Future Facing Metals, Both Precious and Critical
December 12, 2023 | (70 mins 11 secs)
The global energy transition is changing the mining industry. Miners are shifting focus from a China-led commodity supercycle focused on industrialization and urbanization to a new cycle driven by clean energy and renewable energy technologies. Forward facing metals play a significant role in this dynamic. We uncover what are likely to be attractive investment opportunities in gold, silver, uranium, lithium, copper and more.
- Why are gold and silver future facing metals? Future facing metals are typically characterized by their scarcity, unique properties, and potential for innovation. Gold and silver have all three.
- Green tech has emerged as a primary demand vector for silver — including solar panel technology, electric vehicles and 5G cellular service.
- Energy sovereignty and security of commodity supplies are transforming U.S. industry as it expands its energy focus to include critical minerals, along with oil and fossil fuels.
- The West is moving to reshore and friendshore critical mineral supplies, speed up the development of mineral resources closer to home and bolster its domestic mining industry.
- We take a fresh look at energy sector allocations in portfolios.
Managing Partner, Sprott Inc. and Senior Portfolio Manager
Sprott Asset Management USA, Inc.
Director, ETF Product Management
Sprott Asset Management
Senior Managing Partner, Global Sales
Sprott Asset Management
Millissa Allen, RIA Database: Cover Slide
Ed Coyne: Slides 2-4, Introduction
Edward Coyne: Thank you for joining our last webcast of the year today. I'm pleased to welcome both Ryan McIntyre and Steve Schoffstall from Sprott.
Ryan serves as a Managing Partner at Sprott, Inc., Chief Executive Officer of Sprott Family Office, and Senior Portfolio Manager at Sprott Asset Management. Ryan brings over 20 years of experience in the natural resources sector and was most recently the President of the gold royalty company Maverick Metals.
Before Maverick, Ryan spent over 11 years with Tocqueville Asset Management as a Co-Portfolio Manager of Tocqueville Gold Strategy. Ryan holds a Bachelor of Commerce with distinction, majoring in Finance from Dalhousie University, and an MBA from Yale School of Management. He also holds a CFA designation.
I'm also pleased to have Steve join us. Steve joined Sprott Asset Management as Director of ETF Product Management in April of 2022 and has more than 18 years of experience in the ETF industry.
Steve leads the ETF Product Management team in creating, launching, and ongoing support of Sprott U.S.-listed ETFs.
Before joining Sprott, Steve was with ProShares Advisors as a Senior ETF Product Manager. Before joining ProShares, Steve held various positions, including in ETFs at Vanguard.
Steve earned his Bachelor of Science in Finance and his MBA from Penn State University.
For today's webcast, I've asked Steve and Ryan to join us to talk about topics that are very specific, near, and dear to our hearts. I've asked Ryan to discuss precious metals, focusing on gold and silver. And then we'll turn to Steve to talk about the case for critical minerals, whether it's degeneration, transmission and storage and the overall highlight of our full suite of energy transition ETFs.
Then, before we go to Q&A, I'll briefly talk about how to think about precious metals and energy transition materials in your portfolio creation.
For our newer guests on today's webcast unfamiliar with Sprott, Sprott is a global leader in precious metals and energy transition investments. At Sprott, we offer a full suite of solutions in precious metals and energy transition materials. With over $25 billion in assets, Sprott is a publicly listed company that trades on both the New York Stock Exchange and the Toronto Stock Exchange under the ticker symbol SII.
Within our $25 billion in assets, we have over $20 billion in exchange-listed products, such as our physical bullion trust, which gives you direct exposure to physical gold, silver, platinum, and palladium, as well as our physical uranium trust, providing direct exposure to physical uranium.
Within our exchange-listed products, we also have a full suite of energy transition ETFs and gold mining ETFs, focusing on senior large-cap and junior small-cap mining stocks.
Our $2-plus billion in managed equities comprises our flagship U.S. Gold Mutual Fund, Closed End Valued Fund, Energy Transition Critical Mineral Strategy, and Sprott Hathaway Special Situations Strategy.
And lastly, within our Private Strategies, with over $2.5 billion in assets, we offer a full suite of bespoke credit investments to mining and resource companies.
So now that we've talked a bit about what we're going to cover today, as well as the firm itself, at this time, I'd like to turn the webcast over to Ryan McIntyre to focus on precious metals by highlighting both gold and silver. Ryan?
Ryan McIntyre: Slides 5-26, Precious Metals: Gold & Silver
Ryan McIntyre: Excellent. Thank you for the introduction, Ed.
You're probably wondering why gold and silver are featured as future-facing metals. So, future-facing metals are typically characterized by their scarcity, unique properties, and potential for innovation, and gold and silver have all three. Gold and silver, two of the most coveted precious metals, are renowned for their scarcity and finite supply, significantly contributing to their enduring value. The rarity of these metals stems from the fact that they cannot be artificially created and are only found in limited quantities within the Earth's crust. This scarcity is exacerbated by the challenging and often costly mining process, which limits the rate at which these metals can be extracted and brought into the global market. Additionally, the finite nature of gold and silver reserves means a cap on the total number that can ever be mined, making them inherently valuable.
Gold's unique properties have established it as a globally recognized store of value for thousands of years, a testament to its enduring appeal across various cultures and economies. It is viewed as an inflation hedge, often retaining its value or even appreciating it during times of economic instability and exhibiting a low correlation with other assets like stocks and bonds.
Beyond its financial attributes, gold's physical properties are equally remarkable. It boasts exceptional conductivity, making it indispensable in some electronics, and is highly resistant to corrosion. Additionally, gold's malleability allows it to be easily worked into intricate designs in jewelry and industrial applications, further enhancing its practical and aesthetic value.
Silver's unique properties are similar to gold's, but it has more of a balance between industrial and monetary functions, whereas gold is almost uniquely viewed as a monetary metal. From a monetary standpoint, silver is also viewed as an inflation hedge and a safe-haven asset, and it exhibits a low correlation with other asset classes.
