Global Trade Wars: Unraveling the Impact on Critical Materials Markets

In this episode of Shifting Energy, Thalia Hayden interviews Steven Schoffstall, Director, ETF Product Management at Sprott Asset Management about how the global energy shift and market volatility are impacting precious metals and critical materials. Schoffstall provides valuable insights into what's happening with gold, silver, uranium and copper.  

For the latest standardized performance, please visit the individual website pages: GBUG, SLVR, URNM and URNJ. Past performance is no guarantee of future results.

Video Transcript

Steven Schoffstall: Allocating to both gold and silver helps provide some downside protection potential and gives you that critical materials exposure.

Thalia Hayden: I'm Thalia Hayden with ETF Guide. It's nice to see you again. Despite rising market volatility, the global energy shift continues, as does the demand for critical materials. But how will global trade wars impact the market? How can investors and advisors position themselves for the opportunities ahead?

Helping us to get to the bottom of all of it, Steve Schoffstall, Director of ETF Product Management at Sprott Asset Management. Steve, welcome to the program. Great to see you again.

Steven Schoffstall: It's great to be back. Thanks for having me.

Thalia Hayden: Yes, let's get started. There's a lot of uncertainty in the markets right now. What impact does this have on critical materials?

Steven Schoffstall: There's been no shortage of news flow over the last several months. Uncertainty has several impacts, particularly as it relates to critical materials. In many ways, uncertainty is often worse than bad news because market participants try to digest the information and figure out exactly what that means. In many cases, market participants are paralyzed by the uncertainty.

When you start looking at some of the critical materials sectors, uranium is a place where the utilities are watching what's going on in the enriched uranium market. New developments, as they relate to Russia and the enriched uranium that they can provide to Western countries, are top of mind.

When you look at other commodities, like silver and copper, you see pricing dislocations. Metal in the U.S. is more expensive than in other parts of the world, and in some cases, market participants are looking to arbitrage those pricing differences.

We also see end users, or manufacturers, in some cases, starting to front load purchase orders to get ahead of any potential tariffs that might be coming down the pike. All this is sending some mixed signals within the market. I suspect what we'll end up seeing once all this shakes out is we'll see an effort to re-shore back into the U.S. I think we're starting to see some companies make announcements around moving manufacturing in an attempt to get around these tariffs.

Thalia Hayden: Steve, how about investors? How have you seen them navigate the turbulent markets?

Steven Schoffstall: Regarding commodities, I think one commodity we've seen a lot of interest in isn't a critical material. Gold has been a place we've seen investors over the last 2 or 3 months. On the physical side, they have started to invest a lot and buy ETFs in general. If you look at uranium, in the second half of last year, we saw investors prefer to move downstream away from miners to a certain extent.

We're starting to see signs that downstream trade might be softening, and we're starting to see continued flow into Sprott Uranium Miners ETF, Ticker URNM, and Sprott Junior Uranium Miners ETF, Ticker URNJ, which has steadily grown assets throughout the year through investor flows.

Finally, I think we're seeing some other commodities that have been out of favor recently, such as nickel, lithium, and copper. Investors are starting to dip their toes back in and, in many cases, consider this a potential buying opportunity.

Thalia Hayden: How do supply and demand play a role in the investment rationale of critical minerals?

Steven Schoffstall: It's one of those aspects that's important and supportive of the longer-term thesis. When you start looking at things like technological innovation and the transition of cleaner energy sources, that's bullish in our view of things like uranium, copper, and silver. These are three metals for which we're not seeing miners able to increase supply in any meaningful way easily. There tends to be a very long lag. It could be a decade or more to get new projects from discovery to mining and start producing.

In the case of uranium, when we look at the mines that are either already open or plan to be open over the next several years, we're still expected to be in a uranium deficit as it relates to the ongoing needs of utilities. Copper is in a unique situation because many of the large deposits and easy-to-access copper have been very much depleted. We're seeing declining ore grades, and those higher-quality deposits aren't coming as quickly as they once have.

Silver is a unique critical material because, unlike the other materials we follow, it's not principally mined by many companies. 72% is mined as a byproduct, meaning that higher silver prices don't necessarily mean miners will increase silver production.

Thalia Hayden: You mentioned the uranium deficit. Uranium and uranium miners have had a turbulent 12–15 months, so how should investors think about this sector?

