The world of strategic metals and their influence on decarbonisation

I’m Sam Slator from FundCalibre, and today I’ve been joined by Mark Smith and Georges Lequime, co-managers of the [TB] Amati Strategic Metals fund. Thank you for joining us today.

[00:10] Mark Smith (MS):  Hi, Sam. Thanks a lot for having us.

Perhaps we could start with a quick explanation about what strategic metals actually are. What do you mean by strategic?

[00:22] MS: Sam, when we launched the fund, we wanted to encompass a fund which invests in these critical metals. And for us, a strategic metal is a metal that’s involved in the global decarbonisation of the planet. Electric vehicles, renewable energy, all require these critical metals. And also, we’ve got a precious metals element in the fund and that’s strategic for political risk, insurance and / or a counter to global inflation. So, they’re really the two bookends to the fund.

And if they could be of strategic importance, is there ever a danger that they could be used as a political toy like we’ve seen with oil and gas more recently?

[01:05] MS: Yeah, exactly. I mean, this is playing out front and centre at the moment, and what we’ve seen is an emergence of what we call resource nationalism. China has got a stranglehold on the processing of these raw materials into finished, faction metal products. and the west is playing catch up because we’ve effectively sat on the internal combustion engine for 50, 60 years. Now we’re seeing the emergence of the US with the Inflation Reduction Act. They’ve put 485 billion dollars to work, to try and encourage getting an integrated supply chain in country in the Americas. The EU are doing the same with their Critical Raw Materials Act. And this is really a way to counter the Chinese dominance in the

critical metals market. So, it’s going to be a very interesting sector, and how this unfolds going forward.

So, each of these metals has its own cycle. So, could you perhaps expand on that a bit? Does it mean that this investment fund will do well in any economic environment? Is it sort of an evergreen holding?

[02:13] Georges Lequime (GL): Yes, Sam, as Mark said we bookend the fund with the precious metal side. So, if you look, each metal has its own supply and demand characteristics. So, it’s a situation of when supply is going to come on – there’s a longer lead time for certain metals – and right now, there’s four main themes taking place around the world. There’s the energy transition to green energy. There’s the move to electric vehicles, so, that’s the battery technology; the lithium gets used, the cobalt gets used, the graphite. And then you’ve also got precious metals, as Mark mentioned earlier. And then there are those metals that are very sensitive to global economic growth – your traditional metals like copper and aluminum. 

So, as in times where you’ve got very, very strong global growth, copper [and] aluminum will do really well and vice versa. So, precious metals tend to do well when we have ‘risk off’, and the market is looking for a safe haven asset. So, they tend to move in different cycles. And that’s where we are trying to … we set the fund up, really [as] an evergreen fund so we can move our weighting out of certain metals and increase our weighting towards those who are starting to get back into favour.

And maybe one of the things you’ve mentioned there is electric vehicles. It’s a theme for the fund and something our viewers are going to be familiar with. Could you talk about that a little bit more? Please?

[03:53] MS: Yes Sam, it’s very exciting, an emerging market, and it’s very metal intense. Electric vehicles have really grown. In 2020, there was about 2 million vehicles produced and sold. That’s jumped to 10 million in ‘22, and it’s projected to go to over 73 million vehicles by 2040 – that’s a 30% annual growth. And what that means is, they’re very metal intensive. 

Just giving you an example, if you look at the average internal combustion engine vehicle, there’s about 34 kilograms of metal in that vehicle. If you look at the similar average electric vehicle, there’s 207 kilos of metal, and we’re talking lithium, we’re talking graphite, we’re talking nickel, we’re talking copper, we’re talking cobalt, we’re talking manganese. These are all areas that the fund can invest in. 

And what we see is that as the planet tries to decarbonise its energy source and battery storage and electric vehicle transportation increases, we could see probably 21-fold increase in demand for lithium from current production levels. And this is one of the reasons why we launched the fund, is we’ve got this demand wave coming from electric vehicles, but the mining industry has been so slow to catch up with reality on the demand side. And they’re very slow on the supply side of this equation. So, that means higher metal prices for longer, and that means the fund invests in the miners, and the equities should go very well over the next 10 to 15 years. 

And this sector’s not going to go away. And, you know, Europe’s going to start the banning production of internal combustion engines in 2030. Now, when that fleet rolls out globally, we could see over a trillion dollars of metal demand annually needed to put into these cars. It’s big numbers and it’s an exciting sector to invest in.

