Critical Materials in an Era of Energy Security and Defense

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In this webcast replay, Steve Schoffstall of Sprott and Sara Marshall of Nasdaq analyze how intensifying energy security and defense priorities are driving changes across critical materials markets. Their discussion highlights key demand trends in uranium, copper and rare earths, along with the opportunities and volatility shaping the investment landscape.

Webcast Transcript

Edward Ware: Good afternoon and good morning, everyone. And welcome to our webinar on investing in critical minerals. My name is Ed Ware, and I lead the Nasdaq wealth specialist team here in the Americas. Our team's mission is to deliver best-in-class educational content into the wealth space, and I have the pleasure and honor of being your moderator today.

For those of you watching the news cycle around the transition to renewable energy and wondering if there's an investment opportunity here, this is the webinar for you. The best days for me here are the ones where I get to teach and learn, and today is one of them.

We have two excellent, very informed speakers today. Steve Schoffstall joined Sprott Asset Management USA in April 2022, bringing more than 20 years of experience in the ETF industry. He leads Sprott's ETF strategy, including the creation, launch and ongoing support of Sprott's U.S.-listed ETFs and European-listed UCITS ETF strategies.

Before April 2022, he was the Senior ETF Product Manager at ProShares Advisors, where he oversaw launch initiatives and lifecycle management for more than 200 ETFs and mutual funds. Before that, Steve was at Vanguard and had responsibility for ETF product management and capital market functions. Before ProShares and Vanguard, Steve started at ProShares Advisors in the portfolio management group after earning a Bachelor of Science in Finance and an MBA from Penn State University. 

Next up, we'll have Sara Marshall, a senior index insight strategist here at Nasdaq with over a decade of industry experience. With her expertise in point-and-figure and relative strength analysis, Sara provides a unique perspective for uncovering market insights and crafting innovative investment strategies. A dedicated advocate for data-driven decision-making, she remains steadfast in her commitment to empowering clients and investors of all levels to navigate the complexities of financial markets confidently. Previously, Sara spent eight years at Dorsey Wright, culminating in her role as an asset management research senior analyst. Dorsey Wright became part of Nasdaq in 2015, and we're all glad that Sara's on our team.

Today's agenda will consist of three sections. In the first section of today's program, Steve will spend some time orienting the audience to the demand drivers for the various resources that are enabling the global shift towards renewable energy. He may also include additional education on how national defense technologies are driving demand for critical materials.

Sara will then provide brief comments on the importance of index construction when investing in these relatively new markets. Steve will then take back the floor and offer you actual solutions you can use to capture the supply-and-demand dynamics of critical materials in your portfolios.

With those comments out of the way and without further ado, take it away, Steve.

Steve Schoffstall, Slide 3, Introduction

Steve Schoffstall: Thank you, Ed. Happy to be here and talking about all things critical materials. For those who aren't aware of who Sprott is, we're a $65 billion asset manager. We're based in Canada, but we have offices throughout the U.S. We're probably best known for our physical trust products, covering gold, silver, platinum and palladium.

We also have the largest physical uranium fund in the world, which stores physical uranium. It's about $7 billion in assets, as well as the only physical copper trust in the world, available to both retail and institutional investors.

We've spent the last four years building out our ETF pipeline. We now have 13 ETFs in the U.S., with about $7 billion in assets. As a specialized provider, Sprott really focuses only on precious metals and critical materials. That's where you'll find our ETF exposure. We're excited today to talk about a few of those funds and a critical materials opportunity.

Steve Schoffstall, Slides 4-7, Surging Energy Consumption

With that, we'll dive right in. We'll take a look at some of the things driving demand for critical materials, and the first is surging energy consumption, particularly electricity. Looking at global electricity demand growth, we expect about a 157% increase through 2050. Two forces are driving a lot of this.

One would be that, if you were looking at developing economies, you would see that they're starting to have a higher standard of living. Things like air conditioning and more network connectivity are really driving demand from developing economies. And when you look at more developed nations, it's about artificial intelligence, electrification and the reshoring happening in the energy space. 

One of the areas where we're really seeing a significant buildout is in nuclear energy. This is because nuclear energy provides reliable base-load power. So not only is it clean, but it also provides an always-on electricity capability compared to wind and solar.
The U.S. is currently the largest nuclear power, for energy purposes, with China quickly approaching. One of the reasons why we see China building out nuclear capacity is because they are very energy dependent, as has been all over the headlines with the ongoing conflict in Iran.

