Hello Copper!

Friday, 25 April 2023 | 20 | 16:27

Podcast Transcript

Ed Coyne: Hello, and welcome to Sprott Radio. I'm your host Ed Coyne, Senior Managing Partner at Sprott Asset Management. With me today is a special guest, Nick Pickens, Research Director, Global Mining at Wood MacKenzie. Nick, thank you for joining Sprott Radio today.

Nick Pickens: It's a pleasure. Thank you for inviting me.

Ed Coyne: Nick, I want to get into a couple of things today, but specifically, I want to get into what you guys call the red metal, [which is] copper. Copper is an interesting metal that's been around forever, really. Most people have some experience with copper in their homes or in their electrical outlets and so forth, but now it's becoming quite a modern metal. I thought, with the over 20 years of experience you have in the metals and mining sector, it'd be great to hear your insight into copper, and also have you talk a little bit more about yourself, your background, and a bit about Wood MacKenzie before we go into the red metal. Give us a little bit of your background and how you got involved with this part of the market.

Nick Pickens: Thanks, Ed. As you say, I've been looking into the mining and metals sector now for 20 years. Actually, my background is as a geologist. That's what I studied. Obviously, there's a natural progression into metals from there. I've spent about half of that time looking at the copper market in particular. I've been lucky enough to travel around the world and visit different copper mining operations and meet lots of people, from end-users to mining companies and so on. It's been a big part of my career.

Ed Coyne: What about Wood MacKenzie? Talk a little bit about your work there. I spent a bit of time getting ready for this podcast looking at the white papers and research reports you've all done. You take very deep dives into the different metals from a supply standpoint, a demand standpoint, functionality standpoint, what these metals are used for, and so forth. Talk a little bit about your work at Wood MacKenzie and how people can get access to that information as well.

Nick Pickens: I think in the natural resources space, Wood MacKenzie is a pretty well-known company. We've been around for a long time and our core business is market intelligence, research, thought leadership, and of course, energy. We're known in the oil and gas sector and renewables and so on, but in metals and mining as well. As you say, we have a global team based in different markets that spend time digging deep into the numbers and also thinking about the future of what the various different natural resources are looking like in a rapidly changing world.

Clearly, a lot of the focus at the moment is around energy, and metals fit into that picture better than they ever have. It’s a combination of our energy and mining/metals teams. Our mining metals side is really focused on the outlook for the energy transition.

Ed Coyne: You’re focusing on copper. Maybe you saw this coming, maybe you didn't, but can you believe you're sitting here talking about one of the most modern metals out there? I read recently that there's six or seven times more copper used in an electric battery-powered (EV) car than there is in a gasoline (ICE) car. If you think about what all these auto manufacturers are trying to achieve, we're going to need a lot more copper. I know there is some recyclable copper out there and so forth. Talk a bit about that. What's going on? How has that transition really taking shape over the last decade?

Nick Pickens: You're absolutely right. Back in the early part of my career, the structural change in the market feels similar with the China boom. That was when everyone realized, from a commodities and mining perspective, how important copper was going to be. A lot of that demand was really around fixed asset investment and construction infrastructure, the building out of emerging economies and so on.

It has been a long time since we started to see these new technologies building out and building into our models and our thinking about how copper might be used in any of these. But if you think back even only five years ago when people talked about EVs, it was something that most people took with a pinch of salt. It's really gathered momentum over the last three to four years in really quite an incredible way. As I say, we are embarking now in what’s really quite an amazing journey for metals and for copper, in particular, and we are truly seeing a structural change.

It's not just copper. There's an awful lot of different metals that are going to be involved in the shift away from fossil fuels and from hydrocarbon. One thing is for sure, if you look at every end-use involved in that energy transition, it's pretty hard to find one that doesn't need copper.

Ed Coyne: You just said something that even I forget about, is the infrastructure build-out. Whether it's China or the U.S., we've got to rebuild a lot of things in this country. At some level, I would suspect that the construction industry and the infrastructure industry is going to be in direct competition with the electric vehicle industry and the auto manufacturing industry on who gets the supply.

I’ve got to believe you're seeing some squeeze points along the way with demand, with potentially new mines coming online, and the extension or expansion of existing mines. Talk about the supply side first because I think that's something that gets overlooked. How realistic is it for us to get to a carbon-neutral future, given the current state of affairs with mines in general and the overall supply?

Nick Pickens: Not only do we have the electric vehicle demand and energy transition-related demand, there's all the other stuff that goes on in the usual urbanization trends and building wiring and so on. There is significant demand growth for copper over the next 10 to 20 years. If we look at that demand trajectory and then look at where base mine supply is, a gap starts to emerge.

It's not unusual in the copper market to see a gap emerging. You need continual capital investment to continue to generate projects and growth, but we look on a 10-year timeframe, and that gap is looking around about five to six million tons on our base case. This is out of a market where total consumption is around 30 million tons. If we want to achieve zero-carbon targets that have been laid out in the Paris Agreement, the supply that needs to come online rises to something more like 10 million tons in 10 years' time. Now, the market has never, ever achieved that amount of growth in that timeframe in the history of copper project development. That's the challenge.

Again, it's not just copper. There are limitations on the mine development of all these energy transition metals. The question is, what has to happen? There's a whole host of things. The first is that we need more capital investment, and a change in attitude towards capital allocation as well. I think most mining companies want to bring on projects, but they need the investor mandate, and they need to find quality projects that give them decent returns. They also need to be able to get licensing and permitting in quick and efficient ways, and that requires government support and incentive. There are lots of levers that need to be pulled to help accelerate supply, and that's where the challenge sits.

