Uranium, Lithium, Copper, Gold and Silver and Changing Attitudes Toward Commodities
August 25, 2023 | (36 mins 5 secs)
John Ciampaglia, CEO of Sprott Asset Management discusses why a higher uranium price will help incentivize much needed production for the world's growing nuclear fleet. John also discusses his outlook on gold, silver, copper, lithium and more.
Jesse Day: Hello and welcome to Commodity Culture, where we break down the commodity space for both new and experienced investors. Before we dive in, here is the standard disclaimer. Nothing here is investing advice. Do your own due diligence. Today's guest has nearly 30 years of investment industry experience and is the CEO of Sprott Asset Management, Mr. John Ciampaglia. Thank you for coming on the show.
John Ciampaglia: Thank you. When you said 30, you made me feel old.
Jesse Day: We will draw on that wealth of experience today, and I hope to discuss a number of topics with you, including several commodities specifically. But before we do, I start with the origin story of every new guest on the show, so I'd love to hear yours. How did you first discover investing? How did that lead you to the commodity space and ultimately to becoming the CEO of Sprott Asset Management?
John Ciampaglia: That's quite a journey. It’s hard to believe 30 years have gone by, and it's been a wonderful career. I really got the bug in my fourth year of university when I started taking a lot of corporate finance classes and was fascinated by how financial markets work and central banking and the economy. That obviously pivoted to companies, how they operate and their business models and competitive forces. It's just so dynamic. I think that's the part that I find the most fascinating. Every day is new. It's constantly evolving. There's so much to learn. If you have intellectual curiosity, there's so much to latch onto every day across capital markets, economies, fiscal, and monetary policy, just how it all fits together and works. It's been fun. The industry has evolved enormously over the last few years as the world is becoming more passive in nature, where ETFs are starting to take more market share away from active management.
But I think for most of us in the business, we all started on the active management side. That was really the driving force in the industry in the 1990s and 2000s. Over the last 10-15 years, my career has evolved to be more holistic, which is investing in everything from active strategies to passive strategies to physical commodities. In Toronto, where I'm based, we always think of it as the mine finance capital of the world. It's hard not to be involved in mining and investments in some capacity.
Jesse Day: Interesting. Well, I would like to draw on the unique knowledge that you have as the CEO of Sprott Asset Management to ask you what you're seeing as the main market themes right now that you think investors should be paying attention to.
John Ciampaglia: If I started really big picture the most insightful thing I can share with your audience is how the world is shifting interest back to commodities. We obviously had a previous commodity supercycle in the 2000s. Unfortunately, I was not at Sprott to enjoy that ride, but it was an incredibly powerful super cycle. That supercycle saw everything from gold, silver, iron and copper. Many different commodities have multi-year bull runs. That had a pause during the great financial crisis and then resumed.
What was driving that? A lot of it was China building out its industrial manufacturing base and moving hundreds of millions of people from rural settings into urban settings. That requires massive amounts of infrastructure, housing and mobility. If you think about the last supercycle, it was driven by a lot of bulk commodities as things were being built.
Then I'm going to go through the unhappy time, which was 2011, '13, to around to about 2019. That was the last decade and there was little interest in commodities because many of those commodity prices had crashed, a lot of the projects had become uneconomic, and there was a lot going on in the rest of the world. Tech stocks were on fire, and we had many different companies making their way to becoming trillion-dollar giants. You had an era of very cheap money that propelled a lot of industries, and commodities got left behind. People lost interest in them. There was not a very compelling story or compelling economics and, they were working through the overhang and some of the missteps at the tail end of the last commodity supercycle.
John Ciampaglia: But in the last two and a half years, the psychology and the sentiment towards commodities have changed enormously. Three years ago, if we try to talk to an institutional investor about commodities, they would sometimes stop us in the meeting and just say, "Look, stop the meeting. I don't want to talk about any of this stuff." It was obviously disheartening when these large investors had zero interest in the category.
But if I fast forward to today, in the last couple of years, the number of institutions I've talked to is in the hundreds. That is a game changer because they are now rethinking the category. I'm not suggesting to you that they're all backing up the truck and investing in the sector, but they are exploring the fundamentals for the first time in many years. I don't mean generalist investors. I mean, in some cases, commodity investors are looking at commodities that they've ignored in their own portfolios for the last 10 years.