A lot of their oil imports have been significantly disrupted. If you look at the pace at which China is building out its nuclear capacity, it's adding about 4 to 6 new reactors a year to its pipeline. These are reactors that are progressing from approval through planning into the construction phase. We’re seeing very significant growth out of China. And given the growth that they're doing, in the nuclear space, they've gotten very fast and efficient at launching new nuclear reactors. When you look at many Western economies, you can see the white boxes here for the U.S., where we have several proposed reactors.

Many of these proposed reactors are small modular reactors (SMRs), a next-generation reactor type. They could be much smaller and can also be plugged into existing infrastructure. For example, if you had a decommissioned coal power plant, you could put an SMR onto the location of that plant, hook it into the grid, and now you have power that's ready to go. Those SMRs are currently being developed. There are several technologies at this point, with most estimates indicating they will start being rolled out commercially around 2030 or 2031, and it's expected they will ramp up considerably thereafter.

Another metal that's getting a lot of attention is copper, and we'll talk a little bit more about some of the individual metals as we get closer to the end of the presentation. But copper is one of those metals needed across all aspects of the economy, whether in residential or commercial real estate, high-tech uses, artificial intelligence or just everyday life. Chances are, if there's electrical current moving through a device, copper is involved in large quantities. What we're seeing in many of these growing economies, such as India, China and Brazil, is that they're consuming massive amounts of copper, which is really driving overall demand. We'll take a bit of a deeper look at copper as we move through.

Steve Schoffstall, Slides 8-12, Energy Security 

Another aspect of the supply chain that's started to take hold over the last three or four years, and even more so in the last year, is energy security. We're seeing China build out clean energy in such large quantities, not necessarily for environmental purposes, but because having clean energy and renewable sources like nuclear reactors can reduce its energy dependence on other parts of the globe, particularly those subject to supply disruptions.

Germany provides evidence of the importance of energy independence. After Russia invaded Ukraine, they had to reignite their coal plants, after they started decommissioning and closing down their nuclear power plants. There are signs even in Germany and many other European countries where they're doing a one-eighty and reconsidering their opposition to nuclear energy. This is an area not only for nuclear energy but also for other critical materials, where we expect considerable growth over the next several decades as companies seek energy independence.

One aspect of the energy independence discussion focuses on China's control over many critical materials. China, for example, mines about 70% of the world's rare earths. But when we start looking at downstream production, the refining capabilities, the magnet production, it's over 90% of that market that they control. Other metals—including lithium, copper, nickel and battery metals such as cobalt, graphite and manganese—are also significantly influenced by China.

And you'll notice that, for nickel, for example, a lot of that is based on the blue-shaded region that passes through Indonesia. A lot of those Indonesian mines have Chinese influence, whether through refining capabilities or direct mining. China spent the better part of 30-35 years building out its supply chains for different commodities. And because of this, we're starting to see not only governments, but also private companies act. JPMorgan recently announced a $1.5 trillion initiative to invest in various aspects of the economy that are essential to U.S. energy and economic security.

Within that, there are about 30 different points that they're looking to invest in. Of those, about four are directly impacted by critical materials. One would be through the mining and processing of critical materials. Nuclear energy is specifically called out as is, solar wind and then also battery storage. Not just EVs, but also battery storage is used for the grid. 

Another thing we're really starting to see shape the critical materials markets is what governments are doing and the actions they're taking. A lot of this is being led by the U.S., not just in dollars but also in deals. If you were to go back to the Cold War, you would see that the U.S. was primarily focused on stockpiling and on procuring these critical materials rather than on expanding domestic supply chains.

A recent BMO Capital Markets report was released, examining all actions by the Trump administration over the last 16 months or so, and they found that about 60 projects have received about $18.6 billion in funding for critical materials. We're seeing several initiatives we typically don't see from the U.S. government—such as direct equity stakes in companies producing these critical materials. MP Materials is probably the best-known of these, with the government providing funding. They take an equity stake and are looking to go from mines to magnets, as they call it, for rare earths production.

Lithium Americas and Trilogy Metals are just a few of the others that have seen significant investment from the U.S. government. As part of these actions, we're seeing price floors in some cases for rare earths, which are giving companies some consistency and insight into longer-term prices. Those price floors were about twice the going price of rare earths at the time.

