Rare Earths and Critical Minerals: The Hidden Engine of Electrification

Sprott’s Steve Schoffstall joins James Connor to discuss the global race for critical materials, from rare earths and uranium to lithium and copper. He discusses how investors can gain exposure through Sprott’s suite of innovative ETFs. He explains how government policies, supply-chain realignments and the energy transition are driving demand across metals essential to electrification, clean energy and national security.

For the latest standardized performance and holdings of Sprott ETFs, please visit the individual website pages: SETM, METL, COPP, COPJ, LITP. Past performance is no guarantee of future results.

Video Transcript

James Connor: Steve, thank you so much for joining us today. There has been a significant push in the U.S. to acquire rare earth elements, and the U.S. government has made numerous equity investments in several of these companies. As a result, many of these rare earth or critical mineral companies are up 100% or more on the year. You and your team at Sprott have created many products for investors focused on critical minerals. I want to discuss some of these products. However, before we proceed, let's begin with a brief discussion on rare earth elements and critical minerals: what they are and why they are so important.

Steve Schoffstall: It's a great place to start. Thanks for having me here. Critical materials is a term that's used primarily by governments, and it has gained significant traction throughout the industry. Essentially, critical materials can be categorized into several different groups, but predominantly, these materials typically consist of metals that governments view as vital to energy security and national security. Typically, when we start examining different critical materials, we tend to think of them in terms of energy and what that entails in terms of energy generation, transmission, and storage.

Regarding generation, materials such as rare earths, which you mentioned, form a group of critical materials, along with silver and uranium. Copper falls under that transmission banner, stretching across all aspects of the energy life cycle. Additionally, there are the battery materials, including lithium, cobalt, graphite, manganese, and nickel. Those are the nine or so that we focus on. They've become increasingly important because if you look at the geopolitical landscape and how that's developed over the last four to five years or so, what you're starting to see is that a lot of countries are waking up to the realization that a lot of the supply chains to these critical materials are outside of their control.

We're starting to see countries realize that, because China has a stranglehold on many of these critical materials, such as rare earths, where it is the biggest producer and supplier globally, they're looking to increase domestic supply and encourage energy mining and refining within their own borders.
James Connor: You're right. Geopolitics has played a significant role in everything here over the last five years. However, could you tell us how important China is to the mining and processing of rare earth elements?

Steve Schoffstall: China has spent the last two to three decades building out its global supply chains. Many of the critical materials that they'll mine come from other countries, such as Africa or Indonesia, and they'll bring those back to China for refining in many cases. Rare earths are really in the news because they’re very important to a lot of aspects of not only energy security, so think of things like EVs and wind turbines. However, we see them used in AI data centers in certain cases, and also, importantly, in defense. It's used in the guidance systems for missiles and similar applications.

What's happening is that the U.S. and Allied countries are trying to find other ways to access those critical materials. China, realizing that it has the pole position as it relates to the refining and production of rare earths, has really used that position to leverage trade negotiations with the U.S. What we're starting to see now is the U.S. and other Allied countries like Australia and Canada working together cooperatively to secure those supply chains. Just this week, we've seen that the U.S. and Australia have agreed to build out some of that production capability within Australia.

Australia is a very important commodities partner. They have access to a wide range of critical materials, including rare earths, uranium, nickel and lithium. We're starting to see countries go down the path of talking about stockpiles. Australia is discussing this and potentially allowing other countries to participate in it. The U.S. announced last week that the Pentagon plans to build a $1 billion stockpile of critical materials, with rare earths expected to be a key component of this stockpile.

James Connor: Along those same lines, I recently read that J.P. Morgan is creating a $1.5 trillion security and resiliency initiative in key sectors, such as critical minerals. This will include both venture funding and direct investments into companies of up to $10 billion. That's quite significant news.

Steve Schoffstall: It is. When you really drill down into that announcement, they have 27 different areas that they're looking to focus on. One of these areas is mining, including the production and refining of critical materials. They look at these and say, if we're looking from the U.S. perspective, what are those aspects of the economy that are important to maintain a strong economy? That's why they're looking to invest there. We also see in nuclear energy. That's another specific point where they're looking to invest, as you said, up to $10 billion.

This is something that we've seen over the last several years, where governments, including the U.S. government, have begun providing grants to companies. We are now starting to see the private sector invest directly in all aspects of the critical material supply chain. We're seeing it from hyperscalers, which are large data centers associated with AI. Oftentimes, they have clean energy mandates, but they also have a very intense need for electricity. They're increasingly turning to uranium and nuclear energy for its reliable baseload power. 