We see that as the number one industry dynamic happening right now. It's still baby steps and it's not universal. Some of the very, very large institutions are lagging, but we see enormous numbers of smaller institutions, mid-sized institutions, family offices and hedge funds, that are becoming very interested in commodities again, and the reason why is they see the pain that's been inflicted in the sector. The sector is recalibrated and it's the right size. The commodity prices, in many cases, are not incentivizing greenfield production and the world all of a sudden has figured out, "Hey, we need a lot of raw materials for the new commodity supercycle that we think has started."
That commodity supercycle is being driven by not the bulk commodities that we saw in the 2000s, but energy transition-related commodities, because energy transition, if the world's serious about doing it, is incredibly raw material intensive. We believe if the secular decarbonization of economies theme continues to play out over the next 20-30 years, the demand side story is likely to be very robust for critical minerals including uranium to battery metals to copper. The whole complex is obviously going to go from headwinds to tailwinds over the next several decades.
Jesse Day: Well, I'd also like to get your take on some of those individual commodities because Sprott has a suite of ETF products, that cover a wide range of commodities, and I'd like to know how you see them currently positioned. Let's start with my favorite commodity and that of many people who watch this show, and that is uranium. How do you see uranium positioned now and moving forward here?
John Ciampaglia: Well, we're obviously huge fans of uranium. We think that the bull market that started about two and a half years ago has several more years to go. When I talk to institutions and they say, "Well, the price of uranium has doubled; I’ve missed it," I stop them cold and say, "No, you haven't; it’s just getting started." I say that because even with uranium trading at about $56 and change today in the spot market, that is not a price that will incentivize any new project being built, full stop, not a chance.
It will incentivize the restart of shut-in production, which it's been doing for the last two years. But in terms of greenfield production, which the world desperately needs, particularly five to seven years from now, when many of the existing mines will start to get to the end of life, and we need new mines to basically make up the difference, it's an incredibly compelling story. I think it's because it went through a horrific 10-year bear market. When you have those kind of bear markets, they can spawn new, very powerful bull markets, and I think that's what's underway.
The world is embracing nuclear energy, and this is really the fundamental shift that we've seen. Where I live in Toronto, Ontario, we're often put up as one of the world leaders in nuclear energy. It's obvious to hear that because I don't really think of us as really being a leader in much. But we've got one of the largest nuclear fleets in the world in terms of the percentage of energy that we generate here from nuclear energy. We're around 60%, so not quite as high as France, but we're getting there.
More importantly, we just announced that we are going to be building several new large-scale and small modular reactors. I hope Ontario is the first region in the world that builds the first SMR. It's a very interesting story. You've got a backdrop of growing demand and China is driving that. China today announced six more reactors have been approved for construction and I think they have 22 under construction today. They're really driving the new builds. But other countries are putting up their hands and saying, "We're not closing down our existing fleet," which they had previously announced, "We're actually going to consider building SMRs and potentially large-scale reactors." Then you've got countries, for the very first time, like Poland, who are almost completely dependent on coal for energy production, saying, "We might build six new reactors."
The demand story, I think, is easier to model just because the regulatory process is very transparent in terms of all the plants under consideration in progress. You can model out how much uranium all these plants are going to need. Then you look at the supply side of the story and you see a big gaping hole around 2028.
There has been a supply response, as the price of uranium has doubled in the last two years. But we're starting to run out of runway there in terms of how many more brownfield projects are coming back online. There are still a few brownfield projects that still cannot get back online, even at $60 or $65 a pound, so it's going to be really interesting.
Investors are looking for unique opportunities and new ideas in this market. This is obviously an idea that is relatively new for many people, and they look at the supply-demand. They say the only way this story sorts itself out is through higher incentive pricing. Because without higher incentive pricing, you will have massive shortages in the years to come. These projects take many years to develop, to permit and to build. Right now, we've got a race against time because there was so little investment done in the last cycle, which was the bear market, that we're now paying the price, which is that we're behind the curve as the world is shifting back and keeping more plants on for longer.
Jesse Day: I'd like to get your thoughts on gold as well now. Obviously, we've seen a lot of catalysts that a lot of the traditional gold bugs would point to as tailwinds for gold, including the BRICS nations announcing they may release a gold-backed currency, and it remains to be seen how impactful that will be. We saw some of the biggest banking failures in the U.S., since the great financial crisis. People are pointing to that as a reason why you want to own gold and take your wealth outside of the financial system. We're seeing the gold price remain strong in the face of some of the fastest interest rate rises by the Federal Reserve, which seems to be a good sign. I wonder what you see when you're looking at gold. What are the main catalysts and tailwinds that you're seeing for that metal?
