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Battery Metals with Bloor Street Capital

Battery Metals with Bloor Street Capital

Bloor Street Capital's Battery Metals Conference featured John Ciampaglia, CEO of Sprott Asset Management, interviewed by Margot Rubin. The entire conference is available here.

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Video Transcript

Margot Rubin: John, thank you for joining us today. Now, governments worldwide are adopting net zero policies that have created opportunities for investors to shift away from fossil fuels. The adoption of electric vehicles continues accelerating, driving demand for many metals, including lithium. Now, Sprott offers products for investors to capitalize on this energy transition trend. Can you tell us a bit about them?

John Ciampaglia: In the last two and a half years, we’ve noticed there is a growing trend amongst investors globally around playing this long-term thematic around energy transition, and the energy transition in our minds is really about generating cleaner energy from different technologies, it's about the transmission of that energy and electrification, and lastly, it's about energy storage, which is just another way of saying batteries, predominantly for electric vehicles.

The world is focused on generating cleaner energy to decarbonize economies and lower greenhouse gas emissions, hoping to achieve net zero targets in 2050 designed to bring the Earth's temperature down. When we talk to investors, it's very clear they're starting to understand that this transition will be incredibly mineral-intense, so it's very different from fossil fuel-based systems, which are more about liquids and gasses. The energy transition will require a lot of minerals, and many of these minerals are critical in nature because they're relatively new in their development. I think lithium is the greatest example. It's a very nascent industry, and before the adoption of electric vehicles, we didn't use lithium for many things. Lithium is the one common element across every single battery chemistry for electric vehicles. As a result, with the expected adoption of EVs over the coming decades, we will need substantially more lithium. There is a real lithium race going on right now to secure the necessary supplies so that it doesn't become a bottleneck in the supply chain.

We think it's a multi-decade transition. It's not replacing fossil fuels anytime soon, but I think the world is increasingly focused on investing in cleaner technologies as it adds more energy capacity.

Margot Rubin: You have three different products: the Sprott Energy Transition Materials ETF, the Sprott Lithium Miners ETF and the Sprott Junior Miners Copper ETF. Can you tell me about the interest among investors in these products and maybe the flows you're seeing into these products?

John Ciampaglia: I think ETFs are very popular vehicles for investors to get exposure to different thematics, and I think the reason is pretty simple. For the average investor, I think it's overwhelming for them to sit down and think about, okay, I like the long-term prospects of this particular metal. How do I go about investing in it? Do I pick one or two companies, or do I try to get exposure to the physical commodity if I can, or do I buy a basket of different companies, you know, all packaged up for me within an ETF, which is very easy to buy, low cost of ownership, very transparent? That's the path we've taken with several of our recent product offerings. We've taken our knowledge and expertise in metals and mining, and we've worked with different service providers, one of them being Nasdaq, their index group, where we work on developing the investment universe, which is very important.

What we find with many investors is they want pure-play exposure to a thematic. It's very hard for them sometimes to get it because with a lot of these diversified mining companies, for example, you might think you're getting exposure, let's say, to copper, but in reality, most of the revenue at that company is coming from iron ore or coal. We look company by company to determine its role in this energy transition thematic. What exposures does it provide to investors?

We start with the investment universe, defining that to become as pure play as possible. Second, we're constantly scanning the landscape for new companies, spin-offs, and IPOs. Companies are changing their business mix and their strategies all the time, so when we develop our indexes, it's not a static process. Every six months, we look at the entire investment universe from scratch, trying to figure out how these companies have changed and which have come and gone. We rebalance the index with new constituents, so it's a very dynamic process. I think our expertise as active managers, integrating that into a passive approach, and making it dynamic over time, is what investors are interested in from our suite of products.

Margot Rubin: For sure, and you have a lot of different metals to choose from, but I want to focus on copper. A traditional gas car uses about 50 pounds of copper, but an electric vehicle uses 150 pounds, and that's helped copper hang in relatively well this year. Sprott, as you said, has an ETF focused on copper. Can you walk us through that?

John Ciampaglia: I think copper will play a large role in the energy transition for two reasons. One, it's the backbone of electrification, so if the world wants to continue to electrify different daily things that we use in our lives or industrial processes, transportation, copper is going to be a key part of energy generation as well as transportation, so copper I think is going to be the real backbone or workhorse of the energy transition.

We’ve been mining copper for thousands of years. We understand copper. It's a very large market, almost $200 billion a year. But it needs to grow substantially over the next 20 years. We need to grow copper production somewhere between, let's say, 50% to 80%, which is a daunting task given how big the industry already is. What we've done at Sprott is design the Sprott Junior Copper Miners ETF. The ticker on that is COPJ, and it's designed to give you exposure to a broad basket of companies that are smaller producers, emerging developers and exploration companies.

