher multiple just by virtue of having made these statements and setting these ambitions and that in and of itself would lower the cost of capital that higher multiple would create a virtuous cycle.
Because of course then those companies wherein there is that lower cost of capital are more able to afford investment they will grow preferentially at a faster rate and so on and so forth and it will to create that virtuous cycle, but I think what we've seen is the fact that that's not really enough. Just having those intentions and making those statements doesn't actually translate into a lower cost of capital and doesn't translate into superior returns.
Investors probably quite rightly are going well look, hang on, you know something doesn't quite add up there. I think that recognition that it's just not as simple as putting out a glossy credentialing yourself in that space. That's not good enough and I think we're now probably moving to a sort of healthier part of the debate where you've actually got to embed sustainability in the actual performance of your business and that what you've got to make is a value case for the ESG as if it were credentials that you are seeking to claim. So that you can't say look what we have is value on one axis and ESG performance on another and that these are related you've really got to sort of show what is the value case for ESG now.
In the case of mining I think one of the great things about that is we've got a both a supply and a demand aspect wherein we can make that case on the demand side of the equation. It's just it's so manifestly obvious to me that without the raw materials that we supply not only as the sort of notions around sort of decarbonization transformation of the global economy all of that is just so much verbiage, but the basic sort of principle of just ending global poverty and raising people up you know from a standard of living that is frankly unacceptable in this day and age to one that is at least commensurate with that which we enjoy [in advanced developed countries]. That basic demand side solution is so profound for our industry versus so many others.
On the supply side as well you've also got that sort of story. Look at some of the regions we operate in. Who provides the infrastructure in those regions? The mining companies. Who pays the tax? The mining companies. Who creates the employment opportunities? The mining companies. Who creates the educational opportunities? [The mining companies.] Because when you are entrusting people with multi-million dollars of Capital Equipment that comes with a certain training, that comes with a certain skill set and base of raising the entire population. You go to Zambia, you go to the DRC, even in Latin America the importance of the mining industry as a Force for good is so profound.
At the same time when you think about what it is that a mining industry needs to unlock the resources of some of these countries what that actually creates that license to grow right it's precisely that sustainability skill set. Being able to go into a community really listen to them, not put your own or impose your own views on it but listen to what is it that you actually need. What are your concerns what are your issues how can we create a genuine win-win solution wherein we can provide what you need we can generate and create that investment that creates so much both local and positive externalities of what the mining industry does. When you get that right that's when you have the license to operate. That's when you can actually go into these countries and actually win the competition and the natural resources that these countries have.
Friedland & Dynamism
21:31 The West. The animal spirits that used to animate the industry are in short supply. You can pick and identify certain individuals wherein those animal spirits are still there. A classic, I mean not the one wishes to eulogize Robert Friedland here unnecessarily, right but look at an individual like that who has gone into the DRC. He has been there for an extended period of time and has put risk Capital at work and then has created something like Ivanhoe mining. That's the kind of dynamism, that's the kind of animus, that's the sort of genius that used to be so common in our industry.
Aug 27, 2024 Rock Stock Channel Interview
Supply Set The Long Term Price
15:54 This sort of perennial debate. Is it the demand side of the equation or is it the supply side of the equation that sort of sets the long run price? Now, of course, it's the interaction between those two, but as an Austrian economist, I'll always lean into this, the supply side structure that we really need to understand.
And that the demand side, it's always going to be there. It's always going to be volatile, and we're always going to have the cycle. But fundamentally, it's that long term structure that we're looking at. 10 years ago, the issue of grade decline, which, of course, we're all talking about today, was very, very visible.
I agree with him here that the marinal supply side cost structure over the long term is what will set the price.
Productivity is Deflationary and Geology is Inflationary
17:32 The deflationary price environment was more than able to offset the geological conditions of let's say falling head grade, that would otherwise act as an inflationary sort of factor. So in mining, we always have this interplay between productivity, long run productivity gains, which tend to be deflationary and the simple sort of ability to access geology, which tends to be inflationary because as mining engineers and good sort of capitalists, we always maximize NPV.