But silver also has exceptional physical and chemical properties, making it a highly versatile and valuable metal, particularly in today's world. Many don't know this, but it is the best electrical conductor of all metals. This characteristic makes it indispensable in numerous electronic and electrical applications, from conductors and contacts to high-tech devices. Its conductivity is paired with remarkable malleability and ductility, allowing silver to be easily worked into thin sheets or drawn into fine wire. It is ideal for intricate designs in jewelry and industrial components.
Silver also possesses potent antibacterial properties, harnessed in medical and hygienic applications, ranging from wound dressings to coatings inhibiting microbial growth.
Lastly, its optical properties are notable. Silver's ability to reflect light makes it valuable in mirrors, solar panels, and specialized optics. And I'll touch more on solar later, given its tremendous growth and outlook.
Historically, gold's physical form presented challenges in terms of storage, security, and liquidity. The introduction of the first gold ETF in 2003 marked a significant shift, allowing investors to hold gold in a more accessible form. Other fintech solutions, such as blockchain technology, could further revolutionize gold ownership. In today's world, people increasingly seek a store of value independent of external institutions. Gold is the perfect underlying asset for this; having additional avenues to access gold will only increase its appeal in the future.
Silver, on the other hand, will also capitalize on this. Still, its immediate future is focused on the industrial demand side, with the growth in renewable energy, electronics, and medical applications.
Gold's scarcity is a key aspect of its allure in value. It is estimated that all gold ever mined would only fill about three Olympic-sized swimming pools.
This rarity stems from the fact that gold is not evenly distributed in Earth's crust and is often found in very low concentrations, making its extraction challenging and expensive.
The supply of gold is limited and grows only incrementally each year, as you can see. For reference, mine supply only adds about 1.5% to the existing stock of gold each year. As you can see in this chart, mine production has been flat for the past seven years. This is largely due to the depletion of easily accessible gold reserves and the increasing regulatory, environmental, social, and economic hurdles one must pass to get into production.
90% of the demand for gold is split between two categories: investment and jewelry. We will go over gold's investment attributes in the following several slides. Still, gold jewelry has the typical components of desire, such as aesthetic appeal and cultural significance, and is a status symbol. It can also be viewed as an investment, given its metal is easily assessed and attained if desired.
One of the things that typically surprises most investors is gold's solid long-term price performance. Since the U.S. abandoned the gold standard in 1971, gold's price, measured in U.S. dollars, has seen an annual growth rate of almost 8%. Moreover, gold has outperformed many significant asset classes at the start of this century. This is particularly notable in relation to the S&P 500, which has had very good performance over the past several years and is now trading at a 31 times multiple using the Shiller cyclically adjusted price-to-earnings ratio, which has historically only traded at 17 times.
In addition to having good returns, gold's volatility has been relatively low compared to other asset classes, as you can see. Gold is a highly liquid asset, which can easily be bought and sold, and this characteristic is especially beneficial in periods of financial stress, when quick and efficient transactions may be essential. Gold's high liquidity ensures its value is maintained with minimal transaction costs. The ease with which gold can be bought and sold ensures that any significant price movements are quickly corrected, further contributing to its low volatility.
Slide 10 shows that gold often behaves independently from other asset classes. Incorporating gold into an investment portfolio can enhance the portfolio's efficiency frontier, a concept in modern portfolio theory that represents the optimal balance of risk and return. By including gold, investors can achieve a more efficient portfolio that provides higher expected returns for a given level of risk or a lower level of risk for a given expected return. The presence of gold in the portfolio can contribute to smoothing out the volatility and enhancing long-term returns, shifting the efficiency frontier upwards and to the left, which is generally considered more desirable in portfolio optimization.
For thousands of years, gold has been recognized as a store of value, a belief that continues today. As a physical commodity, gold has intrinsic value, unlike paper, money, or digital assets. Gold is traditionally viewed as an inflation hedge, maintaining its value or even appreciating during times of inflation when currency values tend to decline. In periods of economic turbulence or geopolitical uncertainty, as we've witnessed recently, many investors turn to gold as a safe haven asset.
As can be seen in the media, in this chart, during the seven crisis periods since 2007, on average, gold has returned 12% compared to only 4% for U.S. Treasuries and -13% for the S&P 500 during these crises. So, a good thing to have in one's portfolio.
Now, one of the reasons we think gold will become increasingly sought after relates to the dire public finances of many large economies worldwide. The U.S. is a great example of this because it faces a precarious fiscal picture with persistently high deficits and a large federal debt. This unsustainable trajectory raises concerns about the nation's ability to meet its financial obligations without significant money printing, leading to increased sovereign risk. The rising debt burden increases interest payments, consuming a larger portion of the budget and squeezing resources available for other critical areas.
Additionally, demographic trends of an aging population exert further pressure on entitlement programs, like Social Security and Medicare, pushing long-term fiscal imbalances even further. Addressing these challenges requires decisive action for policymakers to reform spending and prioritize long-term fiscal stability.
However, as we've witnessed repeatedly in recent years, the U.S. government has been increasingly fractured and is largely taking a short-term view on many things. Failure to act could lead to significant economic consequences, including reduced access to credit, higher interest rates, or potentially even a debt crisis.
In today's divided world, people increasingly desire independent stores of value. As such, gold, in our view, will become increasingly relevant as people look to protect themselves from external risks. We are already seeing this in certain parts of the market.
Most notably, and ironically, we've seen the shift in attitude with central banks already. For 13 consecutive years, central banks have steadily increased their holdings in gold, culminating in record-breaking purchases of over 1,000 tons in 2022, which is approximately double what they had been purchasing before that. According to the World Gold Council, it has the most records going back to 1950 of any year. Year to date, central banks have purchased approximately 800 tons, so if you annualize this number, it'll be over 1,000 tons again for 2023. And this year's big purchases have been China, Poland, and Singapore.
