The Critical Minerals Supply Crunch Mining the Energy Transition for Investment Opportunity

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May 4, 2023 | (53 mins 10 secs)

The energy transition is accelerating. Aggressive global timelines to reduce global carbon emissions and diversify our energy sources are in place, and the manufacturing and adoption of electric vehicles (EVs) have reached a tipping point. The rapidly rising demand for lithium, copper, uranium and nickel is likely to quickly outstrip supply—and the resulting investment opportunity may be powerful.  The webcast will cover:

• Why concerns about energy security may accelerate the energy transition
• How green industrial policies are “crowding in” private sector investment 
• How momentum in EV adoption may likely drive exponential growth for battery metals
• Supply-demand scenarios for lithium, uranium, copper and nickel and how this impacts miners 
• Opportunities for investors with Sprott Energy Transition ETFs

Featured Speakers

Webcast Transcript

Bruno, Wealth Management, Cover Slide

Mark Bruno, Managing Director of the Wealth Management Group at Informa Connect: Introduction

Mark Bruno: Welcome to today's wealthmanagement.com webinar, The Critical Mineral Supply Crunch: Mining the Energy Transition for Investment Opportunities. This webinar is sponsored by Nasdaq and features Sprott. My name is Mark Bruno, I'm the Managing Director of the Wealth Management Group at Informa Connect, and I'll be your host today.

Now, let me introduce today's speakers. We're delighted to have Mark Marex, who is the Director of Index Research and Development at Nasdaq Investment Intelligence. We also have John Ciampaglia, who's the CEO of Sprott Asset Management and Senior Managing Partner of Sprott Inc., And today's moderator is Edward Coyne, a Senior Managing Partner of Global Sales at Sprott as well.

You can find us find out more about all of our speakers by clicking on the speaker bio widget at the bottom of your screen. But with that, time to get started. John, I'll turn things over to you to kick us off, so please take us away.

John Ciampaglia: Slides 3-10 Understanding the Energy Transition

John Ciampaglia: Great. Thank you very much for the introduction and thanks to everybody for participating in our webcast today. I speak about this topic around the world with all kinds of investors, and I think it's fair to say that this topic is becoming more and more understood, and particularly the investment opportunity that it's creating. We think it's going to be very profound and play out over a number of years.

Just on the first slide, let's talk about this term “energy transition.” We first got introduced to this term when we were talking to institutional investors about two years ago. At that time, it struck me like, "What are they talking about, energy transition?" It became very clear to me that many institutional investors are thinking about how the world is shifting in favor of lower-carbon forms of energy and mobility and transportation, etc.

It has, I think, only accelerated since I was first introduced to the term two years ago. A lot of this is being driven by government incentives, changes in industrial policy, and changes in consumer habits and preferences. As I said, we think this trend is going to create significant infrastructure investment over the coming decades, and we think it's a very interesting investment thematic.

[The energy transition is] really about shifting the way our economies and our lives function. This is all about this idea of lowering CO2, which is carbon dioxide emissions, which scientists believe has a direct link between climate change, climate warming, and what we're seeing in more erratic weather patterns.

You can see that over time, and you can see charts like this that go all the way back to the Industrial Revolution, the reality is as the population on the Earth increases and wealth grows, we use more energy, we produce more food, and all of these things result in greater greenhouse gas emissions, which is the linkage to CO2.

We have this Paris climate agreement that was signed a number of years ago. There are now 93 countries that have made commitments to different net-zero emission targets, and that's really trying to balance this amount of CO2 in the atmosphere. It was very important that a couple of years ago, the United States actually returned to this climate agreement because it has really been the catalyst for major shifts in everything from industrial policy to energy policy that we think are going to impact this thematic.

As we think about net zero, how does it play out? Well, if you break down the carbon pie, meaning where does carbon dioxide… How does it get produced? The biggest components are related to how we produce electricity, transportation, heating buildings, industrial processes, and agriculture. Those are the five main buckets of how CO2 is emitted in our atmosphere.

The world, I think it's fair to say, is trying to figure out ways to help [develop] the different technologies and strategies to help decarbonize in each of these five different areas. We do see a worldwide transition away from fossil fuels, and I want to be very clear about this: This is not an anti-oil and gas or fossil fuel message. The reality is our energy systems, the way we move around, the way we live, the way we heat our homes, is still largely based on fossil fuels, and it will continue to be based on fossil fuels for the coming decades.