What this does is give these companies some certainty that they can invest in the U.S. They understand that over time, they'll have insight into what the minimum prices will be, for in some cases, up to about a decade. On top of that, we're seeing the Department of War and other agencies stepping into an agreement to buy 100% of the output, over a period of ten years. This is creating an environment where investment and capital can flow into the critical materials supply chain. This involves not only the materials needed to build out the infrastructure, but, in Trilogy Metals' case, the access to the mining sites, so that copper can be mined domestically.

This is becoming increasingly important given China's actions, particularly regarding rare earths. This is an area where they've really gotten a dominant stake, and we've seen them exert their influence over the last couple of decades. We'll talk a little bit more about rare earths as we move through, but that's becoming an increasingly important aspect in energy security and trade negotiations as well. 

Steve Schoffstall, Slides 13-18, Critical Materials: Essential to Defense

There’s another aspect in which critical materials flow beyond clean energy and energy security, and that's related to defense. There's a renewed interest in defense spending. Just last year, NATO outside the U.S. agreed to double its defense spending from 2.5% of GDP to 5% of GDP.

They committed to doing this through 2035. What we're really seeing, if we look at the chart on the right-hand side, is that the lighter blue line is the increase in global defense spending. And last year it reached a record of over $2.6 trillion. Significant amounts of capital are being spent by defense industries worldwide. A lot of this is geared toward securing critical materials, as defense departments across the globe look for ways to stockpile various critical materials and other metals needed, in addition to expanding the industrial base and military infrastructure. When we look at how this fits into the bigger picture, the three main drivers of strategic investment are defense, energy transition/energy security and artificial intelligence. The spending or investments in these three industries alone are up 78% on average since 2020. Looking at the bar chart on the right, we can see that combined spending in these three areas of the economy is now about $5.3 trillion, just last year alone.

This is a very significant change for many of these critical materials, and we'll discuss, in the case of copper, a very specific and detailed example of what that means for demand expectations. But the main takeaway here is that we have a shift in structural demand that didn't exist five or even ten years ago, with the defense, energy transition and artificial intelligence providing structural demand levers, and increased investment going forward.

It's probably a good opportunity to touch on AI data centers briefly and what that means for critical materials. This is an area where we see the U.S. and China really battling it out to be the artificial intelligence power. A lot of that is related to the global data centers that are needed to run these powerful AI build-outs. With that, we can see that there's expected to be a fourfold increase in data center power demand from the AI data center component alone. It’s a significant driver in electricity demand, and that's one of the large contributing factors to that overall 157% increase that's expected. These are very energy-intensive data centers.

For cooling and the raw computing power needed to run these AI data centers, they are very energy-intensive. And what we're seeing is that many of these hyperscalers, such as Apple, Meta, Amazon, and others, are really leaning into not only cleaner alternatives (often required by corporate mandates) but also increasingly turning to nuclear energy. They're doing this in several ways. One would be buying nuclear-generated power now. Another is investing in plant restarts. There's 3 Mile Island in Pennsylvania. There are other nuclear sites across the U.S. where they're looking to bring them back online to power data centers.

There is also Talen Energy in Northern Pennsylvania. It's the picture there in the top right-hand side. You can see that the Amazon data center is built on the property or right next to it, so it has easy access to nuclear energy. We're also seeing considerable investments from many of these companies directly in SMR technology, and we expect they'll add growing amounts of nuclear energy as it becomes much more plentiful over the coming decades. 

Steve Schoffstall, Slides 19-35, The Case for Critical Materials

Those are the macro demand drivers for critical materials. But if we were to look at critical materials, this is one of those terms that, depending on where you look, could have some different definitions. The U.S. Geological Survey has its own definition of critical materials, as does every other country in the European Union. But typically, when we talk about critical materials, we're looking for a few things. These would be materials essential to energy security and closely tied to the generation, transmission and storage of energy. On energy generation, we think of things like uranium or silver, which is a unique metal because it's a dual metal.

It's both a precious metal and increasingly an industrial metal, as are rare earths. Rare earths are used in things like wind turbines and EVs. For transmission, no metal is used more than copper to transmit electricity. As I mentioned earlier, wherever you see an electrical current, you're likely to find copper.