The one question we often get from investors is, "How much gold exposure should I have in my portfolio?" We suggest investing 10% to 15% of a diversified portfolio in gold and gold-related equities as a general recommendation. We think 10% should be allocated towards physical gold, typically the more conservative option in the gold allocation. And anywhere from 0% to 5% could be allocated to gold-related equities, which I'll talk about in a little bit. This is generally considered the more aggressive option in the gold allocation, aiming to offer leverage to gold prices and the potential for high returns, albeit with increased risk levels.
Edward Coyne: Hey, Ryan, this is Ed Coyne. This slide deserves more conversation around the question, "How should an investor read into central banks buying more gold?" In your mind, as a portfolio manager, what is that telling you?
Ryan McIntyre: What it's telling me is that they're not comfortable with strictly holding fiat currencies at present. And I think there are a couple of different reasons for that. One is the perpetual debasement of a fiat currency, so the purchasing power of any currency in the world has depreciated over time. And so, I think that's sort of level one.
And then, what we've witnessed recently, particularly over the past two or three years, is you've had places where they've confiscated the currency or frozen assets of certain currencies, so not allowing people to transact. Russia would have this notable experience. Moving away from that to gold, for example, gets them away from anybody controlling the outcome of what they want to do with their money. We've had recent meetings with the BRICS group of countries talking about this very issue, creating their own currency or currency basket or that type of thing, or at least moving outside of the traditional U.S. dollars being the base currency. I think they're exactly portraying what other independent people and ordinary citizens want, frankly, something that's a store of value that someone can't confiscate or freeze overnight.
Edward Coyne: Yes, that's helpful. I just thought it was worth highlighting that a bit because, so often, investors aren't thinking about central banks, and we live and breathe that every day.
Ryan McIntyre: Absolutely. On slide 14, we talk about some of the gold equities. We think about gold equities like any other specialty sector and cyclical industries. We believe it's prudent actually to capitalize on the cycles and potential mis-pricing. We recommend buying gold equities when they're out of favor and selling them when in high demand. As you can see in the chart here, which tracks the enterprise value per ounce of resource divided by the gold price, shows that gold equities appear to be at a cyclical low and worth considering.
Now, ownership in gold equities provides leverage to the gold price, so when the gold price rises, the profits of these companies tend to increase significantly, leading to large gains for investors through the share price. And conversely, when gold prices fall, losses can be amplified the other way as well. So, it's important to buy these cyclical lows. Typically, gold equities offer about twice the short- to medium-term return than gold prices. So, if you were to mention that the price of gold is going to go up 1%, you'd expect gold equities to go up approximately 2% and vice versa.
The other element that gold equities add is their growth potential. A mining company's discovery of new gold reserves can add considerable value. And it's one advantage that physical gold doesn't possess. An ounce of physical gold will always be an ounce of physical gold.
The other aspect is that a gold mining company's lifecycle is segmented into three stages. There's the Discovery Stage, the Development Stage, and the Production Stage. The most value-enhancing stages occur during the Discovery and the mining company's transition from Development to Production. These are independent parts of the cycle where you can take advantage of value addition to gold equities.
These companies also have some operational risks that they have to deal with. There are technical, geological, geopolitical (if the mines are in unstable regions), and market risks, given extreme volatility with stock prices potentially.
Contrary to physical gold as well, which does not yield any income, gold-related equities have the potential to pay dividends. So, right now, the NYSE ARCA Gold Miners Index is yielding 2.6%, notably higher than the 1.7% from the S&P 500, providing solid income relative to the S&P 500.
Now, let's move over to silver. As you can see in these charts, silver mine production has experienced a notable decline over the past decade. This trend contrasts sharply with the increasing demand, especially in industrial applications. The same factors that have impacted gold production, such as depleting ore grades, operational challenges, and environmental and regulatory constraints, have contributed to silver's reduced output. But it is also worth noting that 80% of the silver supply is a byproduct of lead, zinc, copper, and gold production. And notably, today anyway, lead and zinc prices are reasonably low, so many of these mines are barely profitable, so it's really unlikely that you'll get any new investment in your new mine, so very unlikely that additional silver production will come on stream anytime soon.
From the demand side, silver's exceptional electrical and thermal conductivity, along with its reflective and antimicrobial properties, make it invaluable in numerous applications. It's extensively used in manufacturing solar panels, electronics, and emerging technologies, such as electric vehicles and 5G networks. The growing industrial demand, coupled with the decline in mine production, has led to a significant tightening in the market for silver, leading to potential impacts on its price now and in the future. The global market dynamics continue to evolve and accept the idea that there will be these deficits going forward.
Specifically, as global efforts accelerate toward energy transition, the swift advancement of solar technology stands out as a crucial element here. As seen in the next slide, solar panels have become a pivotal element in the shift towards clean, sustainable, and reliable energy solutions.
Today, solar panels are becoming increasingly dominant due to their ability to generate clean energy efficiently and cost-effectively, coupled with their low environmental impact and long lifespan of over 25 years.
The chart on this page shows the evolving global mix of electricity production worldwide going forward, and it clearly shows that solar will be taking a larger share of this growing market. The International Energy Agency predicts solar energy capacity will outpace all other energy sources, with solar expected to contribute 98% to the expansion of global electricity capacity by 2030.
Elon Musk is also really bullish on solar, and in a podcast about a month ago, he talked about the idea of powering the entire U.S. with 100-mile by 100-mile sections of solar panels. So clearly, this has a lot of potential here, and overall, the potential surge in the solar market will likely lead to a significant increase in demand for silver, potentially leading to this continued supply-demand imbalance.
As you can see on slide 18, there's been a significant deficit of silver over the past several years. Deficits have been addressed, frankly, by depleting current silver stocks. When you look ahead, we continue to see deficits going forward in the sector with very little ability for new supply. So, we see this could positively impact the price of silver moving forward.