And what does that mean? It means bringing forward as best we can the fairest portion of the geology that we have in our reserve base and exploiting that preferentially. And that creates an inbuilt tendency that what comes later will almost invariably be higher cost or in some way more challenged than what we are accessing today.
No Such Thing as a Negative Balance of any Metal
24:50 It's very easy to draw supply demand balances that show us negative 2 million tons deficit by 2030 in coppper or whatever commodity. But of course, we know that there's no such thing as a negative balance of any metal, right? Supply and demand are just labels given to production, right? And what we're asking is, what price ensures enough copper production by 2030? What is the price point? That will ensure that production continues to grow. So we'll never actually have a deficit in that sense of the metal.
What we will actually have is a price line that sort of iteratively tests the cost structures of an industry, trying to work out where the lowest cost solution for the delivery of the demand that people have.
In how that can be met, whether or not that's through scrap metal and recycling, whether or not that's through reprocessing of tailings, novel leach solutions, brownfield developments of existing mines, and so on and so forth
Growth Requires Multiple Expansion
30:00 When mining companies trade on four, five, six times EBITDA, what you're really doing is putting a brake on growth, right? If you want to precipitate growth, if you want to create the kind of growth that you see, for example, in the tech sector, it's not the case that the multiple reflects the growth. It's the multiple causes the growth. It's what delivers the low cost supply of capital that has enabled them to create this proliferation of sort of entertainment services that surrounds us today. If we really wanted to fix the aggregate decarbonization, environmental, and frankly, also just standard of living challenge that faces the global economy today, we could do so.
You would do so by a reallocation of capital away from nonproductive to productive sources of economic activity, a rewriting of the entire sort of industrial sort of space. And that would liberate. And incentivize the capital to flow to those areas that would then create the supply in the materials that we need.
Which came first, the chicken or the egg? It's true that at 5x EBITDA it makes more sense to pay dividends and do share buybacks than to invest in expansion. But it's also true that you are trading at 5x EBITDA because of cyclical returns with multi-year periods of losses and through cycle low returns on capital. If you look at the mining royalty companies they trade at healthy multiples but have high margins, more profitable years, and generally are better businesses.
Capital & Wealth Creation
36:18 Just just to give some of these figures that that Howard was sort of touching on earlier in his conversation. If we look at Western world, what does it take to create wealth in the Western world, it takes capital. But what is that capital? The reality of it is not dollars and cents. That's just the symbol economy. The reality of it is tons of steel, copper, cement, and so on and so forth.
In order to create the standard of living that we enjoy in the West, we need 200 to 250 kilograms per person of copper embedded in that capital stock. Now that's what forms the basis of our standard of living. It generates the services that enable us to have the high levels of output that we enjoy. So 200 to 250 kilograms concentrated in a population of about a billion people in the developed world.
The global average is 60 kilograms of copper, and in the developing world, it's closer to 20 kilograms of copper. The delta, therefore is between 60 kilograms to, let's say 260 kilograms. 200 kilograms per person, on 10 billion people in the planet, right? You know, you can do the math, right? That's 2 billion, tons of copper. The sum total of all the copper that has ever been mined through human history. Right, is about 490 million tons, let's call it that, right? So hence that's where you get these kind of numbers being generated.
The longer term sort of demand for this material, right, is underpinned by the basic desire of people for their children to have a better standard of living than they themselves enjoyed. And that's before we add on the Internet of Things before we add on decarbonization before we add on all of the new Applications for copper that human ingenuity is capable of creating.
This is Jevons paradox. Jevons was writing in the sort of 19th century or whenever it was about the nature of economic growth and material intensity that sits behind it and as he pointed out then. Just as we decrease the material intensity of existing applications Jevons new applications are always being unlocked by that process and think about, data centers and the copper intensity of data centers, let alone sort of artificial intelligence data centers, the amount of energy they consume and the most efficient mechanism for creating those services is through materials like copper.