It bridges the gap between generation, transmission and storage. You'll find it in all three aspects of critical materials. And then finally, we look at the storage side, typically called battery metals, lithium, nickel, manganese, cobalt and graphite are all essential to different battery chemistries, whether it's electric vehicles or if we're starting to look at the grid storage. We looked at the spending and investment that we're seeing from a defense standpoint. When you look at the energy transition, this is an area that really reached an inflection point back around 2020. That's where we've really started to see a global ramp-up in annual spending. This is led by China, the world's top spender on energy transition and clean energy. But this also includes not only producing energy but also providing transportation and expanding the grid.

Just last year, alone, we saw about $2.3 trillion invested in the energy transition. A very significant source of that structural growth that, in most cases, sits outside of global economic health, which is what we're typically used to seeing for a lot of commodity cycles. When you look at many of the critical materials, the main takeaway is that electric vehicles depend on a range of them. Also, copper is a key component across many aspects of the energy transition and clean energy technologies, and no single metal is required. It's a basket of metals that's needed to fuel the growing electricity demand.

Let’s take a quick look at what we're seeing in growth projections for demand and lithium. If we look at the lighter blue line rather than the taller, darker blue one, that's probably a more accurate estimate. These are two cases. One would just be: if we were looking at current stated policies by many governments, this would be the demand and growth we're expecting to see for these metals. If you were to look at copper, there's not a significant amount of growth there. The reason it looks so much smaller than lithium, for example, is that it's the third most mined metal on Earth. That market is already so large that just 100% growth, or even 50%, would be a very significant amount of copper that would need to be mined beyond what's happening at this point. One thing that often gets lost for many U.S. investors is the importance of EVs. Our view is that we would expect to see hybrids and, in some cases, plug-in hybrids act as a bridge between gas-powered vehicles and EVs.

I think we've seen, at least in the U.S., that the EV market has pulled back considerably. But that's not the same thing that we're seeing in other parts of the globe. When you start thinking about the European Union and China, areas that are much more urbanized, where they're not used to the American culture, where we take a four or five-hour drive somewhere, and things are much closer. You tend to see widespread adoption of EVs, and in some countries, new-car sales are rapidly approaching 100%.

It's a very significant driver of growth, particularly internationally. This year, it's expected that an additional 24 million EVs will hit the road. This is a significant factor to consider, given the growing demand for materials for electric vehicles. If you were to look at just your conventional average everyday, gasoline-powered car, it's about 34 kilograms, so about 70 pounds, give or take. EVs would require over 415-420 pounds of the same materials that are within gas powered cars, but also other metals too, things like rare earths that you would see, that are often found in the motors, for the EVs and, things like, graphite, which you would find in the battery metals in a lot of cases, that don't exist in gas powered cars. We do see those in EVs. 

Let’s take a quick look at a few of the critical materials we're really focused on, as well as some of those I laid out. We'll first take a look at uranium. This is a market where, if you look at production, much of it comes from Kazakhstan. They're going to produce about 40% of global uranium. A lot of that is then sent to Russia, where it undergoes enrichment and is sold worldwide for use in nuclear reactors. Canada is a growing player. They're uranium-rich, and we see a number of projects close to coming online and moving through the pipeline, where they're increasing their output, which will benefit many of the mandates we see from U.S. and allied countries looking to source materials from allied nations.

There is a significant period of growth there. An interesting note about Kazakhstan: China is trying to improve relations with the country. And if we were to look across the globe at which countries are buying uranium, typically, what we're seeing with other critical materials is that China is leading in uranium stockpiling. Whereas we often see many other countries and utilities in a wait-and-see mode. They're waiting for uncertainty to leave the markets and for prices to come down, which have increased quite significantly over the last four or five years. Our view is that, given the structural demand we're seeing for uranium, we don't anticipate those prices coming down significantly, and we're seeing prices moving much higher.

If we were to look at the supply and demand characteristics of uranium, the main focus is that supply is expected to peak in the next 6 or 7 years. At the same time, we expect demand to continue to outstrip supply. There is some secondary supply and some inventories that can be pulled on for the next few years, but we’ll need to see increased production. One way to increase production is to make the permitting process much easier, so these companies can go in. Instead of having ten or fifteen years to build a mine, we see that timeline significantly shortened.

The U.S. and Canada, specifically, are working not just on uranium but also on other critical materials to reduce the hurdles and shorten the time needed to get a new mine up and running. But specifically for uranium, we anticipate a cumulative supply deficit of about 1.4 billion pounds through 2045. To put that in perspective, we'll probably produce around 170 to 180 million pounds this year alone. China, the U.S., India and other countries are expanding their nuclear fleets, and we expect this to be addressed moving forward.