As previously mentioned, silver is often compared to gold. And because of this, many compare its price relative to gold. Historically, the price of gold has been about 60 times that of silver, a ratio that serves as a benchmark for comparing the relative values. Currently, the gold-silver ratio stands at about 81, suggesting that silver is relatively less expensive than gold, and the current price is about $24 or so today. Still, you can see that moving into the mid-30s if that average was maintained at some point in the future that it has historically.
Now, in addition to physical silver, there's also the ability to buy silver stocks, just like gold. Silver stocks currently present attractive opportunities, you can see, as they seem to be valid again at the low point in their cycle, so it's a perfect time to take a look. These stocks also provide a distinctive mix of benefits like gold, so growth prospects, the addition of silver reserves or production, and potential dividend payouts, particularly as the silver price might increase.
And so, the one thing to note here with silver versus gold is that typically, you get a little bit more price volatility. So you'd expect a further level of amplified gains if silver were to go up; conversely, the opposite is also true on the downside.
So anyway, I'll leave it with gold and silver and turn it over to Steve to talk about critical metals.
Edward Coyne: And Ryan, before we have Steve talk about the case for Critical Minerals, could you answer the question of "Why do you think there is this ongoing disconnect between the price of physical metals like gold and silver relative to the opportunities or valuations within the mining equities themselves?" Could you shed some light on that for our listeners as well? Why do you think that disconnect continues today?
Ryan McIntyre: I think it's easier for most investors, and it's sort of the first entry into the precious metal space, typically to start with just the physical commodity itself first. It has lower volatility, is easier to manage, and you don't have to worry about various country risks. I think people are doing that. And from the equity side, I think the valuations have disconnected from the prices.
It will take a couple of different factors, one starting to happen now with inflation slowing down. In recent periods, you've had pretty steep increases in inflation, which impacts the costs for the mining companies. But what's interesting now is you've seen the price of gold and silver move slightly over the last several months with a tandem decrease in the inflation numbers, which is great for the producing companies. For the first time in a while, margins should start expanding a little bit more, which is exactly what you want to see. And typically, when that happens, the share prices also go up, so I think we're at the very early stages of that piece of the equation.
Edward Coyne: "Stay tuned" is what it sounds like to me.
Ryan McIntyre: You got it.
Edward Coyne: Great. Thank you. Ryan will also be available for Q&A towards the end of the webcast. But before we go to that, I'd like to turn it over to Steve to talk about "The Case for Critical Minerals." Steve?
Steve Schoffstall: Slides 27-43, The Case for Critical Minerals
Steve Schoffstall: Thanks, Ed. I want to spend a few slides talking about the energy transition from a bigger picture and understand exactly what we mean when we say that because the energy transition can mean different things to different people.
Suppose you were to go back through human history. In that case, society is always looking for a way to find new energy sources to diversify their energy sources and look at ways to increase energy efficiency. And we're kind of at that next step in our energy transition. It's something that's been talked about now. For the better part of 30 or 40 years, I'd say, "Where do we move from fossil fuels?" You know, it's been a while now since nuclear started coming into commercial use in the 1960s, and we're starting to see that take a more prominent role, and we'll touch on that in a minute, but if we could go back just one slide for a second here.
How do we view the energy transition? So, one thing that we think it's not is a complete move away from fossil fuels. We believe that, at least for this foreseeable future, several decades out, fossil fuels will continue to play a very important role in how we get energy.
As we shift to more renewable sources, we think we’ll see a renewed interest in nuclear power, and we have some relatively breaking news that we'll discuss throughout.
We're also going to see an increased need for battery storage, and things like lithium, cobalt, graphite, and nickel will be used for those, particularly as it relates to EVs and how we change how we move around society.
On the next slide, I'd like to take just a second and talk about, from a graphical perspective, how the investment in the energy transition has changed over time. So, if you go back to the early part of this decade, you'd see somewhere between $500 to $600 million a year spent on the energy transition. And in the last two years, we've seen a significant rise in spending and investment, so, just looking at 2022 as an example, that 1.1 trillion that was invested on a global scale is important because it's the first time we crossed that trillion-dollar threshold. And then, secondly, because it's the first time that investments in the energy transition were actually on par with investments in fossil fuels.
As we move through the energy transition, we expect to see these yearly investments continue to increase at a rate that's going to be, if we were to look back ten years from now, significantly different than where we are today.
The following slide focuses on one thing that often gets overlooked when we start thinking about the energy transition. Anytime you start building up a new industry, much focus gets placed on the cost and the investment needed.
If we look at the other side at the revenue that's coming from different aspects of the energy transition, what we can see is that it's accounting for about 2.6% of global GDP, so not only is this a growing sector, it's already a significant contributor to economic activity across the globe.
If we were to look at the 8,000 or so companies that are heavily involved in the energy transition, we'd see revenues of around $2.5 trillion. A lot of that, not surprisingly, is dedicated to electrified transportation, whether that's EV passenger vehicles, public forms of transportation or light trucks. Still, I think something that many people find surprising is the second largest revenue generator in nuclear power. And we'll spend some time on that as we go through the following few slides.
So, when we look at the energy transition, we talk about investment. We're at this critical juncture where we must keep feeding this fire to keep the ball moving forward. Things like COVID-19 and the ongoing war in Ukraine, as well as some of the political and geographical moves you've seen by Russia and China, are starting to shape how predominantly Western countries look at the energy transition.
One thing that Russia and China are looking to do specifically is try to gain influence in these resource-rich countries in Africa and South America. You'll see that as they're trying to either go in and mine the materials that are there so that they can send it back and process it and try to remain a leader in that market, or else they're investing further down the supply chain within each market so that they can get access to those minerals.
In the U.S., Europe, Canada, Australia, and many Western countries, we're seeing a concerted effort to prioritize securing critical minerals, particularly related to battery metals and uranium.