Buy Vs Build
46:03 I think two things there. The build versus buy decision, that's a function of two things. Valuations in the mining industry versus capital intensity. In other words, you're looking at the implied capital intensity of existing supply versus the capital intensity of new build. Those two things are mismatched.
You could not rebuild Anglo American's copper business for the market cap of Anglo American. You've got this tension between what is embedded in the equity valuations and what is embedded in forward looking capital intensity.
You've got the price of the commodity itself which would sort of suggest the nature of the imbalances that you're going to be seeing going forward and what that therefore implies about the value of existing supply versus future supply, bearing in mind the sort of lead times that it takes to develop these mines.
That all favors the buy over the build decision. Of course, from a macroeconomic perspective all that generates is inflation. All it generates is price inflation because the actual supply, the actual new productive capacity simply isn't there.
When we then sort of think about, what does that imply for prices? Of course, the simple answer is higher, right? When we look then at the kind of shocks that are created and that will be needed in order to create those animal spirits and the resurgence of genuine risk on activity.
I think that's kind of where the industry often struggles because the temptation is always to think about our flat, long term, real, commodity price expectations. But we all know that's not actually the way the market works. The market works in the way that we've just seen in lithium. The lithium price goes from whatever it was, I can't remember, $8, 000 to $64, 000 a ton creates this enormous wave of money that is then articulated and trying to articulate itself in new supply. And at the same time, it creates the risk appetite for investors to say, I actually want you to deploy that money in new sources of supply other than just in say, for example, buybacks or dividends.
So you need both of those factors at work. I think that that's what we are going to see. We are going to see a continuation of volatility. I think the volatility is going to be higher. And I think the trend line around which that volatility will fluctuate is also going to be rising.
October 6 2023 Anglo American Presentation
June 2023 Anglo American Presentation
September 2019
https://s-i-a.ch/wp-content/uploads/dlm_uploads/2019/09/03-Metals-and-Mining-Bernstein_Paul-Gait.pdf
Natural Resources Forum June 2019
https://naturalresourcesforum.com/resources/NRF-Mining-June-2019-2.pdf
Bernstein | Natural Resources Forum
The Natural Resources Forum is an independent invitation only forum created specifically for professional investors and industry advisers
Slides 1-8 establish the tight relationship between the growth in tons of steel and copper to GDP. We need more metal to eliminate poverty and continue economic growth.
Slides 9-27 largely talk about productivity gains in mining and deep diving into what drove them.
He makes a salient case that a lot of the things that drove productivity gains in mining are now played out. Electrification, equipment scale, SXEW. He ends by showing that miners are actually more profitable in years of rising costs and less profitable in years of falling costs.
If he's right it's a great time to invest in miners and you want to invest not in the longer tail of projects but in the larger high capital major end of projects.
I think there are some technologies that have the potential to continue to continue to increase productivity, so I'll mention them here.
Heap-leach of low grade copper sulfides, mainly low grade chalcopyrite. SXEW made heap-leach of copper oxides more economic to the point that much of the higher quality copper oxides have been extracted. The question is can the same be done for sulfides? So far the answer is no. Jetty & Nuton haven't gotten much traction. Bio-leaching is expensive and finickey. BHP has invested heaviliy in developer new technologies but so far they haven't been game changing. But this is definately a watch this space to see if things change area.
Autonomy. It turns out a lot of the activities at a mine are repetitive. There's a large movement to automate a lot of the equipment, with a smaller number of remote operators able to take over when needed. Ten haul truck drivers might get replaced by one remote operator and some upgraded equipment for example.
Solar + storage for remote sites. Traditionally remote sites used diesel generators to generate electricity at a high cost. Now companies can install a large lithium battery facility and a solar farm and have inexpensive renewable power on site.
So there is still deflationary innovation at work. But the continued falling head grade is an inflationary backdrop and it's quite possible that the rate of innovation can no longer keep up.
June 2018 Natural Resources Forum
Bernstein | Natural Resources Forum
The Natural Resources Forum is an independent invitation only forum created specifically for professional investors and industry advisers
https://naturalresourcesforum.com/resources/bernstein-paul-gait-slides.pdf