The reality is that all of these systems I mentioned and industries are based on fossil fuels for the large part. These systems have been in place for the last 200-odd years. Yes, we've transitioned to different forms of energy over that time. If you think about burning wood 200 years ago, to burning coal, to burning oil, to moving to hydroelectric and natural gas, nuclear energy, solar, wind, geothermal, the world is obviously trying to extract more energy from less resources and do it in a more clean and cost-effective way.

We think this worldwide transition away from fossil fuels is going to be a slow but gradual thematic. With respect to electricity production, we see a huge resurgence of interest in all things: wind, solar, and more recently, nuclear power. We see a significant need for battery storage, and that's both in long-term storage to back up renewables that are intermittent, and then finally, electric vehicles, which we think are going to become more and more dominant over the coming decades.

At the same time that we're trying to decarbonize all of these industries and sectors, the world continues to grow in population. The parts of the developing world would love to have higher levels of electricity usage, and so you've got this challenge of how are we going to decarbonize at the same time? A lot of the world wants to use more electricity as they become more wealthy.

Just moving to the next slide, I think it's really interesting to provide some historical perspective in terms of the global amount of investment in dollar terms going into energy transition-related investments. This chart comes from Bloomberg New Energy Finance. It's quite recent actually. What was really profound when I saw it is that 2022, according to Bloomberg, was the first year when the dollar investments in energy transition equaled the total global investments that we've made in fossil fuels.

One point one trillion [dollars] was made in energy transition-related investments and about 1.1 trillion was made into fossil fuels. We think this trend is going to continue in terms of the sheer dollar amount of investments going into energy transition, and we think the skew toward energy transition will continue to move in favor of energy transition relative to oil and gas. As you can see from these colored charts, it's everything from renewable energy, energy storage, carbon capture, hydrogen, electrified heat, electrified transportation, etc. So it really covers the whole gamut.

What are governments doing to incentivize this transition? Well, I think it's fair to say, they are subsidizing it in serious terms. This is a snapshot from the International Energy Agency that summarizes as of late last year, the number of different investment programs that have been announced in the United States, the UK, EU, Canada, Korea, Japan. They're all making significant investments to crowd in private capital.

They're incentivizing this capital to come in, make these long-term investments to help move this transition along. It's becoming a bit competitive and it's becoming… There has been some friction between competing countries because everyone is trying to incentivize investments on their own soil, and it has created a bit of friction even amongst allied countries.

What is also driving this transition is energy security, and I'll talk about it in a little bit more detail as we go, but I think governments around the world, they're connecting this idea of energy transition with energy security, meaning if we can be sustainable and we can be independent of certain other nations for energy needs, that puts us in a more concrete position.

I'm going to talk a little bit about the Inflation Reduction Act which was passed last year. It's about $390 billion of incentives that go toward everything from renewable energy to nuclear energy to electric vehicle subsidies, hydrogen hubs, all kinds of different technologies across many different sectors. This is what I'm talking about in terms of governments around the world trying to crowd in investments to help move this transition along.

It's pretty significant when you throw these kinds of tax incentives and investment credits and whatnot at an industry. It can bring a lot of private sector capital and create a lot of different investment opportunities.

We see a very similar parallel happening right now that happened in the mid to late 1970s after we had the OPEC oil crisis, where governments said, "Hey, we're at the mercy of other countries in terms of our energy security. We need to change energy policy and incentivize shifts." And we saw massive capital and infrastructure build-out after that.

It was a time when many of the nuclear power plants in the United States and other Western countries were actually built — it was in response to that energy crisis. Last year, we did see an energy crisis, not so much in North America, I think we all felt it, but it really hit Europe and Asia incredibly hard because they are very dependent on other countries for everything from oil to coal to natural gas.

John Ciampaglia: Slides 11-20 The Case for Critical Minerals

So how does this all play back and tie back to critical minerals? Well, critical minerals are really the building blocks to enable this energy transition. This is a slide we borrowed from McKinsey, which shows the level of importance of a number of different minerals in terms of different energy systems or electrified transportation.

I'm going to focus a little bit on electric vehicles because it is a very profound part of the story. You can see that these big blue dots signify the level of importance of these various minerals in order to move to electric vehicles. You can see lithium is very important, copper, nickel, manganese, cobalt, graphite, rare earths. Many different critical minerals are necessary to enable this shift to electric vehicles.