There's also a growing openness in the uranium sector in the nuclear industry, which is why we're seeing increased investment there. And if you were to look at the United States and energy production, you would see that nuclear energy accounts for about 18% of the U.S.'s energy production. We're seeing legislation move through Congress, and the Inflation Reduction Act (IRA), passed not too long ago, provided $369 billion in incentives to build clean energy infrastructure in the United States. That's the official estimate.
If you were to look at other non-government estimates, many have that approaching $900 million to $1 trillion over the next decade. A significant amount of money comes from private and public sources.
Finally, one aspect of this is the notion of re-shoring, where countries that are aligned politically are looking to work together to ensure secure supply chains. That will play an increasingly important role in the future as companies look to build out various aspects, whether it's the EVA infrastructure or battery manufacturing plants; sourcing those minerals from those “friendly" countries will become increasingly important.
To put a picture of what that government investment looks like, one of the things I appreciate about this graph is if we look at the 12 months since the Inflation Reduction Act was signed, there have been more than a hundred new clean tech manufacturing announcements worth about $80 billion in total investments that have been made in the U.S., so a lot of that is coming from U.S. and European countries.
We also see significant investment coming from Japan and South Korea, particularly in the battery manufacturing process, with both countries being leaders in that space.
We're seeing that if you look at those large red dots, the size of the dots shows how big a project is, and the color will show you what it's invested in. So, those large red dots are large projects dedicated to battery manufacturing. And we're seeing the emergence of a battery belt from Michigan down to Georgia. A lot of that is incentivized by federal money. Still, we're also seeing on a state level that governments are looking to build out these industries in their states to increase their taxable receipts and grow their populations. We're seeing significant competition for many states to bring those jobs to their localities.
We'll take some time here, and on the next slide, we will lay out the framework for how we view the energy transition. So, we look at it in three separate buckets. The first is the generation side. So, Ryan did a great job covering silver and discussing its use in solar panels. And I think probably my favorite silver stat that many people don't realize is that about 10% of the silver that's mine is used in the solar panel industry, so it's a lot higher than I think most people would imagine.
Rare earths are very important to their use in windmills and wind turbines, given their magnetic properties, and in EV manufacturing. Your EVs that you see going down the road, we'll use a number of rare earths to help propel the engine forward. And then, of course, we have uranium there.
On the transmission side, we have copper, which ties this whole energy transition together, given its ability to conduct electricity efficiently and its abundance around the earth. It is prevalent in anything with electricity flowing through it, whether it's a smartphone, power grid or solar farm.
And then, finally, on the storage side, this pertains mostly to EVs and the batteries for EVs. Although we do see some applications coming up for storing electricity from solar and wind farms for periods when they're not generating power, lithium, nickel, manganese, cobalt, and graphite are the predominant metals that we see there. We will discuss lithium a little bit more in greater detail as we move forward here.
While we have this energy transition going, we have this backdrop of electricity demand setting to almost double by the time we get out to 2050 relative to 2022. So, an 86% expected increase in electricity demand is driven largely by two different factors. One would be in more developed countries, where we see the need for technological innovation as we move the EVs, which require more energy output for charging infrastructure to power the EVs.
And then, when you look at more developing countries, we would expect to see an emergence of a middle class as investments start to be made in those countries, where we think that we'll start to see the increased demand for electricity come out of countries where you wouldn't expect that to be just like 10 or 15 years in the past.
One of the things that we'd like to focus on, on the generation side, is uranium, and that's for a few key reasons. One, uranium is the primary fuel source of nuclear energy. It has the distinction of being a very reliable source of energy. You only have to turn the power off from a nuclear power plant when refueling and restocking uranium within the nuclear reactor. Other than that, it's an energy source that's very reliable, is essentially always on, and is what we refer to as providing reliable baseload power.
When you look at things like wind, solar, and other forms of energy that are reliant on natural factors, whether the sun's shining or the wind blowing, they could have significant periods of downtime. And if you have periods of overcast, days where the sun's not shining, or depending on where you're located from a geographic perspective, the amount of sunlight they get, even during the daytime, can limit how much power is being produced.
The second thing about nuclear, and why we think it will continue to be a centerpiece for many governments as we transition, is how clean it is. If you look at nuclear, wind, solar, hydro, and other forms of clean energy, they're essentially carbon-free ways of getting energy. Some news from the COP28 conference last week was that the U.S. has pledged to triple its energy output from nuclear energy by 2050. So, this is a significant step toward adding nuclear energy to our mix. If you go back two or three years ago, it would not have been as likely to have been a much bigger surprise, but this is still a big announcement. Within that pledge, it includes commitments to not only mobilize investments in the nuclear power industry but it's also to develop new forms of nuclear power that might be able, like small modular reactors (SMRs), that could use much less real estate and be much more localized and allow smaller, more reactors around geographies and not necessarily rely on these huge nuclear power stations that we're accustomed to seeing.
The second thing this pledge looks to do is encourage the World Bank to include nuclear energy in its lending policies. And that would allow countries that might not have the financial conditions that many developed countries have to increase their use of nuclear energy.
One of the things that surprised many people before July, the things that we heard most, I would say as we talk to clients, is that "The U.S. hasn't built any nuclear power plants for the last several decades. Is it not a focus here? Is it an investment case to be made here?"
So, in July, Georgia had a nuclear power plant go online. We expect another expansion of that plant to go up in the early part of next year.
But, until now, the nuclear story has been international. When you look at the operational reactors around the globe, the U.S. currently leads in nuclear production. There are about 434 reactors around the globe. But if we look at reactors that are under construction now, that's another 59 reactors, and looking at the chart here, you can see that most of that is predominantly in China. But we also have a significant amount of 111 reactors planned for construction.
Not only are we seeing Asia as a primary growth driver here, but if you look back to North America, we're starting to see more and more plans being made to bring nuclear power online. This chart doesn't capture the nuclear restarts or the plants already running and expecting to be commissioned to have their lives extended.