I've mentioned copper a few times, which has a very similar story. If you look at the upper-right-hand corner of this slide, you would see a similar supply-and-demand outlook for uranium, where we entered a supply deficit last year. This was about two to three years earlier than many other investment houses anticipated. Some had it in 2026, 2027 or 2028.

We experienced several supply disruptions at major mines last year, significantly affecting production. Two out of the five largest mines were completely or mostly offline by the end of the year. Not only do we have about a 5% disruption rate in copper mining in any given year, but the industry is also working with declining ore grades, which means it has to extend the life of existing mines. The material that they're moving isn't as ore-rich as it once was.

This makes it much more difficult not only to meet current demand but also to grow to meet future demand. A lot of the mines that are being discovered, if we were to go back over the last ten years or so, just a fraction of those mines would be considered major deposits. This is an aspect of concern. And one of the reasons why we see copper, even though we start to see this overarching feeling that the global economy could be softening, copper, unlike what we've seen in the past, where it would have reacted negatively to that scenario, is actually at near all-time highs here in the last few weeks.

That's because there's a structural demand, driven by things like the defense, artificial intelligence, and energy transition we've been discussing, that has really created a demand that wasn't there ten years ago. We're seeing a significant change in how copper reacts.

It's no longer just a barometer of global economic health. It is becoming a strategic asset. And if we look throughout history, we see how copper has performed during other periods of economic expansion. We're currently in an industrial, electrical and energy-related expansion in the economy. But, on average, every 25 years, we see the demand for copper double. We saw that as China was building out its industrial base over the nineties and early two thousands, and we expect this continued upward trend in demand to continue well into the foreseeable future. 

I’d like to spend just a few minutes on rare earths. This is an aspect of the critical materials market that is probably the least well-known to most, but is the most reported on in the press. It's a very important aspect of the global economy, and it's becoming increasingly significant as we see China imposing export controls on many of these materials, controlling over 90% of the market in many cases. We are seeing surging demand for rare earths, a subset of critical materials. There are 17 chemically similar metals. Because they are so similar, separating these metals is very technology-intensive and very difficult. The separation aspect is very expensive, time-consuming and intricate.

This is an aspect of the market where the U.S. used to be the leading producer of rare earths back through the nineties, and China really took over production, now controlling the industry. This remains a highly contentious issue in U.S.-China relations and elsewhere.

If we look at some of its uses in defense, many of the things our military depends on are heavily reliant on rare earths. They tend to have very strong magnetic properties, allowing them to operate at very high temperatures. It makes them extremely important for applications such as fighter jets and missile guidance systems. But also, when you start looking at missile interceptors, they're extremely important for that as well, given their magnetic properties. This is an area of increasing concern. 

We've seen the investments by the U.S. government, as I showed on another slide in MP Materials. There's Sierra Verde in Brazil, where the U.S. has been making some investments, and it looks to be acquired by USA Rare Earths in a potential deal announced in the last few weeks. This is an area where we're seeing that China has really weaponized its hold on rare earths in the past. We saw back in 2009, when they limited all exports to Japan. That led to a 26-times increase in the price of rare earths.

As China imposes export controls on many of these critical materials, prices rise. When prices rise, countries often try to boost domestic production. When that happens, China can flood the market, making it no longer profitable for them to increase production. That's why what we're seeing from private companies like JPMorgan, along with government investments, is so important: to help crowd in that capital and build out our industry.

Another aspect of rare earths that I think tends to get underutilized or underdiscussed, because it focuses so much on defense, is that it is used in your everyday life. And anytime you look at your cell phone, those are rare earth magnets that make the phone vibrate. We also see that rare earths are used in visual displays, color brightness and related features. This isn't just a defense aspect, but we see it in clean energy and everyday technology as well. Its uses are far-reaching, including MRI machines and similar devices.

Another area where we're seeing significant growth as of late is lithium. Three years ago, spot lithium prices were trading somewhere around $80,000 per ton. They then fell down below $10,000 per ton. Over the last six months or so, they've really started to climb rapidly, and we're now seeing them trading around 26 or $27,000 a ton.