In many cases, we're seeing the U.S. government take different equity positions, including a 10% stake in MP Materials, which is a rare earths miner. Trilogy Metals is looking to develop a copper project in the Arctic region. You look at Lithium Americas, a Canadian-based company with assets in the U.S. All these companies are just ones that have been announced. We've also heard from other companies that they're in discussions with the government regarding potential equity stakes.

James Connor: You touched on nuclear energy. It's worth mentioning that 20% of the electricity in the U.S. comes from nuclear energy. They consume 45-50 million pounds of uranium annually to run those nuclear reactors, yet the U.S. produces very little uranium.

Steve Schoffstall: This is one of those aspects where having a very close relationship with Canada, which has large uranium reserves, is of utmost importance. Not only do we have the largest fleet, but we also see a rapid build-out in China related to their nuclear capabilities. However, within the U.S., only if you consider that approximately 170-180 million pounds of uranium are being produced on a global scale. By the time we reach 2050, and the Trump administration has stated that its goal is to quadruple nuclear energy capacity by then, we could see the amount of uranium needed within the U.S. alone actually exceed what we're producing at this point.

One of the common themes that runs through many of these critical materials is an impending supply and demand imbalance. Some metals, such as copper, have shifted to a supply deficit this year or are expected to do so by the end of the year. Others, such as uranium and, going into the future, copper, are expected to remain in a prolonged deficit. That's an area where governments and private companies are trying to incentivize production, as they recognize the growing demand and the issues associated with bringing more supply online.

James Connor: That's a great overview. Why don't we examine some of the products that you and your team have developed, so investors can invest in some of these rare earth elements and also critical minerals? Where do you want to start?

Steve Schoffstall: The Sprott Critical Materials ETF is one that's really caught a lot of investor attention here over the last 18 months or so, and we've really seen it ramp up in investment activity in the last five to six months. This is an ETF that enables investors to access a diverse range of critical materials. It's those nine materials I mentioned earlier: the battery metals, uranium, rare earths, silver and copper. It's unique in that we have a pure-play approach whenever we roll out a new ETF.

Essentially, our goal is to provide the purest access to the metals listed in the benchmark. In this case, we have a 50% revenue or asset test, meaning that to be included in the index, they must derive a majority of their revenue from mining one of the nine critical materials. It's unique in that it is a pure-play index. We also include uranium, which many diversified critical materials type ETF strategies may not include. When you start to look under the hood a little bit, you'll see that about 25% of the exposure is to uranium equities, another 20% to lithium, about 19% to copper, and you also have a meaningful exposure to rare earths coming in around 17 or 18%.

James Connor: What's the symbol, and where does it trade?

Steve Schoffstall: That would be SETM. It's primarily listed on the Nasdaq, but available throughout the U.S. and anywhere that has trading in the U.S. capabilities.

James Connor: You also have an active, Sprott Active Metals & Miners ETF. Tell us about this one.

Steve Schoffstall: This is ticker METL, also known as Metal. It's our most recent ETF, launched back in early September. So far, we've gathered about $35 million in assets. This is an ETF that we were keen to bring to market. Our legacy at Sprott is in metals and mining. We have several decades of experience there, a well-educated and experienced investment team.

What we're able to do is rely on that experience and bring out an ETF that really allows that investment team to take an active approach to not only critical materials, but other metals as well that we view to be important to infrastructure build out and growing the economy, whether it's through electrification or as we see in developing nations as they're looking to modernize their economy.

Not only does it provide exposure to critical materials, but it also exposes individuals to metals such as steel, platinum, and palladium. They also have a broader mandate to invest in aluminum, zinc, gold, and iron ore. A very wide mandate. When considering active management, we believe some sectors can benefit more than others. Mining is one of those sectors that, because it's so complex, we feel like an active strategy could do quite well, because we tend to see a very wide dispersion in returns.

A lot of the returns in mining are found in the top 25% or so of mining equities. We believe that by going through our process, which involves our investment team conducting over 200 management team meetings per year and visiting up to 30 mine sites annually, they gain the knowledge and insight that may not be available through traditional financial analysis, allowing them to identify outperforming companies.

James Connor: I'm glad you brought that up. I often wonder, and this is a discussion we hear quite often, whether active money managers can be considered passive products, but you're saying they can.

