Active Edge: Why Experience Matters in Metals and Mining Investing

Sprott's Steve Schoffstall and Justin Tolman discuss the newly launched Sprott Active Metals & Miners ETF (METL), which provides active exposure to a broad range of metals. Tolman highlights his background as an economic geologist, the team’s rigorous investment process combining top-down sector analysis and bottom-up stock selection, and the importance of site visits in evaluating projects. Steve and Justin also explore long-term themes, such as steel decarbonization through green steel, platinum group metal deficits, AI-driven power demand and global infrastructure growth.

For the latest standardized performance and holdings of Sprott Active Metals & Miners ETF (METL), please visit METL. Past performance is no guarantee of future results.

Video Transcript

Steve Schoffstall: Welcome to Metals in Motion. I'm Steve Schoffstall, Director of ETF Product Management at Sprott Asset Management. Geopolitics, innovations, and increasing demand for many metals are leading to resource nationalism and opportunities for investors. On today's episode, we'll focus on investment opportunities in the mining sector. Joining me today is Justin Tolman, a Senior Portfolio Manager and Economic Geologist with Sprott. Justin, welcome to the show.

Justin Tolman: Thank you, Steve. It's nice to be here.

Steve Schoffstall: We recently launched the Sprott Active Metals and Miners ETF, ticker METL or “Metal” as we've come to call it. METL is the only ETF that provides active exposure to miners of a diverse group of metals. Not only do those metals include critical materials, but the fund also has exposure to things like steel, platinum, and palladium, and it has a broader mandate to invest in more diversified metals. Justin, not only are you one of the senior portfolio managers for METL, but you're also an economic geologist. Can you talk a little bit about your background?

Justin Tolman: I grew up in mining towns. My dad spent his time as an apprentice underground in copper mines in Australia, and my granddad did too. Naturally, I gravitated towards a career in metals and mining. I liked solving puzzles. I was naturally curious. Geology was a natural fit.

What I did a little bit differently, perhaps, was that I was fortunate to have many different opportunities early. It would be really wrong to call it a plan. It was more about just saying yes to things. But it meant that I had the chance to work in open-cut mines, underground mines, doing geo-statistics and building resource estimates, exploration, and taking different projects all the way from discovery to the studies to show their economic potential through to production.

I ended up working for some of the world's biggest miners like Newmont, helping to run junior explorers, ultimately doing a lot of corporate development work, analyzing other deposits as potential acquisitions. I ended up as a Renaissance geologist with a broad set of skills, and I didn't know it at the time, but it was very well-suited for analyzing metals and mining investments.

I've been fortunate to hone that here with the team at Sprott for the last seven or eight years as a portfolio manager and an investment strategist. If you'll indulge me, our team as co-PMs at Sprott is very complementary. We've got Shree Kargutkar, a wizard on financial analysis and markets, and Maria Smirnova, one of the world's authorities on silver markets, if you ask me, who worked directly with luminaries like Eric Sprott. We've got a very well put-together team that I think is one of the best anywhere.

Steve Schoffstall: That really ties into our heritage at Sprott. I think that's one of the things that really sets us apart from other asset managers. Our expertise is in the metals and mining space, and at the corporate level, we have decades of experience. But folks like yourself have much more specialized experience within the sector. We do have a very deep bench of investment professionals. Can you describe the team's investment process and what it looks like in an active strategy?

Justin Tolman: We like to characterize it as the intersection on the Venn diagram of top-down sector analysis, where that overlaps with bottom-up stock selection. We work in a cyclical industry. All commodities go through boom and bust periods of varying lengths and intensities, but in the broader universe of commodities, cycles don’t all move at the same time. One mineral or industry can be very much vogue while another languishes in purgatory.

Understanding where you are in a given cycle and the supply-demand fundamentals has to be the starting point from the top down. Once you've identified the industries and themes you think are positioned for success and investible—you must have both—you must select your investments.

It's worth saying at the outset that I have a bias towards quality and value. There's a time and a place for leverage at different stages in the market for turnaround stories. Still, I'm always going to be most comfortable when I feel like we've backed the very best management teams, the best discoveries, the sorts of projects that are so good that other companies will ultimately feel like they have to own this and be willing to pay a premium for it.

Where those things come together, you look for well-run businesses with ethical management and relevant experience, companies with clean balance sheets, strong share structures, and high-quality assets.