John Ciampaglia: At Sprott, we have a long experience investing in gold and we have several funds that are multibillion dollars that own physical gold. We're very active in the market. It's been an interesting year. We view gold as the ballast in your portfolio. It has very different attributes in your portfolio versus other traditional financial assets and it's a good complement.
Even though we've had multiple interest rate hikes and a very aggressive Fed tightening cycle in the last 12 months or so, gold is holding its own at around almost $2,000 an ounce. But I think what's interesting to us is more recently, is who've been the more active parties with respect to physical gold, and it's been central bank buying. Central banks, several of them around the world, have been accumulating gold for the last year, and we think that is part of a concerted effort to diversify away from the US dollar as part of their foreign reserves mix.
Countries like China are slowly winding down their allocations to treasuries. We think this, in part, has been driven by actions following the invasion of Ukraine where Russia's assets were frozen. I think some other governments think, "Well, what happens if we get on the bad books and our assets get frozen?" Gold is an asset in which you can store a tremendous amount of value in a very small amount of space in terms of storing that in your own country.
I think gold is reasserting itself as a financial asset. It's going to play a larger role in the financial reserves of several countries. As you said, there's a lot of speculation about whether a new BRICS-type currency may be in the works that's backed by some degree in gold. Obviously, we've left the gold standard 50 years ago, but there is a lot of speculation that gold could be playing a much more prominent role in our financial system. Central banks have really been the key story and it’s been muted for institutional investors. We have not seen meaningful inflows around the world into gold ETFs, which is one of the key barometers that we look at. Institutional investors have been quiet when it comes to gold. Retail investors are more slow and steady and they tend to buy and hold both gold and silver.
Jesse Day: What do you think silver's role is going to be up ahead? Do you think it will continue to be seen as a monetary metal as it has throughout history? Do you think its role will shift to more of an industrial metal? You mentioned at the top of the show the energy transition. Silver is very essential for that, used in solar panel production, EVs, and a lot of these technologies. Do you think silver could shift more to an industrial metal? Do you think it will maintain its monetary role? Could it do both, and how do you see it performing up ahead?
John Ciampaglia: It's a hybrid metal, as you mentioned, with monetary and industrial characteristics. Unfortunately, central banks don't hold silver anymore as part of the reserves, and the reason for that is just that it's so bulky to store. I have been in our vaults that hold upwards of 1000-ounce bars and it's pretty astonishing to see the amount of space you need to store that amount of silver.
But I think it's always going to have a monetary role. The reason for that is it's accessible. The denominations of it make it very accessible for retail investors. We see it continues to play a prominent role amongst retail investors as a monetary metal, but a growing share of silver will go into industrial processes. The world right now is in hyperdrive in terms of building out solar capacity. It is building massive amounts of new capacity. It has in the last year, and it will continue to build out very aggressively.
Most people have no idea that within a solar panel, they use solar paste to basically release the electrons off these wafers and to move them out of the panel. About 12% of all the silver produced and recycled each year goes specifically for PV panels. As the world expands, we see that number going up. Again, technology is always evolving. Commodities are thrifted, so it's hard to know exactly how much silver will go. But between solar and EV adoption, given how conductive silver is, we see it playing a more important role in new and emerging industrial technologies like solar and EV.
Jesse Day: What about copper, which is another important mineral for the energy transition? It's used in anything that requires electrification. It's not only the demand from the energy transition, but as we see emerging economies, a new middle class develops. In a lot of these emerging economies, people want more access to electrification. That means more copper. It looks like demand is going up across the board, but there's not enough supply. I think that's been made quite clear by now. The research has been done and it takes a very long time to permit a new copper mine. To bring a copper deposit from discovery to production is incredibly time-consuming and expensive, and the supply just isn't there right now. How do you see that situation being resolved, and what do you think the future of copper is going to be?
John Ciampaglia: I think people are realizing the real backbone of this whole move to electrification. There are just so many applications that require copper. If you think about copper mining, we've been doing it for thousands of years. What does that mean? Well, it's obviously a very mature industry, unlike something like lithium, which is an emerging industry. Because we've been mining and smelting and refining copper for thousands of years, we've discovered all the easy deposits and now it's becoming harder and harder to replace reserves because we've been mining this mineral for thousands of years.
The big copper deposits that are in places like Chile, at one point were around 1% ore grades, and now we're down to about half of that, 0.5%. These are big projects and they’re very earth moving, intensive, and we're getting less copper in the ground. As these big open pit mines come to the end of life and grades are falling, there is a bit of an alarm being sounded that we need to discover and invest in more copper deposits to ensure we've got the critical mineral for all things electrification.