Steve Schoffstall: In a sector like mining, it makes a lot of sense. Regarding dispersion and returns, when comparing the top performer with the bottom performer within the category over the last five years, the average annual return has been over 600%. Typically, the top 25% tend to perform very well, while the bottom 50% do not perform as well. By adopting an active approach, along with the flexibility and management structure, they can move in and out of positions that they believe will outperform over the longer term.

James Connor: Steve, one of the themes you touched on earlier is electrification. To build these grids, we need a significant amount of copper. Even in a typical traditional car, you're looking at 50 pounds of copper versus a hybrid, which is 80 pounds of copper. An EV, depending on the size, can use 150 pounds of copper or more. What products do you have that focus on copper?

Steve Schoffstall: SETM has a 20% allocation to copper, but for investors seeking a more targeted approach, we offer the Sprott Copper Miners ETF (ticker: COPP) and its junior counterpart, COPJ. Both of these strategies are pure play. If we examine COPP, it provides all-cap exposure. It also has about a 5% allocation to physical copper. If you examine the copper mining landscape and the available strategies, it's the only pure-play all-cap copper ETF, and it's the only ETF to offer physical copper within its holdings.

Pure play becomes very important when examining an industry like copper. If you were to look at the 10 largest producers, you would see that only three are either publicly traded or predominantly copper miners. That means we are targeting other strategies that might involve investing in the largest copper producers or companies with a significant portion of their revenue coming from copper. We are specifically targeting those copper producers with the hope of providing less unintended exposure.

Our Junior Copper Miner's version (COPJ) is also a pure-play strategy. There's not a physical component to that, and it's the only junior copper mining ETF available to U.S. investors. This is a way for investors to invest more in companies involved in development and exploration.

James Connor: Once again, when it comes to copper, we've had many bottlenecks this year. Freeport, which is the world's largest copper producer, had to shut down one of its mines in Indonesia. Is it still shut down?

Steve Schoffstall: Yes. That's the Grasberg mine. They had a massive landslide earlier this year. They don't expect to return to full production capacity until 2027. It not only sent a lot of mud into the actual mine itself, but also damaged a lot of the infrastructure. It's the second-largest copper mine in the world. When considering this and some of the other major disruptions we've experienced so far this year, we've seen a 5% decrease in copper production. This is something that we tend to see year after year. Many of the large mines have been affected this year.

We've had civil unrest that has closed some other mines. Copper is unique in that not only does it have that favorable supply and demand outlook for investors, we're seeing investments start to come in with some mergers and acquisitions that are happening, specifically on the basis of larger, maybe more diversified miners targeting pure play copper producers or just the copper assets lets you see how important that's being viewed within the industry. Additionally, with copper mining, we often encounter the situation where a significant portion of the easily accessible material has been extracted, resulting in declining ore grades.

This makes it much more difficult to ramp up production. We're not seeing large discoveries like we have in the past. Over the last decade or so, we've seen only about 14 of the 250 or so discoveries classified as major discoveries. There is significant disruption in the industry, with issues arising from the development of new mines. We're starting to see investment come into that space, whether from governments or private companies.

James Connor: Steve, I also want to ask about another metal, lithium. Two or three years ago, lithium was skyrocketing to the upside. It was huge. Then suddenly, it just cratered. All the mining stocks associated with lithium also came back significantly. EV stocks also pulled back significantly. Perhaps you could briefly discuss the current status of lithium. Have we found a level where we're starting to consolidate now? Is this a sector that investors should consider investing in? What products do you have for investors?

Steve Schoffstall: Those are all great questions. The lithium industry is the poster child for China's influence on the critical material supply chain. They're by far the leader in the production and refining of battery-grade lithium. Very important not only for storage, but also for EVs, as you mentioned. When examining the underlying market dynamics, it becomes apparent that as the price of lithium has decreased, it is making it increasingly difficult for some miners to invest in mines and increase production.

As we see falling prices, we need a higher incentive price. I mentioned Lithium Americas as a company that the U.S. government is investing in to keep a Nevada mine on track to begin producing lithium. We've seen the US Treasury Secretary come out and mention that the administration plans to set price floors for some strategic industries. Presumably, this would include critical materials, not just semiconductors. From a government standpoint, we can see that equity stakes are being held in companies. There is potential for a price floor, which will provide some stability to these mining companies and hopefully attract additional investment.

