The Metals that Make the World

Podcast Transcript

Ed Coyne: Hello, and welcome to Sprott Radio. I'm Ed Coyne, Senior Managing Partner at Sprott. Today, I have one of our returning guests and one of Sprott's very own, Justin Tolman, Senior Portfolio Manager and Economic Geologist. Justin, as always, thank you for joining me on Sprott Radio.

Justin Tolman: You're most welcome, Ed. It's my pleasure.

Ed Coyne: Justin, I want to talk specifically about what we're seeing in the metals markets today, beyond just precious metals, and really get into all metals, critical materials, steel, you name it, all the things we need in the world today, and why we need them. I also want to talk a bit today about different ways to invest in that space. Whether it's a passive or active strategy and why you think one over the other makes more sense. Let’s unpack this opportunity because many things seem to be happening right now.

Let's start with the base case on why the metals markets, in general, is growing. What are some of the metals out there that are gaining your attention right now?

Justin Tolman: The big macro drivers in the metals and mining space, as I see it, are energy growth and energy and mineral security. This drives a lot of our investment theses right now here at Sprott. Some short-term perturbations are happening in the economy, whether it's tariffs, changing trade policy or other things that lead to increased uncertainty. That can cause investment paralysis, but if you look back at the long-term drivers for commodities, it starts with energy growth. By 2050, this planet will have close to 10 billion people.

That means huge investments in infrastructure: homes, schools, hospitals and highways. They're all hugely resource-intensive. More than half of those people will be in developing economies with long growth cycles, young populations, and rising incomes, and they're working to bring their lifestyle closer to that of developed countries. That means metals and energy. That means power generation and transmission. There is no such thing as a country with low energy consumption and a high income per capita—those things are on a log scale graph at 1 to 1 ratio.

You don't need a little more metal if you're a developing economy. You need an order of magnitude more to lift yourself to developed economies. You put those two things together, meaning more people in cities. We will add two and a half billion people to the world's cities. Guess what? Cities use huge amounts of steel and copper and need way more power than other areas. Over in the developed world, we've seen a big push with the growth of technology infrastructure, AI, telecommunications, and data centers. The amount of energy going into those, the growth rates are eye-watering. It's up 60% in three years.

Three years ago, AI wasn't even in the popular vernacular. You can check the frequency in Google searches, but that's set to double in the next five years. Frankly, our current infrastructure isn't set up for that demand, and it's got to come from everywhere. A lot of that will be what we call non-traditional energy sources. Solar, nuclear, we need all of them. It's not a case of one necessarily replacing the other. The drivers I'm talking about, at least in the medium term, will have to come from everywhere, and it will have to come sooner rather than later.

The flip side of this is the energy and mineral security discussion. That's being moved right into the forefront now. Energy security is power. You're hugely at risk if you have growth ambitions and don't have control over your minerals, materials, and energy. You stick out like a sore thumb. You see governments everywhere making these lists of critical materials.

Ed Coyne: One of the things, I think, that's happened is in the last, say, five years or so, the first trend, the first group of investors waking up to this reality, we're just looking at basic indexes, ETFs, just ways to get exposure to it. As it's evolved, there's become this, maybe not a debate, but there's been a line in the sand of, "Do you just want exposure to it or do you want a more active, engaged exposure to it?" Can we talk about that? Because this space is unique in that it's not as liquid as some other spaces. You really need to have an educated background in the space.

You're an economic geologist. You're also a portfolio manager. You know this space. You've lived and breathed this space for a very long time. Talk about the value of approaching it as an active portfolio manager versus simply getting exposure to the space. What are the pros and cons? How are you thinking about it? What would you tell an investor?

Justin Tolman: Obviously, I fall down on the side of being pro active management, not least of which because I've got a vested interest in it. It's served me well over the last few decades in my tenure at Sprott. In active management, it's one thing to say I want exposure, and you can generate a set of formulas and gain exposure. What we're trying to do is curate asymmetric risk reward. We're doing it based on real-world insights, reacting to what we see in a macroeconomic environment and local inputs.

It's not just charts or formulas or sentiment. It's very strategic positioning where we understand valuation gaps. We can see that when in a sector that we think is great and doing well, a stock trades below NAV or peer comps. Then you've got to ask "Why?" and understand if there's a chance there for a re-rating. We can build themes around understanding where a region is in a virtuous cycle. Let's say a company has a great discovery that's absolutely world-class in an emerging area that attracts additional capital.

As people look for more of that style of deposit, more dollars spent means a greater likelihood of more discoveries, which keeps that snowballing along. Being able to identify that early can be a huge advantage. Understanding where projects are in their life cycle and the different catalysts that are coming, permitting milestones, drill results, resource updates, the cumulative effect of all of these things, I believe, lets you construct portfolios with a superior risk-reward balance than some passive index. Obviously, a lot comes down to the individual managers treating it the right way, but you touch on an interesting theme because the return for metals markets is very pronounced.

The dispersion that you have around an average return for a market is not a normal distribution. It's not like you have an average and an even set of results on each side. In metals markets, just like in ore bodies, you have a lot of average companies, and then you have a long positive tail where a small number of companies actually deliver most of the value. These things get modeled by log-normal distributions, power laws, or other fancy statistical terms. At the end of the day, you could look at something like 2024, when the broader market actually had a poor year.

It was a negative year, but the top quartile of results returned close to 200%, a low dispersion year. This is arguably one of the strengths of well-run active management. Suppose you've got a team that can identify which sectors of an environment are working, lean into those and reduce your exposure to areas where there are challenges. In that case, it can adapt to a changing environment. It can adapt to technological breakthroughs and changes in legislation. All of these can impact performance.