A lot of attention is again being paid to lithium. That's one of those aspects: growth in EVs from overseas markets, and in battery energy storage systems, which are used to back up the grid. We're seeing significant growth there. We're also seeing production cuts, which are supportive of the price. And because of that, we've seen lithium prices move considerably higher in the last six months, and the underlying lithium mining companies, as well, have been performing quite well over that time period. 

So just one more metal before I kick it back to Ed here. It's silver, which many consider a precious metal because of its historical use as such. But it's increasingly being used as an industrial metal. About 59-60% is being used for industrial purposes. Silver has over 10,000 uses, ranging from investments to semiconductors. It's the most conductive metal on Earth, with copper second.

Whenever you have energy-intensive applications like data centers and semiconductors, you tend to find silver in them, which helps conduct electricity. Another aspect is that, if you look at how silver is mined, Sara will touch on our pure-play methodology: 74% of silver is mined as a byproduct metal. What that means is that a miner could be mining copper and, along with the copper, producing small amounts of silver. That's how 74% of silver hits the market.

Identifying those pure-play companies that are just in the business of mining silver is exceedingly important if you're looking to get exposure to those miners. Given what we've seen in the prices of silver, where I think today, around $85 or $86 an ounce, the all-in sustaining cost of mining silver, for those pure-play miners, is about $14.58 per ounce. If you look at the margins, these companies are operating at about an 80% margin, assuming sub-$72 silver prices. We're considerably higher than that. It's allowed many of these mining companies to see something similar for copper miners, who are operating at over 60% margins as copper prices are at record highs.

This has helped many of these mining companies, as their balance sheets have improved and their investability has increased. It's really helped them weather the higher gas and oil prices we've been seeing, so they can continue those operations. And just one last note on the pure-play aspect of silver. If you were to look at the 10 largest silver producers in the world, zero of them are primary silver producers, meaning that they have less than half of their revenue coming from mining silver. This is a very important aspect of the silver market. 

And with that, Ed, I'll take a pause and kick it back over to you.

Edward Ware: Thank you, Steve. I remain impressed by the emphasis and resources Sprott places on investor education. There's a question about your points on planned and proposed reactors. Is there a practical difference for today's audience?

Steve Schoffstall: “Proposed” reactors, they're those reactors that countries are generally looking to bring online. “Planned” would mean, here's a plan to bring them online. It's one thing to say we want to have 100 reactors. It's one thing to say, "Here's a plan to bring 100 reactors up and running," and another to have the under-construction ones, which are already moving and likely to be completed.

Edward Ware: Sara, can you please walk our audience through the importance of index construction when investing in critical materials?

Sara Marshall, NSETM™ Index Construction

Sara Marshall: Absolutely. Thank you so much, and thank you, Steve, for that great context and overall investment thesis. I'm Sara Marshall. I am a senior index strategist on the index insights team at Nasdaq. I'm going to walk you through how the rules-based NSETM index is built, what goes in and out, and the overall methodology behind the strategy. 

But let's just start with what the index tracks. What is the index aiming to capture? The index tracks the full value chain of companies tied to the critical materials Steve just discussed. The metals that are essential to electrification and the energy transition, and everything that we just learned about. And when I say the full value chain, we're looking at every step: mining, exploration, refining, recycling and investing.

There are nine critical materials here: uranium, copper, lithium, nickel, cobalt, graphite, manganese, rare earths and silver. We're looking at the companies that find these materials, dig them up, process them and even invest in them. What qualifies with this index? It is a rules-based index, so these are just some of the high-level rules.

Those nine eligible materials that I just went over, related to energy, defense and electrification metals. And who's eligible? We're looking at producers, developers, explorers, refiners, smelters, recyclers, and companies investing via royalties, royalty streams, debt or equity.

Eligible names are being determined by Sprott, our third-party research provider and partner on this index. So they are the subject-matter experts who will classify those names and set the intensity threshold, as Steve mentioned.

The names eligible for this index must have an intensity score of at least 50% based on revenue from these eligible materials. If there is no revenue stream, or if it's not appropriate in that particular metal to have that revenue threshold, this would include junior mining companies involved in the development and exploration of critical materials. They are assigned an intensity threshold score of 50%.

We do have liquidity, floors and thresholds for new and existing names in the index, and it is a global index eligible across 45 exchanges. Right now, about 20 companies or countries are represented, with Canada leading at about 37%, followed by Australia and the U.S. 