There's also been a lot of M&A [merger and acquisition] activity in the space, and the reason for that is everyone is viewing copper as a strategic mineral now. Everything from the big, diversified mining companies down to the traditional gold companies like Barrick Gold, which have been very open about their view of copper as a strategic metal for the coming decade, so we've seen a lot of M&A activity in that space. I think the majors, if they find high-quality projects in good jurisdictions, are very keen to buy those projects and ultimately build them or expand them rather than continue to develop new projects from scratch, given the very long lead times for some of these projects. It's a very interesting way to gain exposure to the space.

Margot Rubin: Nuclear energy is another component of the energy transition movement. According to the World Nuclear Association, 440 nuclear reactors are operating globally, with another 60 under construction, and this is driving demand for uranium. Sprott’s most successful energy transition project is the Sprott Physical Uranium Trust product. A lot of retail investors call you specifically for uranium. Why do you think that fund has been so successful?

John Ciampaglia: I will start by saying we embrace the idea that nuclear energy is part of the energy transition. We felt that way from day one. It's very reassuring that a number of governments around the world have publicly acknowledged a similar policy in the last couple of years, as they are shifting back to nuclear energy for a few reasons. It provides a very low carbon footprint, incredibly reliable baseload power and energy security. Unfortunately, in the last year and a half, we've learned what happens when a country does not have a secure supply of energy; it is at the mercy of sometimes aggressive nations and weaponization of commodities.

The narrative, perspective and public support for nuclear energy have changed enormously since the United Nations Climate Change Conference in 2021. That is attracting a lot of interest in uranium because it is the primary fuel that will power not just the existing fleet of nuclear reactors you mentioned, but another 150 reactors in different stages of construction and or planning.

We've got a very constructive long-term demand profile for uranium. Against that, we have a very large looming deficit of primary production of uranium because, for so many years, we had prices so low that companies were not incentivized to produce uranium. They weren't incentivized to develop their projects. They had no way of financing them, so we've lost a lot of time with many new projects.

The industry right now is in the process of resetting itself. A big part of that reset is higher prices, which have allowed a lot of the mines to come back online, so we've seen mines in Canada, Africa, Australia, and the U.S. slowly start to come back online, which is a great outcome because it's helping a lot of these uranium mining companies. We don't think we're done, and we think that even though the price has gone from the high 20s per pound to currently about $74 a pound, we still don't have incentive pricing to build some of the key new mines that are scheduled to be built. We believe in this cycle.

Investors are attracted to that supply-demand dynamic, and we think that even though the price has more than doubled in the last year and a half, the price still needs to reach higher levels to deal with this supply deficit that is going to widen around 2030.

Margot Rubin: We've seen a lot of wide divergence in performance this year between various metals, as we talked about. Uranium is in a bull market. But then, if you look at lithium, it's down about 60%. What do you think is driving this divergence in the market, or what's your view on that?

John Ciampaglia: We have a very broad basket of different minerals and metals that are playing a role in this transition, and we've built our product suite to allow investors to pick and choose depending on where we are in the cycle and every commodity has a different supply and demand fundamentals and is at a different spot in its cycle. Lithium, for example, in 2021 and 2022, was the best-performing commodity in the world by far. It went parabolic. The price went from about $20,000 a metric tonne to $80,000 a metric tonne. I think most market participants, including ourselves, did not feel that was sustainable because if you look at the industry's cost structure, it's substantially lower than 80,000. A few years ago, lithium was at $15,000 a metric tonne.

There was a short-term bottleneck that created incredible pricing pressure on lithium. This year, we've had a sharp reversal. As you mentioned, lithium price is down substantially this year. I think that's a function of it being a nascent industry. It's still trying to find its way. It's still maturing.

When you think about the copper industry, which has been operating for thousands of years, the lithium industry is very new. It's still developing, and I think that makes its supply profile very lumpy. The demand side is also lumpy because EVs, while they've been growing at 35, and 40% in the last few years, have slowed a little bit this year. Part of that is because the general economy has been softer worldwide. Interest rates have gone up a lot. When you think about the cost of car ownership, financing is a key part, so you have seen a moderation in demand for EVs.

Now, are we going to grow still at 25 or 30%? Yeah, probably. It's not 40%, so that expectation has taken some of the energy out of the lithium price. But I think there are great opportunities in lithium space in the longer term because of all the different minerals we look at. It's the one that is going to have to grow the fastest in terms of new greenfield production.

The M&A activity in the site and the sector has been very good. It reinforces to us that everyone is trying to get strategically positioned to secure the best assets, so they've got very robust pipelines of future production that they can sell to the OEMs; so yes, it's been bumpy, not unexpected given the meteoric rise of lithium in 21 and 22. It's going to find its footing. I think it's basing here, and the price is still at a good level that the lithium companies can remain very profitable.