Cabling and transmission is a big one, but there's also copper within EV battery cells. Then the other issue is some of these copper deposits are in countries that are more difficult and represent higher geopolitical risk. I think this is a theme for many different commodities, which is that as we find the easy deposits, and then we have to go to places that are more difficult to either mine because of location or perhaps geopolitical risks with respect to a particular region. It's making it a little less predictable in terms of where is that future supply going to come from.
One of the big challenges is permitting, and it's being talked about now, which is music to our ears, because it's something that's largely been ignored. Companies obviously talk about the challenges of permitting a new mine. It's very onerous, and now you're seeing government officials talk about permitting reform, and it's everything from mine development to transmission lines. I love when mainstream newspapers and publications help educate the marketplace about some of the challenges. Everybody wants to decarbonize and move to cleaner energy and then they read articles and say, "Well, such and such transmission line in the United States, that took eight years to build because of all the challenges and permits." It's the same thing with mines. It's not unheard of to have a new mine take eight or 12 years to get into production because of some of these permitting challenges.
Certain politicians and governments are actively talking about permitting reform, which is great because they realize that if they don't make this less onerous... This isn't about abandoning sustainable, responsible mining, but this is about taking away multiple layers of bureaucracy to expedite the process.
Jesse Day: I think a lot of people don't realize just how important mining is. They want the result, but they're not interested in the process. I think people need to pay more attention to that and educate themselves. You mentioned lithium there and I'd like to touch on that as well. You said it's more of an emerging story, as opposed to copper, which has been going on for a very long time. From your perspective, how are you seeing the lithium market now? How is it evolving, and where do you see it moving forward?
John Ciampaglia: Well, lithium has had a wild ride the last three years. Three years ago, the price of lithium was around $15,000 a metric ton. It peaked last year at about 80,000 a metric ton, and right now, we're about half of that. We've had a very meaningful correction, not unexpected. I don't think anybody thought an $80,000 metric ton price was sustainable, but it really highlights something, which is you've got an emerging industry, and when it hits a shortage, which it did last year, it can cause prices to really take off.
Why we had a shortage last year was because we sold the most EV, electric vehicles, in history, about 10 million units. China was driving that, but it's also being driven by Western markets that are finally playing catch up. As the price differentials between internal combustion engines and vehicles and EVs start to compress, if you're in the market to buy a new car, all of a sudden, it's no longer like five years ago where only really wealthy people could buy electric vehicles. Now a lot of people have the option to think, "Should I buy an EV?"
Last year, we had 10 million units sold and this year, many analysts think we're going to hit 14 million. We're talking about 40% growth. When you've got that kind of growth and you've got an emerging industry in terms of the supply chain, it is more vulnerable to these kinds of supply shocks and we saw that. Even at $40,000 a metric ton, that is a very attractive price for lithium companies to explore and develop and make good profits on their production.
You've seen companies generating strong revenue and earnings growth. You're seeing a lot of M&A activity in the lithium sector because everyone is trying to bulk up and win business. The other interesting dynamic you're seeing in the lithium space is car companies making investments in lithium companies. This is almost akin to 100 years ago when Henry Ford owned rubber companies and steel companies to be vertically integrated and to control his own supply chain. We're seeing that right now in the mining sector, where OEMs, the car companies, are starting to make strategic investments, either equity investments or they're providing capital to these mining companies, through uptake agreements so that they're at the front of the line of future production.
We're seeing it in lithium, aggressively. General Motors investing $650 million in equity in Lithium Americas was a good example. Stellantis, which is the company that owns Fiat and Chrysler and Jeep, has been very active in terms of making equity investments in different copper companies and lithium companies. The companies that are building these EVs are very concerned about the security of supply, and they're starting to make strategic investments in mining companies.
If you had told me that was going to happen two or three years ago, I would have laughed because it's the last thing a company would want to do is to start making equity investments in mining companies. But they're doing it because they know that if they're going to be making multibillion-dollar investments in new EV manufacturing platforms, they are not going to build these platforms and then find out three, four, or five years from now that they don't have the raw materials to actually operate these plants. They're not waiting around, they're making these strategic investments, and it's very powerful.
The other thing that's happening is the level of concern around the supply chain has become so front and center that governments here in Canada and in the United States, for example, the Department of Energy in the United States is, through the Inflation Reduction Act, handing out multi-hundred-million-dollar loans to a number of companies that are trying to develop lithium deposits in places like Nevada.