However, what we're also seeing is that, in the U.S., we tend to be somewhat different and isolated from what's happening in the rest of the world. EV adoption continues to progress at a steady pace throughout much of the world, even as headlines in the U.S. might suggest otherwise, implying that EVs aren't being adopted as quickly. We're not the major player in that market. That's China and the European Union. Many countries have shifted predominantly to electric vehicles in their new vehicle sales. Many of these factors are at play.

I think the short story is that you had an oversupply of lithium in the near term that crowded out investment. We saw prices come down. I believe we are at a point now where we're starting to see not only individual companies, but governments understand the value of lithium and the supply chain around batteries, which is starting to bring investment back to the table. We still have a favorable opinion on lithium moving forward.

James Connor: What products does Sprott have for investors so they can focus on lithium?

Steve Schoffstall: The Sprott Lithium Miners ETF—LITP is the ticker—also listed on Nasdaq. That's going to be a pure-play lithium miners ETF. That's the first and the purest way out of our lineup. Also in SETM, there's about a 20% allocation to lithium. However, we find that for investors seeking a targeted approach and potentially overweighting their exposure to lithium, LITP tends to be the preferred destination. We do see that lithium, unlike some of the other metals, tends to be very news-driven. We tend to see these larger pops when there's positive news for the industry. However, as with many critical materials, we advise investors to expect some volatility as the global economy undergoes a structural shift.

James Connor: I was in London recently, and I saw a lot of those Chinese-produced EVs, the BYD. Beautiful cars.

Steve Schoffstall: That's one thing that gets lost within the U.S. because we are so geographically dispersed across the continent. Once you start going to China and many parts of Europe, it's very much urban. EVs tend to be a much easier mode of transportation, while they might not be quite as practical in the U.S. What we think we're going to see in the U.S. is a slightly different path. Instead of transitioning directly from gas-powered cars to EVs, we expect to see hybrids continue to gain acceptance, whether that's through plug-in hybrids or other types of hybrid vehicles. With that, you do still need some significant battery capabilities. We still see a demand for lithium coming from hybrid vehicles, although not quite as much as from EVs, but it is still positive for the demand picture.

James Connor: I recently took out a Honda Civic. I think it was a hybrid. Beautiful car.

Steve Schoffstall: They're really technology-forward, right? When you start looking at EVs, it's not just about the lithium in the battery or even in hybrids, but you also have all the increased copper because of a lot of the electronics that you tend to see in EVs. They tend to be very clean-looking and technology-heavy. We also see the rare earths in EVs. It's used in the magnets within the motor. All those components are necessary for increasing our EV production.

James Connor: I've taken out the Teslas, too, for test drives, but I think it's still 5 years away before I would purchase one. I live in Toronto, so these batteries don't perform too well in cold weather. I'm told they lose 20-30% of their charge in cold weather. Once they improve the battery chemistries, I may consider it more seriously. We still lack the necessary infrastructure here. I can drive to Montreal, which is 6 hours away, no problem. We're probably down to Buffalo or Detroit. However, if I have to go somewhere further, it becomes an issue because we simply don't have the necessary infrastructure here in Canada.

Steve Schoffstall: That infrastructure buildout, as it relates to EVs, is one of those aspects that we think really feeds into the demand for critical materials. As you set up these charging stations, you start to think about the need for copper, which is the second most conductive metal behind silver, but far more affordable. Copper tends to be used in EV chargers. You have to run transmission lines. You need infrastructure that tends to require a lot of steel, which is one of the reasons why we see investors taking a look at METL, as it does have that steel exposure. It also has the ability to invest in aluminum and other infrastructure-type metals.

James Connor: Steve, this has been a great discussion. I would like to thank you very much for taking the time to speak with us today and sharing your thoughts on the various products. If someone would like to check out or read more about these products, where can they find more information?

Steve Schoffstall: They can go over to sprottetfs.com. There we have a lot of information about each of these strategies. We also have an Insights page where we publish a significant amount of our research and thought leadership and provide regular updates. Many of these materials are updated on a monthly basis. We're investing heavily in thought leadership.

James Connor: I would echo that sentiment to our viewers. One thing you and your team do very well is educate people about resources and minerals, explaining how they benefit society, as well as how they can be invested in. I encourage our viewers to visit your website. Steve, once again, thank you.

Steve Schoffstall: It was great. Thank you.