If you think about Japan, for example, a lot of their nuclear power production was cut back after Fukushima. They're taking a leadership role in moving forward and restarting their reactors. Japan was one of the signatories of the 22 nations that signed that COP28 agreement, so we're seeing some encouraging signs from places many people might not think are taking place. However, governments are starting to wake up to the fact that any energy transition or heavy reliance on green energy will come in the form of nuclear energy.
I want to take a brief minute and look at the supply and demand dynamics we see here for uranium. We've had a lost decade of underinvestment in the uranium industry. Prices weren't at a level that would cause companies to invest in the space. That created a tight market in the spot market. We’re now at a point where utilities could spend the better part of the last decade or longer actually drawing down stockpiles of uranium as their stockpiles became more available after the Cold War. Now, utilities are at a point where they are starting to go back into the market and force and produce and purchase more uranium.
If we were to look at 2022, about 125 million pounds of uranium were bought by utilities, which was the highest amount in 10 years. But, as large of a number as that is, that's nowhere near the 180 million pounds a year that need to be purchased by utilities, given today's nuclear makeup, to fully replenish their supplies.
We think that what we'll see over the next 12 months or so is that global production will reach about 150 million pounds. And if we were to look out through 2040, as this chart shows here, the World Nuclear Association expects requirements to get closer to 300 million pounds by the end of the next decade. What’s driving the movement in uranium recently, one of the best-performing asset classes, up close to 70% over the year, is these utilities have to come back into the market and are replenishing that supply.
And if you were to look at the production versus demand out through 2040, and if you were to add up all the production deficit, you would see something close to 1.5 billion pounds of underproduction over the next 17, 16 years or so.
We’ll take a few moments here and move to the transmission and storage side. So, on the next slide, we would like to show that, on the left-hand column, we have the various critical minerals, and across the top, we have the different uses for those minerals. We’ll focus on this next section, mostly on electric vehicles.
On the right-hand column, we can see lithium, copper, and nickel playing prevalent roles in EVs, as well as manganese, cobalt, graphite, and ferrous. And then copper, we'll also take a few moments to speak about that. As you can see, on that third line down, it pretty much extends across the energy transition and has a huge role to play.
Look at an internal combustion engine car, a fossil fuel-powered car. You will see about 70 pounds of different critical minerals needed for your everyday average gas-powered vehicle. If we look at an EV, we will know that you're starting to get closer to that 400-pound usage for all of these critical minerals we have listed. Prominently among these are copper, graphite, lithium, and nickel, which also play an increasingly important role there. So, many materials need to be used to produce these electric vehicles, and we'll talk about the growth of that in just a second versus what we see with gas-powered cars.
So, unsurprisingly, we've seen a ramp-up in the EVs in the last several years. If you go back seven or eight years ago, I remember my first time seeing a Tesla. You didn't see them frequently, but now they seem all over the place. And we have all the major manufacturers now, most by, I'd say, 2035. They have said they'll move away from producing gas-powered cars and move strictly to EVs. Some places are doing that based on government mandate. We see that in California. We see that in Europe and some other states here in the U.S. as well. Others are doing it of their own accord as early as 2030, ahead of those expected timelines.
So, the exciting thing here is that we're up to 10 and a half million EVs that were produced last year and sold, but it's just that hockey stick play pattern that we're starting to see as we move along this transition.
On the next slide, I'd like to point out that this looks at sales of electric vehicles, designated by the green lines in the first column, internal combustion engines, and all passenger sales if we combine those two in the right-hand column. Not surprisingly, Southeast Asia, India, China, and Japan, given their urbanization in many parts of these countries and how close they are to the battery production process, are all leading in their growth in electric vehicle sales.
I find that center blue line interesting. Besides Australia, Southeast Asia and India, many major economies are decreasing gas-powered car sales. One reason for that is EVs are starting to take over. There are more incentives for EVs and for purchasers to buy EVs through subsidies and things like that.
Another is, if you look at current interest rates, it's getting increasingly expensive to finance a car. If you go back two years ago, you could probably get 0% financing, and now you could be looking at 5%, 6%, 7% or even higher. So, that's weighing somewhat on vehicle sales as well.
But the interesting thing to point out here is at the bottom of this page. Looking at the EV column, you see a 62% growth on the global scale expected for this year. If you look at gas-powered cars, we're expecting a contraction of about 4%. When you put all that together, it's clear that EVs are growing, even though it's a meager growth of about 2% in all passenger car sales driven by EVs.
We’ll spend another moment here on copper and then move to lithium. One of the things about copper is that this metal has been around and used for thousands of years. It's the third-largest metals market in the U.S. by dollar volume. It's only behind iron ore and gold, accounting for about $183 billion in mining activity. Its large market size and wide-ranging applications have historically made it a barometer for the global economy. And many people look to copper to understand where they think the economy is moving.
Look at the previous commodity super cycle in the early part of the century. You will see that the growth in copper usage really ramped up, and the industrialization of China largely drove that, and that started to give way to a new super cycle in many commodities. So, copper has been recognized by many countries, including Canada, the U.S. and Europe, as a critical mineral. And countries are incentivizing its production.
It plays such a prominent role as it relates to the energy transition because of its high conductivity. It can efficiently move electricity as needed over long distances with little loss to the electrical capacity. We would anticipate that, if we were to look at how much has to be invested into the electricity grid to meet the net zero requirements by 2050 laid out by nearly 100 countries, we would have to see about $630 billion a year of investment through 2030. That’s to stay on track for targets, so that's about 2.3 times what we're seeing over 2022 levels.
If you were to look at that horizontal orange-ish colored line going across the screen, copper has run into some issues as supply issues that are expected to continue for quite some time. We're in a period now where all the easy copper has been removed from the ground, and we're facing declining ore grades. Today, you would see about 1% of the material being pulled from the ground as having copper. Traditionally, it's been almost 5% when you're looking at the copper mines about 150 years ago. So, all the easy copper has been taken.