Steve Schoffstall: I think one of the main differentiators that you, from a geology perspective, and other members of the investment team, really bring to the table is that you're actually doing site visits. You and other team members have visited more than 40 countries, and on average, you do up to 30 site visits a year. Can you talk a little bit about what that evaluation process looks like when you go to these mine sites?

Justin Tolman: The site visit is one of the key differentiators of some of our actively managed products. Even after doing these for decades, I still find new ways to extract value and help shape our investment decisions and sizing. Before we even get to the site, a lot of screening happens. There's a lot of due diligence to get to the point where it's like, all right, we need to try to resolve this.

But ultimately, the whole process is about minimizing risk and maximizing returns. One of the best ways to minimize risk is to go deeper with your due diligence. Someone who comes from a purely financial and accounting background would be able to look at profits and losses, and we do that also.

But suppose you're able to understand the controls to what one of these miners is trying to mine and see how they've put together their estimate of the resources and understand where they've been aggressive or conservative in their assumptions. In that case, that's a powerful insight to have for thinking about what they'll be able to achieve.

You can only see some things through the lens of experience. I'll anonymize the companies in the examples, perhaps, but I remember going to a site where a project was under construction. The company had told the public that they were going to be producing concentrate in three to six months, and they had a percentage of completion out, which, when I went and looked at it, there was just no way.

They didn't have nearly enough structural steel, and the workshops had no concrete floors. Delays on mining projects are a big deal because they cost money, and debt providers want to get paid back. I formed an opinion that that would not happen, and we could adjust accordingly.

Culture is important, and it’s not something you can pick up across a 20-minute speed date at a conference. It's one of the things you see better when you're in it. We've sometimes visited a site thinking the company was overvalued and may be a potential sell. But you get there, you talk to management, you realize that there's a shared vision across different departments.

You see the mill foreman talking about how he's got an inexpensive fix that can lift recoveries. You see the technical services team working together to optimize the mine plan in real time because there are changes day to day, and everyone's not just arguing about where the goal line is; they all know that. They're arguing about how to get there fastest. There are times we've left the site thinking it's a sell but realizing it's not, it's actually an add, and these guys do have some uncertainty in what they're doing, but they're all pulling in the same direction, and we needed to be part of that. These are some soft things and hard things that you can only get from site visits. 

Steve Schoffstall: On this channel, we spend a lot of time talking about critical materials, things like uranium, copper and silver. However, one of the things that makes METL unique is that it will also expose other metals that aren't necessarily critical materials. Still, they're important to growing infrastructure like steel and platinum group metals. Can you talk a little bit about what makes those metals so important?

Justin Tolman: Steel is part of our world. It's essential for what we do. Steel's not the first thing that springs to mind if we talk about energy, but it's an “infrastructure enabler”—that’s the tag line I've ended up on. We need steel. It's going to be there for not just all the buildings, but all the wind power, hydro, nuclear, any energy, and electric vehicles that you come up with. We're going to be big consumers of steel.

Right now, steel accounts for almost 10% of our fossil fuel emissions. That's more than all the cars and planes in the world combined. Looking for some way to think about your impact on steel is very important. There's a niche sector internally in the steel industry that's still off the radar for many, which is growing very quickly: green steel.

That's the corner that we're excited about. We think it's revolutionizing the industry. Instead of using old blast furnaces, which have to be fed with coal and traditional products that are very energy-intensive, the newer electric arc furnaces are fed from recycled products and direct reduced iron (DRI) feed.

The green steel sector is more energy efficient, cheaper and faster to build, has lower operating costs, much lower emissions and lower regulatory hurdles. We're particularly excited about that corner of the steel market. The fact that you can marry the economic benefits with much lower emissions makes it a nice win-win.

On the platinum side, there are six platinum group metals altogether, but the main ones are platinum, palladium, rhodium and iridium. These things go into catalytic converters, fuel cell electric vehicles, and hydrogen production, and across the world, increasingly major economies are realizing that they're critical. The U.S., the UK, the EU and China all consider these important to their domestic growth and economies.

One of my co-PMs, Shree, was on an interview last month, and he pointed out that platinum has been in a structural deficit for coming on to three years now. You put that together with stockpiles going down, and you have a recipe for the price action to respond. I think platinum is up 50% this year, and that demand will only keep rising as countries enact stricter and stricter emission standards, and the hydrogen economy keeps growing.