Steven Schoffstall: It really was a tale of two different stories over the last 15 months or so. Around this time last year, we were coming off recent highs in the physical uranium market. What I would tell investors is to stay focused on the long term. Uranium and many critical materials are still emerging asset classes, even though we've been mining them for decades. With that, you tend to see a lot of volatility. The main thing to focus on with uranium is that the fundamentals have stayed the same and improved over the last year or so.

We're not seeing utilities step into the market in any meaningful way. There's a bit of a staring contest between miners who don't want to accept what they believe to be undervalued prices for their uranium. On the other hand, you have utilities that aren't willing to spend higher prices than what current prices would otherwise dictate. There's a bit of a stalemate happening there, but at some point, utilities will have to return to the table. They will have to replenish the supplies they've been drawing down over the last few years. Moving forward, we expect that that fundamental underproduction story will remain intact.

Thalia Hayden: How would copper be impacted if trade wars lead to a softening global economy?

Steven Schoffstall: Copper is one of those metals in a much different position than it was 10 or 15 years ago when it was reliant, particularly on the Chinese and global economies. We've seen a lot of the investment in copper comes from the energy transition, with almost $2.1 trillion invested last year. It's an 11% increase over 2023. In our view, that's acting to give a base level of demand for copper.

We also have an increasing reliance on artificial intelligence. That's very copper-intensive as we look to build out electricity grids to support the growing energy demand, whether it's through the energy transition or artificial intelligence. These are two aspects of the copper market that weren't as prominent 10 or 15 years ago, and we think they should help cushion any potential slowdown in the global economy.

Thalia Hayden: Steve, are there certain critical materials that may be more resilient in a deteriorating global economy?

Steven Schoffstall: Three come to mind, uranium being the first. As we talked about, the fundamentals are very strong there. Uranium tends not to move in lockstep with other asset classes to provide some diversification to a portfolio. Very similar to uranium, copper is starting to fall into that story as we're looking at increases in electricity demand.

Finally, I'd say silver is another area where we're seeing a lot of support for the metal moving forward. It tends to do well in periods of geopolitical uncertainty, economic uncertainty, market volatility, currency debasement, and falling interest rates. Those types of volatile environments still make silver not only a critical material but also maintain many of its precious metal qualities.

Thalia Hayden: You mentioned silver. I know Sprott has recently launched the Sprott Active Gold & Silver Miners ETF ticker, GBUG. What can you tell us about how it is managed?

Steven Schoffstall: GBUG, which we refer to as our first foray into active management. It's a logical extension of our precious metal suite, most recently our Silver Miners & Physical Silver ETF (SLVR) in January. The ETF invests in gold and silver miners, predominantly miners, development, exploration, and royalty-streaming companies.

The portfolio management team can invest in other precious metals, such as platinum and palladium, though we would expect those exposures to be relatively small over time.

The thing that makes this unique, precious metals, is really where Sprott's made a name for itself. The investment team has over a century of experience in the precious metal space. Over that time, they've developed deep relationships within the mining industry, which comes in handy when doing over 200 site visits a year to understand management structures and which management teams have the resources they need to manage the portfolio properly.

They also do up to 30 site visits a year globally, not just in the U.S. and Canada. We have a financial geologist on staff who is very involved with the investment team.

The portfolio management team examines capital structure and management capabilities, as well as sensitivity models that consider changes in costs, the price of the underlying metal, and taxes' impact on the underlying companies.

Thalia Hayden: Sticking with GBUG, how might changes in the geopolitical landscape impact the ETF?

Steven Schoffstall: GBUG is a little unique because it gives you that gold and silver exposure, which have their precious metal qualities, but when you look at silver, it's also a critical material. It's a way to get exposure to both precious metals and critical materials in one ETF. You do get those diversification benefits that we discussed with the precious metals.

Specifically, when you start looking at how gold miners and gold equities stack up relative to the S&P 500, what you'll see is that, in general, gold miners tend to be undervalued by about 40% relative to the S&P 500. They have about 50% higher dividend yield, lower levels of debt, less leverage, and from a profit-margin perspective, it's about 35% higher. I think that having an allocation to both gold and silver does help provide some downside protection potential and gives you that critical materials exposure.

Thalia Hayden: Steve, we learned a lot in this episode. Thank you so much for your timely insights, and keep up the great work.

Steven Schoffstall: Happy to be here. Thanks.

Thalia Hayden: All right, that does it for today's episode of Shifting Energy. Thank you for joining us.