We're also seeing additional social issues in some parts of the country that are mineral-rich in trying to mine copper. We see this most recently in Panama, where First Quantum had to have their mine shut down as the Supreme Court rolled against their mining rights because the citizens of Panama didn't like the contract. So, that was a severe hit to copper production, with about 1% of the expected annual production coming out.
If you look at Anglo-Americans, they just reduced their copper production by two to 300,000 tons of copper for 2024 and then went out again through 2025. We would expect even more decreases in production from them. That’s our struggle; higher prices will hopefully help incentivize more production.
You can see the final copper comment here before we move on. As we move through the next decade and a half to two decades, the share of energy transition-related activities results in higher uses of copper. We'll keep an eye on that as we continue to move forward.
This slide is a quick graphical representation of how we expect demand growth related to the energy transition for many critical minerals. Lithium has about a 15 times demand or demand projection growth through 2040. Copper seems more muted as you approach those two to three times. The reason for that is the vastness and size of the copper market. That's a significant amount of copper when we look at overall production.
Now, we'll run through lithium. If you were to look on the left-hand side up until about 2025 or 2026 or so, we would expect to have a period of lithium surplus. And then, from 2026 onwards, we expect to be in structural deficit.
We anticipate that as prices increase over time, incentivizing more miners to come to market, combined with technological advances in how we mine lithium, we will be able to bring more production online. But most recently, lithium had a rough year in terms of performance. But, from our position, given the newness of many of these industries and the amount of growth required, that volatility is not unexpected, particularly in the short term. We advise clients to look at the longer term and not necessarily be as concerned about short-term supply and demand disruptions or price movements.
We'll take a moment here and talk about our energy transition suite on this slide. We've built a suite here that captures the essence of the energy transition. Our focus is on upstream companies in the supply chain, so we're focusing strictly on the miners bringing these critical minerals to market and leaving out battery manufacturers or EV companies.
Our thought is that if we can focus on the upstream part of the supply chain, we don't necessarily have to be concerned about picking winners and losers related to downstream companies. If you were to look at a battery manufacturer, for example, there are all sorts of different battery chemistries that you could have. Still, the one commonality between those chemistries is lithium. For us, instead of figuring out which chemistry might be the battery makeup of the future, we'll focus on lithium, which is common to all those.
We have a screen that allows for a pure place selection of these companies. In our energy transition ETF, SETM, we're looking at companies that get at least 50% of their revenue or have 50% of their assets tied to one of the critical minerals of the index. In SETM's case, we follow nine critical minerals: silver, uranium, rare earths, copper, nickel, lithium, graphite, manganese, and cobalt, which are the nine that are checked by that index. That’s the one-size-fits-all approach to somebody who understands the energy transition thesis but doesn't necessarily feel they have the information to pick the winners and losers between the different metals.
And one other aspect I'd like to focus on here before we move on is our uranium suite. We have a comprehensive uranium suite and are making up significant assets in the space. Suppose you look at our Physical Uranium Fund. In that case, it's a Closed-End Fund listed in Canada, available for trading in the U.S. It's about a $5 billion fund that stores physical uranium, so it's 100% uranium-backed.
URNM, our Sprott Uranium Miners ETF, is an all-cap ETF with pure-play exposure to the mining companies and about a 15 to 17% allocation to the physical uranium product.
Finally, URNJ is our Sprott Junior Uranium Miners ETF in the uranium suite. This fund was launched earlier this year in February and has accumulated about $200 million in assets. It focuses on those smaller cap names and the more exploration-type companies within the uranium sector. Those junior miners could often be takeout targets for the larger miners as it can be much faster, easier and cost-effective for a larger mining company to buy an exploration company that might not be producing but has the rights to valuable resources.
One last slide before handing it over to Ed. To recap our product lineup, we focus on the pure play side of the equation, where you might look at some other strategies out there that are upstream, they're downstream, and maybe they include companies that have just a couple percent of allocation to one of the critical minerals. We're ensuring that the companies included in these strategies, the energy transition, and the minerals they're bringing out of the ground are core to their business. And the last thing we want is to have a uranium company, for example, that is also involved in mining other things, and uranium is just a small piece of what they do.
We have the most extensive lineup of ETFs dedicated to this space. Having that ETF wrapper is a convenient, liquid way for investors to access the theme instead of picking which individual companies within each of these minerals they would like to specialize in. We've spent the last several decades growing our expertise in the mining industry, and we're harnessing that as we go through twice a year to pick those companies for inclusion in the index. We rely on that expertise to provide the product that represents the opportunity. And with that, I'll hand it back to Ed.
Ed Coyne: Slides 44 - 49, Portfolio Allocation & Q&A
Edward Coyne: Great. Thank you, Steve. And this may be the first we've broken through the full hour. We’ve received a lot of questions, and for those who want to stay on, I still want to address a few of them. But we will also be responding to all the questions via phone call and or email to each one that did pose a question.
But what I would like to do before we go to Q&A is talk a little bit about how to address potentially putting today's topics into action when you are building out a portfolio. And starting with what Steve just talked about, the Energy Transition ETF.
Energy now represents more than 10% of the S&P 500 estimated net income, up from a little over 6.5% in 2022, yet its weighting is only 4% as of June 30 of this year. So, we recommend that the Sprott Energy Transition Suite of ETFs be considered to complete that overall energy allocation and have it be better represented in the overall portfolio.
We think the suite of offerings we have today could potentially offer you a way to allocate to this opportunity, which we're seeing from an income standpoint becoming a bigger and bigger part of the S&P. And then, as it relates to what Ryan talked about, both on gold and silver.
From an exposure standpoint, again, depending on how opportunistic your portfolio looks, you may only need about 5% of gold on the conservative side. But on the opportunistic side, you might need as much as 10% or 15%. And as Ryan mentioned, speckling that with both physical and mining stocks.