Ed Coyne: You bring something up from a government standpoint. It does seem like both sides of the aisle have agreed that we need to move in this direction. I always remind people too, this is not an anti-fossil-fuel conversation. We're still going to need oil, we're still going to need gas. This is not something that's happening overnight, this is going to happen over decades. Talk a little bit about what you're seeing from a licensing standpoint, from a government standpoint, from a policy standpoint.

Nick Pickens: It's really interesting at the moment because I think there are lots of contradictions in this energy transition and lots of dilemmas. If you talk to people in the energy industry, there's that logic going around now, where people talk about the energy trilemma. You've got energy security, energy affordability and energy sustainability. I think that applies to mining and metals and to the copper industry as well. The security element is what's helping to drive government support at the moment, and this has actually changed pretty quickly over the last 12 to 18 months.

We've seen things like the U.S. Inflation Reduction Act coming in, which is supporting more raw material development to some extent, although it's mainly about processing at the moment than it is extraction, but that might change. The EU just last week put out some more legislation around critical minerals and also brought in copper and nickel as strategic minerals in that list, which means more support and recognition as these metals get recognized as being important in the energy transition. We are seeing that security element driving change and that's happening quite quickly.

Then you have the sustainability part, and I think this is where there's still a bit of work to be done in terms of joining the dots for people and for governments, that mining is the answer in delivering clean energy – and not the enemy. Mining has to raise its standards and make sure that it's meeting all the ESG criteria and so on. Ultimately, if we are going to achieve this zero-carbon goal, we are going to need more investment in mining. That's the sustainability side.    

If we look after all that and the investment comes, then that will look after the affordability element because, at the moment, the risk is that this doesn't happen, price has increased so much that we just simply can't afford to do all this stuff.

Ed Coyne: You see it in the electric car market in general. When Tesla first came out, and this is not a plug for Tesla, but they're the best example of electric cars. When Tesla came out, it was only the wealthiest people who could buy a Tesla. If you were driving a Tesla, that was the equivalent of driving a Mercedes or a BMW or a Porsche, whatever it was. Now you see more and more auto manufacturers out there bringing in lower-point electric vehicles. Tesla's coming out with lower-price point electric vehicles. I think when that happens over time, you see that affordability happen.

Security, obviously that is something that has changed drastically. We've all seen that in the last year, or year and a half. That's probably not going away. Political uncertainty is the one constant we see.

Then sustainability. That's the thing I think that people are trying to get their arms around the most. I agree with you that there are two sides of this story. There's the extraction, manufacturing and refinement side of the story, which some people don't want to know about and they still see as a negative. The reality is you can't get to the sustainability side of clean energy, without that extraction, manufacturing and refinement. I think there is still a lot of education that has to happen in this space.

What else should investors be thinking about when they think about not just copper but battery metals in general? You guys do a lot of work at Wood Mackenzie on all the metals. What other opportunities or issues are you seeing in this energy transition movement?

Nick Pickens: Cathode chemistries have evolved rapidly and they involve a lot of different metals. We've been doing a lot of work on thinking about how that might change going forward. Given this whole scarcity issue, we think that down the line, we'll get quite a diverse range of different chemistries and different end uses. It's not just cars as well, we've got batteries for energy storage and other end uses and electronic portables and so on.

Our view is that the predominant battery chemistry in the near term will probably actually be nickel-based. Nickel is clearly an important energy transition metal, followed by this iron-based chemistries like LFP [lithium, iron phosphate batteries]. Lithium – there’s big interest at the moment from some of the people I talk to around the lithium market. Lithium, iron, phosphate batteries and LFP.

If you look at all of those markets -- particularly lithium, cobalt, and of course, one final one, which is probably the less well-known but the most important in some ways is the graphite part of the batteries -- their growth is going to be huge. We think the lithium market over the next 10 years could grow by three times. The nickel market may grow by high double-digit numbers as well. It's a story that's replicated really in terms of supply requirements for those commodities as it is in copper. Perhaps the difference with copper is, if you look at its end uses, it's across the board. Nickel, lithium, cobalt and graphite more specifically relate to battery uses.

Ed Coyne: Nothing happens without copper, for sure. You can do everything you want, but if you can't connect point A to point B, then it's useless. It's like a flashlight without a battery. I've been talking about this for quite a while with our investors, that metals, and minerals, in general, have gone from these short-term trades where people try to take advantage of price inefficiencies in the market and trade it like a true commodity to really more long-term investments. This is something that pensions and endowments are saying, "Okay, we need to think about this because this is part of our future, probably part of our investment landscape in perpetuity. This is not going away anytime soon. This will be part of our life going forward."

We're trying to educate our investors on it. We've had tremendous interest in this space, and we're trying to engage firms like Wood Mackenzie to help us get educated, but also to help educate our investors. I really appreciate you taking some time out of your schedule today to talk a bit about copper.

Nick Pickens: Look, I think this theme isn't going away, and if anything, it's gathering momentum.

Ed Coyne: For those who want to learn more about Wood MacKenzie and Nick's work, I encourage you guys to all go to WoodMac.com and take a look at some of their additional market insights and online reports. I know at Sprott, we pull a lot of information from your reports and great educational pieces. We really appreciate the work you do. Nick, thanks again for joining Sprott Radio.

Nick Pickens: It's a pleasure. Thanks, Ed.

Ed Coyne: Once again, I'm your host Ed Coyne, and you're listening to Sprott Radio.