The weights are set using the intensity score I discussed, which Sprott assigns. We're going to take the free float market cap multiplied by the intensity score. The larger, more focused companies weigh more. Those more involved in critical materials and their larger companies will receive a higher weighting. Each name has a cap. In a single stock, we'll rebalance to a weighting of 4.75% or higher. Names will drift outside a rebalance, but that's why we have a semiannual rebalance reconstitution to bring those weights back down. Each material is capped at 25%.

Those weights will drift between resets. Right now, uranium is one of the top, and I believe it is right outside of that 25% threshold. Upon the next rebalance, we'll bring that back down to those caps. And again, the semiannual reconstitution and rebalance will happen together in June and December. 

The current exposure comprises 124 companies spanning eight critical materials and 20 countries. At the material level, again, uranium leads, and at the country level, we're seeing Canada. In terms of ICB industry exposure, we're looking at about 93% in basic materials, about 7% in energy, and just a sliver in utilities. 

Looking back at live index performance, this index was started in December 2022. Since that time, we've seen the index on a price-return basis gain 111%. Right behind them, the benchmarks shown are the S&P 500 at 81%, the UBS Rare Earths & Critical Minerals Index at 28%, and the Bloomberg Industrial Metals benchmark at 5%. As I mentioned, a 111% cumulative return with about 25% annualized return over the last 3.5 years. 

Here is the overview of the methodology: rules-based, four moving parts, what's in, who counts, how they're sized and when they reset. The nine eligible materials that we discussed, and let Steve go over in great detail. The inclusion criteria again are based on a Sprott classification and an intensity score of at least 50%. We're looking at the whole value chain in scope, and the intensity score will filter for that exposure. A theme-adjusted free float weighting: the free float is multiplied by the intensity score to determine those weights, with a single-stock cap of 4.75% and 25% per material at rebalance. And again, the reconstitution and rebalance are semiannual.

When that basket is refreshed in June and December, the reference dates are as of the last trading day of May and November, respectively. So that's again the high-level rules for the index methodology, and Ed, I'll throw it back to you.

Edward Ware: Thank you, Sara. As always, you must know what you own and understand the power of a rules-based allocation within a portfolio. Now Steve is going to take us home with some examples of investable solutions offered by Sprott that are designed to deliver economic exposure to the market Steve covered in his earlier comments. Steve, the floor is yours again.

Steve Schoffstall, Slides 36-46, Sprott Critical Materials ETFs Overview of Funds

Steve Schoffstall: Thanks, Ed. I mentioned 13 different ETFs that we have listed in the U.S. Today, we're talking about SETM, the Sprott Critical Materials ETF. This is going to be that one ETF that, if you're an advisor and only have one ticker to allocate to a theme, many advisors use as their one-ticker solution. It gives investors access to those nine critical materials. 

For investors who want a more tailored approach or have a view on any particular critical material, we have a number of strategies, whether uranium-, copper-, or lithium-based. The nickel fund is the only Nickel Miners ETF in the world. And one thing all these strategies have in common is that they are pure-play strategies. Different rules underlie each index, given the relative size of each market.

But I'd also like to draw your attention to REXC, the Sprott Rare Earths Ex-China ETF. 

We launched this a month ago today. This is the only ETF that focuses on exposure to rare earths. While you look at SETM, it has about a 14% exposure. REXC is going to give you about a 96% exposure to rare earths, far surpassing any other competing strategy on the market. And with that, it also has an ex-China overlay. We'll briefly discuss that when we run through the fund details.

SETM is a pure-play critical materials ETF. Some strategies might just have a revenue test, where as long as they have positive revenue, they'll be considered a critical materials fund, whereas SETM has a 50% threshold. These are metals we believe have a very favorable long-term investment thesis, principally driven by imbalanced supply and demand dynamics.

The fund has actually grown quite a bit since we've put these slides together. The assets are actually, at $700 million, having started the year around $250 million. This is a fund that's now been out for over three years. It's had that three-year track record. It’s used by many advisors looking for a one-ticker solution. Advisors are the biggest cohort of users we see from that fund. I won't spend much time on this, as Sara covered many of these statistics, but what you'll see is that it is Canadian- and Australian-based.