We've seen time and time again that gold, from a liquidity standpoint and a resilience standpoint, has been a wonderful safe haven and asset that has been proven over and over again when you see volatility in the market and zigs and zags in the market. More of our investors are using gold in a less-recessed silver as part of their fixed income and/or cash portion of their portfolio. As we see with central banks, gold is becoming more of an alternative currency.
And then, as it relates to the full product suite, as Steve already touched on, Sprott offers a full suite of solutions, whether you're looking to capture opportunities within the energy transition market or the gold and silver market on the physical side or the equity side, I would encourage you to reach out to our Sprott client service team.
You can see your contacts here for those on the institutional or broker-dealer sides. And for those on the financial advisor side, dealing directly with individual clients, I would encourage you to reach out to Sergio and Matt to talk about how we could work with you all and help you allocate potentially to your portfolio and take advantage of the opportunities that we're seeing in this space.
So, before we go to Q&A, I'd like to turn it back to Millissa briefly, and then we'll go through a few of the questions that came in across the board. Millissa?
Millissa Allen: Great. Thanks, Ed. As a reminder to the audience, materials can be found in the document folder at the bottom of your screen. We appreciate your feedback. Please take a moment to fill out our brief survey at the bottom of your screen. We will be taking advisor questions. Please type your question in the box under the media player window, and we'll answer as many of your questions as possible. If your question is not answered on today's webcast, a Sprott team member will contact you directly.
If you would like to have a conversation to discuss further the ideas that were covered during today's event, please click the blue "Confirm" button in the meeting request box on your screen. And with that, I'll turn it back to you, Ed.
Edward Coyne: Thank you, Millissa. And what I'll try to do is throw out a few questions as it relates to the energy transition side, as well as the gold and silver side. Again, we recognize we're past an hour. And just, again, a reminder that we will follow up with everybody's questions after this webcast.
The first one, since we just talked about energy transition, I think Steve, this would be a good one for you to address. And it relates to uranium: "How large is the current stockpile? And what will that look like on the longer-term supply and demand gap?"
Steve Schoffstall: Yes, I mentioned in my remarks that, coming out of the Cold War, we had a large stockpile that the utilities could draw on as we no longer had to store that material. As we're moving forward here, though, and given not only current utility needs but also expected future production, and as more nuclear reactors come online, we're starting to see utilities restock those reserves. So, they're racing in many respects to figure out and buy their future supply for the next couple of years to know they have what they need to operate their plants.
For them, it's a relatively small cost relative to the overall process of producing electricity, and it's quite profitable, so they're racing to increase those stockpiles.
In large part, one of the reasons we're seeing the price action that we've seen with uranium itself to around $82 a pound or so floating around that area now for a few days, it's not quite at the point where that's incentivizing enough miners to restart the mines that might be on care and maintenance or to break ground on new mines. So, we'd expect some higher prices to bring additional supply online.
Edward Coyne: Thank you, Steve. And, Ryan, this is a good one for you. As of late, anyone following the gold market has seen it break above $2,000 and then settle back down at or slightly below $2,000. The question is, "You know, with these dramatic moves, can you give any color on the next, say, one to three-year outlook given the backdrop of the current economy?" Any view there, Ryan, from a pricing standpoint? I'm not asking you to predict, but just a general view.
Ryan McIntyre: It’s been an interesting time for gold. I think there are a few things that have been influencing the price. We first saw geopolitical tensions with Russia and Ukraine, and it's moved over a bit to the Gaza area, and then some other tension with the United States and China, among others. So, I think that's influenced it.
Again, it shows central banks buying it, and I think other governments outside the central banks are also buying it for their purposes. Moreover, I believe that the level of uncertainty in the geopolitical scene has helped gold, indeed.
From an economic standpoint, you look at the world's major economies: the U.S., Europe, and China. The U.S. has performed well. Europe has been a bit more muted. And China was indeed a little disappointing in terms of the comeback most were expecting out of COVID-19. There are economic headwinds on that front as well.
One of the things that I look at as an indicator is the growth in money supply. And you can look at whether it's Europe or the U.S.; they're both negative for the first time ever. And that's scary, considering QE was first introduced after the financial crisis of 08 and 09 to make sure that the money supply didn't decrease. And so, right now, I think you're also starting to face some underlying economic uncertainty.
From the gold price standpoint, I think both things bode very well for gold. I showed a chart earlier in the conversation showing how resilient the gold price is in economically uncertain times. I believe that will continue, and it'll be increasingly the place that people view as the place to go. And I think the beautiful part about right now is that you don't have a lot of, I would say, certainly retail investors, particularly in the Western world, who are there at all.
We've seen huge declines in ETF holdings over the past couple of years, down about 20% and 25% in that period. And so, to me, that's all opportunity. I think over the next several years, gold prices will go up. And how much and how fast, I don't know, but the trajectory is certainly positive.
Edward Coyne: Great. Thank you. One other question before we finish up is a hybrid question. Speaking about central banks, this is a unique question. It says, "With central banks purchasing gold, do you see other metals, for example, copper and lithium, being purchased by central banks given the importance of the energy transition?" I'm not sure what the answer is there. And maybe, Steve, you want to start with that. But I think that's a fascinating question I’ve never seen.
Steve Schoffstall: I think there are two different aspects to that. One, I would say it wouldn't surprise me to see that, at some point in the future, something like what we've done with the Strategic Petroleum Reserve. But the other consideration here is that we're in a position in many of these minerals where we're at a significant expected supply deficit for the foreseeable future. So, I think maintaining any sizable strategic store of any of these minerals would be difficult. I wouldn't think it's out of the question as countries look to ensure energy security.
Edward Coyne: I trust we could go for another hour on the Q&A because they keep racking up here, which is good. And I'm happy to see we still have listeners. But in the interest of everyone's time, I encourage you back on page 48 to reach out to your respective teams, whether you're on the critical account side, the institutional side, or the financial advisor side, for any further questions you might have. Also, we will follow up with everybody directly with their questions.
Thanks again for everyone's time and attention. Enjoy the holiday season, and I look forward to working with you all in the new year.
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