We have lithium in Nevada. It's largely been untapped, and the U.S. government's saying, "Look, we want to build this capacity, not just primary production, but also the processing, because we don't want to be reliant on lithium from, let's say, South America that then goes to China for processing and then gets assembled in the batteries, and batteries come back to the U.S. and put into Ford cars." They want to incentivize local production of lithium and local processing to turn those into chemical forms so that they go into batteries built on U.S. soil, and lo and behold, here's your tax credit of $7,500 per EV.
It's a very interesting dynamic right now because it's not just about a new technology reaching adoption; it’s also about a new supply chain being built outside of China. That is going to be the primary catalyst for what we believe will be hundreds of billions of dollars of investment in EV supply chain investment in Western countries.
Jesse Day: Thank you for giving us all that insight into those different commodities. I would like to end with discussing how you evaluate a mining project, maybe to provide some color on your process. When you look at a mining project, what are the things that you see that make you think it could be a favorable investment, and what are maybe some red flags that you look for as well?
John Ciampaglia: Well, it's obviously not my direct area of expertise, but at Sprott, we have a team of active managers that have been investing in mining for decades. It's a tricky business and it’s very technical. You've got to be part financial analyst, part mining engineer, part geologist. For earlier stage companies, they're much more technically focused in terms of trying to assess.
The last piece is around jurisdiction. You need to ensure you're operating in places with good mining laws, because unfortunately, as we've seen just in the last week, in places like Niger, which is a big uranium mining country with about 5% of global production, unstable governments can create a lot of uncertainty and scare away investment capital. As I said earlier, as we move further afield and are finding deposits in more and more countries, jurisdiction is becoming increasingly important, making sure that we're investing in sectors that have acceptable levels of risk.
On the ETF side of our business, they're passive based indices. But I think it's fair to say that we use a lot of our intelligence and knowledge and expertise at Sprott in how those indexes are constructed with our partner at Nasdaq. We do a lot of the basic research around the companies and what exposures they have to various metals to provide that data to the Nasdaq so that we can build a suite of pure play indexes that give people the target exposure that they're after.
We're very focused on the whole spectrum, actively managed strategies, passive strategies that incorporate a lot of our active expertise, and then, obviously, physical commodity funds is a very large part of our business and we would love to grow that. As interest in commodity grows, we find a lot of institutional investors get a little bit nervous about investing in mining just because it's very technical, particularly for generalists, and sometimes they have a positive view on a commodity and they say, "I just want to get exposure to the spot commodity market. I'm not too comfortable trying to pick the winners in the sector in terms of evaluating specific companies, or I might just buy a basket through an ETF to diversify any company specific risk away." Physical commodities, I think, is another part of the investment landscape that is going to grow in prominence over the next few years.
Jesse Day: Absolutely. John, thank you so much for joining us and sharing your knowledge with our audience. You’ve discussed quite a bit about Sprott and the ETF products. Maybe we could finish with having you just break down quickly the difference between a physical fund such as the PSLV and the SLV when it comes to ETFs and why investors should be paying attention to that difference.
John Ciampaglia: Great question. It's important to understand what you own. These are technical financial products, but we've had an incredible success at Sprott by offering precious metals funds that are 100% based on fully allocated metal that we buy and that we store at the Royal Canadian Mint, which we think represents the absolute lowest counterparty risk in terms of a storage party. When you buy an ETF, the authorized participants are the only parties that create and redeem shares, and they basically are responsible for sourcing the metal that they provide the ETF in exchange for the shares they then sell in an open market.
When we raise capital through our vehicles, we take the cash and our trader procures the metal, and we arrange for shipping to our vaults. It's a very different product structure and mechanic. As I said, having the funds 100% backed by fully allocated and segregated metal in the Royal Canadian Mint is a real advantage. We also have a physical redemption feature on our funds, which, believe it or not, sometimes people take advantage of, which is another key differentiator versus some of the other traditional ETFs.
Jesse Day: Great. Well, I will put a link in the description below to the Sprott website as well as Sprott ETFs website, where you can find my work as well. I've been doing some educational material and some videos for Sprott. Once again, John, we really appreciate you coming on the show and sharing your knowledge with us and looking forward to keeping in touch and keeping up to date on Sprott.
John Ciampaglia: Thanks for having me. I want to just congratulate you on all your work. It's top notch and it's really needed because I think there's a very thirsty audience to educate themselves about investing in commodities and mining.
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