There aren't many substitutes available for these things. On the mining side, we've had chronic underinvestment in new supply. There haven't been new discoveries coming on. You have a strong setup that could lead to continued price appreciation.

Steve Schoffstall: That underinvestment and supply difficulties are something that we've seen prevalent throughout a lot of the metals that we talk about on this channel. One interesting thing about the mining sector is that this is an area where active management can add a lot of potential value.

When you start looking at dispersion of returns, for example, amongst the miners, if you look at the average over the last five years, the top-performing miners have outperformed the bottom-performing miners by about 612% per year. What are some reasons we see such drastic differences in performance in the mining sector?

Justin Tolman: There are a few. As a starting point, we talked before about the broader metals and mining complex and the different constituents, each of which has its own orbit and price cycle. Obviously, if you've got some weak and some strong sectors, you've got to set up for a wide dispersion of results.

You complicate that and realize that different metals influence each other in substitution or related markets. Some of these things get mined as byproducts. You've talked before on this show that I've heard about. A lot of the big copper miners make a surprising amount of silver. The vanadium market is impacted by what happens in the steel market, because it's a big additive in that.

We've seen rapid changes in battery chemistry when thrifting comes in, affecting things like cobalt, nickel and manganese. Leaving aside that as a driver for a wide dispersion of results, like you touched on, you do tend to have a small number of companies that deliver outsized results, and that happens in lots of naturally occurring phenomena. We see it in cities, in wildfires, earthquakes and in ore bodies.

There's going to be a few monster ore bodies that'll deliver a lot of the value, and then a lot of average ones at the other end. We see it in share price performance over appropriate time periods as well. That, like you touched on, is arguably one of the strengths of well-run active management, where you've got a team that's able to adapt to that changing environment that I talked about, who can be abreast of technological breakthroughs, react to changes in government legislation. If you can be nimble there, there are opportunities for outperformance, which can impact performance.

Steve Schoffstall: I think this feeds into what we do at Sprott when we decide to bring new strategies to market. We tend to take a very thoughtful process, particularly as it relates to our ETFs, which we've really been expanding here over the last several years. We'll look at the long-term opportunities within the mining sector and where we think they are favorable. We also look at gaps in investor options and where our strategies can align with our core values and our expertise in metals and mining. All that being said, as we've recently rolled out METL, why is this a good time for METL to become available to investors?

Justin Tolman: I couldn't be more excited about METL launching now. I think if you're able to see through some of the short-term perturbations going on in the economy, look through the tariffs and the changing trade policy and some of the uncertainty there today. The long-term drivers for commodities are all about global growth.

I think we're seeing a Malcolm Gladwell-type tipping point in the public consciousness or the trend for what we're going to need for the metals to deliver, for us to sustain the population growth that's coming. In the next 25 years, we will be pushing against 10 billion people here. That means massive investments in infrastructure. They're all going to want homes, schools, hospitals, and especially power.

A lot of those people will be in developing economies. With young populations and rising incomes, they're going to want to improve their lifestyles, and that means bigger living areas and air conditioning. That means power generation in uranium and power transmission in copper. Those two themes mean more urbanization. Cities use way more materials than rural areas: more steel and more copper.

You look at what's happening in the developed world with technology and AI's rise. The consumption of data centers has gone up 60% in three years, and it's projected to double in the next five. That's crazy. Our infrastructure is just not set up for that. We're going to need more energy and more metals.

Then you layer in things like supply chain security, friend-shoring, strategic stockpiling and the decarbonization trend, where we've spent $2 billion last year on cleaner, non-traditional energy sources. I couldn't be more excited about the timing for this product and the impact I think we'll be able to have.

Steve Schoffstall: Thanks for that, Justin. We're just about out of time here, so thanks for your insights today.

Justin Tolman: My pleasure.

Steve Schoffstall: That will do it for another episode of Metals in Motion. Be sure to hit our season two playlist in the description section below. You can watch all of our archive shows where we discuss things like silver, uranium, copper, and the metals market in more detail. Also, be sure to jump over to sprott.com to learn more about metal and our suite of ETFs and provide access to our research and insights for all things metals and mining. Thank you for watching, and we'll see you next time.