And what other growth opportunities are there in this area?

[06:01] GL: We think that there’s two other very interesting developments and growth opportunities. One is uranium. Now, currently 10% of the world’s energy comes from nuclear energy, nuclear power. And we’ve seen with the energy crisis that we are facing and the move to decarbonise the planet

and the energy transition to green metals, and now uranium is being seen as a green metal. So, even if we get the energy growth that we normally get through population growth over the next decade with a slight increase maybe in nuclear energy, we are going to get a situation where the demand for uranium is going increase significantly, at the same time as we don’t see the possibility for a response from the production of uranium to meet the increased demand.

And what’s also happening is you’re getting the bifurcation of the world between the east and the west, and right now the bulk of the uranium production sits in the east, and the demand is primarily in the west and is growing in the east. So, you’re getting these forces at play, which could be quite an interesting sector over the next couple of years. 

The other one is silver as well, because silver is sort of your forgotten metal. It’s primarily used [for] industrial uses, and about 10% is used in solar panels. And this is a very high growth sector. And we think that this could put upward pressure on the silver market in the coming years.

Some of the, forgive my ignorance on this, but some of these metals, presumably they’re finite Resources? Is there enough considering how much we actually need? And can you actually recycle any of these metals eventually if we needed to?

[07:57] MS: Yeah. So, all the metals, I mean, ultimately, they’re finite. What will happen is the economics and mining come to play. So, the finality of the source is dictated by the metal price.

These metals can be extracted, but it’s at cost. What we are going to need … the demand is such great for lithium – 21 x, nickel – 2 x current production, and 70% of the nickel is going in stainless steel; this is just demand from electric vehicles. 4 x current rare earth are needed in the magnets. 

So, what we are going to have is, once these batteries get fabricated and get into the cars, within a 10-year cycle, they’ll start to be returned and recycled. So, we’re going to need a pool from the miners to actually mine raw materials, but also, we are going to have to use a very efficient closed-loop recycling. So, currently aluminum’s the best closed loop recycling market in the world, about 90, 95% efficient, copper’s about 60 [per cent efficient]. With all these other metals coming on stream, and the prices remaining high, it will encourage recycling, but that will come in 10 years’ time. But if we are going to meet the next zero pledge by 2050, the miners are going to have to step up. 

You know, to give you an example here, the EV [electric vehicle] sector alone since 2018 when it was first got into the public domain in a material way, spent about 265 billion dollars, building out EV plants and fabrication plants and assembly plants. The battery manufacturers in China, Korea, a little bit in Europe, they spent about 125 billion [dollars], yet the extraction of the raw materials is only 40 billion in the last six years. So, that’s where the weakness in the supply chain is, it’s in the raw materials. And that’s why the Amati Strategic Metals fund is just focused on investing in the miners, because that’s the point where we think we can make a good return and catch up on the theme here.

And finally, perhaps you could let us know why an investor should consider this fund or asset class this ISA season?

[10:12] GL: As Mark mentioned, we’ve just gone through two to three decades of underinvestment in the production and extraction of metals, just at the same time as we are moving towards more energy intensive industries over the next coming decades with the decarbonisation, with the move to electric vehicles. So, this is where you’ve got a mismatch between growing supply and demand – growing demand, sorry, – and supply that’s battling to catch up. And we think that this will keep metal prices high for quite a while, while we recapitalise. So, for the next decade, we think we are going to get a growth in the production of these metals just to meet increased demand. And that’s really, as an investor, you want to be invested in the recapitalisation of any industry. And I think this is the start of the recapitalisation that we’re seeing over the last year or two, but we think it’s going to happen for the next eight years.

[11:17] MS: George, also, I’d add, I mean, as fund managers, we’ve got a dual expertise in terms of a technical industry background and a financial pedigree. And investing in the resource sectors is challenging.

Our fund is actively managed, and we get out on site and we look for these investments, and it’s important to stress, I think, that you can make money, you can get an investment gain through the drill bit. So, if we can find a company with an exciting geological expiration play and they discover a material deposit, they can make some money independent of the metal price. So, it’s about getting value through the drill bit, and we provide that as an actively managed fund here.

That was really interesting. Thank you. It’s a fascinating subject and one that I’m personally not very familiar with, so, thank you. And if you’d like to find out more about the Amati Strategic Metals fund, please go to FundCalibre.com.