I will note that the China exposure is extremely low. We do not, in our critical materials funds, allow any China A-shares investments, and that's also true here, which is why you see that very low China exposure. Many other strategies will have significant exposure to China. There is a large-cap tilt in this index: about 52% in large-cap and about 31% in mid-cap, but you still have meaningful small-cap exposure. We've seen this as one of those industries where the market caps of these companies, as evidenced by their performance, have increased quite considerably. We'll just flash the performance for one second here.

Moving on to the Sprott Rare Earths ex-China ETF, which was launched a month ago with $2 million in assets. We're currently about $42 million. We've seen significant interest not only from investors but also from the domestic and international press. We've been having a lot of discussions there, as this is truly a unique offering in the market, where not only does it have that pure play focus, but it also has that ex-China component. This ex-China component is going to be much more rigorous than what we're seeing with our other strategies in the lineup, where they limit China A-shares.

REXC can't invest in China A-shares, B-shares, H-shares, and depository receipts, and other, smaller nuance share classes are prohibited. Things like red chips and P chips, which can't be invested in. It is truly an ex-China ETF, and it has a focus on rare earths, which is a clear differentiator from the market. One of the things I would advise you is, as you're comparing investments, and we see this particularly with rare earths, that you need to look under the hood to understand exactly what the fund holds.

Some of the other strategies will position themselves as rare earth strategies. In some cases, we're seeing less than 10% exposure to rare earths. Other strategies are primarily lithium funds marketed as rare earths funds and have about a 30% allocation to China. I would caution you: as you're looking at these different critical materials investments, really take a look under the hood and understand what you're earning, because there are significant differences that the pure-play methodology gives investors, which reduce that unintended exposure.

And I don't think you can see that anywhere more than in a rare earths exposure, where it is so nuanced and so small. This is a fund that is principally invested in Australia, followed closely by the U.S. and Canada. You'll see a very significant small-cap component to this. This industry is growing rapidly.

We looked at launching this fund eighteen months ago, and the industry wasn't large enough yet. And as we were working on this yet again, the industry had grown to such a size, not only in number of names, but also liquidity and market cap, where we were comfortable launching a strategy and bringing that to market.

With that, Ed, I'll flip through. There's no performance here because it's only been out for a month, but you can visit our website to see the update at any time. But then I'll flip through the disclosure slides here to satisfy compliance, and I'll hand it back to you.

Edward Ware: Steve, you brought up the conflict with Iran earlier. It's in the news constantly. How has the conflict with Iran impacted the market for critical materials?

Steve Schoffstall: I think some impacts might be felt down the road.
One of the things is sulfuric acid, which is produced in large quantities in the Middle East, but we also see it produced in China. The U.S. is a large producer.

That could have an impact, but, in our view, it would take longer to materialize in many cases. If the Russia-Ukraine war wasn't enough to show how important energy security is, and if COVID wasn't enough to show how important securing supply chains is, hopefully the U.S.-Iran Conflict is shining a light on how important it is to become energy secure, as we're seeing those crude oil shipments being turned off.

We're seeing a lot of countries, really scrambling to find ways to fuel their jets, for example, or keep the lights on. I think that's probably the biggest thing we're seeing in the near term, just how important energy security is.

Edward Ware: Steve, with so many different lists of critical materials, how does Sprott determine which metals are critical materials?

Steve Schoffstall: If you were looking at the U.S. Geological Survey, you'd see there's a much bigger list. They vary by country. As an asset manager, we face a few constraints. One is that we want to have a pure-play benchmark series. And so, with that, there are certain diversification and market-size requirements that must be met.

A lot of the smaller critical materials just aren't investable on their own. Probably even more importantly, if you were to look at the nine we've chosen to focus on, not only are they investable, but they are also metals that, in our view, have variable, favorable long-term supply and demand and are likely to face disruptions.

Because of that, we expect significant investor interest over the coming years and decades. That's where our focus has been. We think that by focusing on these nine different critical materials, you're really capturing a lot of the market. Also, some of the other critical materials can have many uses beyond those we discussed today.

If you were to think of aluminum, for example, you could argue that it's critical to a lot of these different technologies, such as wind turbines and military. And that's certainly true, but its uses are so vast that it still has that non-core strategic use element that can drive into it as well.

Edward Ware: Thank you. I would like to thank the presenters for their preparation for today's webinar. I would also like to thank Jazlyn Ko and Luis Wei from our Nasdaq marketing team for organizing today's webinar and, most of all, you, the audience, for your time. We hope we exceeded your expectations today.