Margot Rubin: Interesting. There are a lot of geopolitical considerations to look out for when it comes to the energy transition. But right now, you are marketing your investment products to clients across North America and Europe. Is the energy transition a major topic that they're bringing up? What questions are they asking you?

John Ciampaglia: We’ve been very busy for the last two years talking about this story, and we started off with uranium. It was the beachhead for us in this broader category, and as we were talking to different funds, they were mostly in Europe. We were talking about uranium to funds, and I would ask them, what kind of fund do you run? Tell me a little about your strategy, and we would increasingly find we were stumbling into funds or sleeves or pods at hedge funds or whatever that were focused on energy transition.

Sometimes, they came from traditional energy backgrounds, meaning they used to be an oil and gas fund or traditional energy or how to utility or infrastructure background, and they were starting to broaden their area of expertise to include not just uranium but a whole host of different renewable energy technologies as well as energy transition technologies and minerals. It started there, and it got us thinking that this is much bigger than we originally thought. And I think a lot of investors are one, they're looking at those signals and asking themselves, okay, if the world is starting to shift from a fossil fuel-based system to a system that will be focused on cleaner technologies. It's going to play out for the coming decades, this isn't a one or two-year fad; this is a multi-decade investment.

How do I take advantage of this? We think more and more investors are starting to understand energy systems, how energy is produced, all the critical minerals that we rely on for many of these technologies, and many investors are doing a lot of research in this space. Historically, they were invested downstream, so they were investing, as far as 15, or 20 years ago, in solar and solar companies, manufacturing, or wind. But now they're thinking about the upstream opportunity. Okay, if we build all this downstream capacity, what do we need upstream? And the upstream opportunity is compelling because, at the end of the day, you need these minerals to build all of this capacity downstream.

I would say there's been a shift from downstream to upstream investments, and that's where a lot of these discussions go around: all the critical minerals we will require.

I would also say that we're seeing a broadening of interest, particularly this year, where more generalist investors are reaching out to us interested in some of these thematics. This is just too hard to ignore. They're just becoming more and more mainstream. They're in the media every day. If you think about five years ago, owning an electric car was for a very privileged few, and now you've got electric cars where the price points are actually at the same points as gasoline engine cars, so the accessibility for electric car has changed dramatically.

It used to take us years to build a million electric cars. Now, we're building a million a year and seeing an acceleration. I think it's becoming top of mind, and younger generations of investors are particularly interested in this, as they seem to be much more focused on climate change issues. They want to be part of the solution.

We've seen a younger group of investors engaged with us. We've seen a broader group of investors, from specialty type of funds to more generalist funds, and because some of these industries and companies are still fairly small, we think we're still at the very early stages of this cycle. There are going to be a lot of companies that are going to be big winners. There's going to be companies that are going to be losers. It's going to be volatile, and I think a lot of investors, because of that, are opting to buy baskets of these stocks and riding with thematic, and I think that's where some of our ETFs have come into play.

Margot Rubin: Absolutely, and given the fact that we're still in the early days of this cycle, do you think you will be launching more products within the energy transition space?

John Ciampaglia: We're constantly looking at trends and how new technologies are being deployed. We're looking at competitor offerings in the marketplace to see if they are doing a good job of providing exposure to these minerals. We often find that they're constructed by generalist indexing shops and ETF sponsors that don't have any real expertise in metals and mining. It's very easy for us to come up with something that we believe is more compelling because it's either giving you more pure-play exposure, or a more thoughtful way to index some of these strategies.

We're constantly looking on the horizon. One of the themes for us in the next 12 months will be copper. We have a very long-term bullish view on copper. It's a very big market. I think institutional investors are going to gravitate to copper because it's very large, established, and liquid, unlike some of these other metals, which are still earlier stage in their development and are more volatile as a result. I think copper is more understood by institutional investors, so we have a few things in our pipeline related to copper specifically.

Margot Rubin: We look forward to seeing that come out of the pipeline. John, thank you so much for spending time with us today and sharing your insights.

John Ciampaglia: Thank you for having me. Nice to see you again.

 

 

1 An offtake agreement is a binding contract between a company that produces a particular resource and a company that needs to buy that resource. Offtake agreements are particularly crucial for companies focused on critical and industrial metals, given that many of these metals are not sold on the open market and that makes it harder for producers to offload them.
2 The Urenco Group is a British-German-Dutch nuclear fuel consortium operating several uranium enrichment plants in Germany, the Netherlands, United States and United Kingdom.
John Ciampaglia
John Ciampaglia, CFA, FCSI
CEO, Sprott Asset Management
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