Obviously, for things like nuclear energy, uranium is the primary fuel. For electricity networks, as we electrify, and we build more solar and wind, copper is really the key there to connect everything to the grid. For solar, copper, I mentioned is very important, but one that many people may not know is silver. Solar power requires a lot of silver, and about 10 % of all the silver produced each year actually goes into solar PV panels. With respect to wind power, copper again, and rare earths, which are used for permanent magnets that are used in the turbines.

Let's just talk a little bit about EVs because I think more and more of us can relate to this, and I definitely see more and more driving around each day. In the last few years, you can see the adoption of EVs was pretty negligible. Very few people owned a Tesla, but something's happened. We've seen a big jump in adoption globally.

China is leading the world here, where about one out of every four new cars sold in China is an electric vehicle. We are way behind that in the United States, in Europe and Canada, but we are slowly catching up. We're catching up because there are incentives. I think there are a lot more consumer choices. I think the choices we're seeing are much better. I think there's a growing acceptance, particularly among younger generations, that EVs are the way to the future.

Some places in the world are taking very drastic measures to try to accelerate this transition. For example, the EU recently said that they would like to ban the sale of all internal combustion engine vehicles by 2035. I don't think they have any chance of hitting that goal because I think the supply chains that we need to build out to enable that are just not ready yet. But this change, I think, is going to only accelerate from here.

That was a backward-looking view, let's look at the forward-looking view. This is all the major automakers in the world and when they are planning to phase out or shift down a lot of production of internal combustion [engines]. You'll hear this term “ICE,” internal combustion engine, which are traditional gas and diesel vehicles.

Every car company is on a slightly different trajectory, but I think it's fair to say they're all moving toward an eventual phase-down. As I said, whether this will happen by 2035 or 2040 or 2050 is hard to predict, but I think the trend is clearly going to be moving in this direction where more and more new cars will be EVs over the coming decades.

This is a really good example of how legislation – and this is the Inflation Reduction Act – how it has spurred manufacturing projects related to North America battery cell manufacturing in the last few months. You can see that there have been multiple projects announced in the United States and Canada in terms of building capacity.

Another part of this story is about building capacity on home soil. Governments do not want to outsource these critical supply chains to countries like China, which, believe it or not, today control somewhere between 60% and 80% of many of these critical energy transition supply chains.

For example, when you think about solar panels, about 80% of them are made in China, 60% of the rare earths are produced in China, and 70% of all EV battery packs are made in China. Obviously, with rising tensions around trade in Taiwan and just the wake-up call with respect to supply chains and COVID, I think many governments in the West are very concerned about continuing to outsource all of this production to countries like China, which one day may not be as friendly as they are today.

Let's talk a little bit about what's under the hood inside of an EV so you can understand exactly where all these raw materials fit in. Most of the materials are in something called a battery cathode. Those are primarily nickel, cobalt, and manganese. There are many different battery chemistries, meaning different compositions of these minerals in different quantities, but many of these elements here are quite universal.

There are batteries in China that are based on lithium, phosphate, and iron chemistries, but we believe those chemistries are actually coming to America because there are a lower-cost, entry-point EV solution. In the anode, you have graphite, you have these rare earths which are permanent magnets, and then there's tons of copper wiring in each car as well as copper coil in the battery cells. If we think we're going to be able to move to a greater percentage of EVs, we're clearly going to need significant amounts of all of these different materials.

Just to give some perspective on that, if you think about a conventional car, and sorry, this is in the metric system here, but these critical minerals today account for about 34 kilograms. You got to multiply that by about 2.2 to get pounds. If you compare that to an electric vehicle, you can see how much more these materials represent in terms of weight, just over 200 kilos per vehicle. Copper and nickel are very heavy, lithium is the lightest element on Earth, but there is a lot of lithium, cobalt, and whatnot inside of a car.

All right, the next slide. As I mentioned, there's a lot of crowding in of investments. It's happening both at government levels, and it's also happening within the car companies themselves. The car companies are positioning themselves to become more vertically integrated. This is something that happened 100 years ago when car companies owned steel companies, for example.

Because the car companies realized that the bottleneck to enabling the transition to EVs comes down to things like lithium, it's not about building the factories, it's about getting the materials in order to build the component parts. They are starting to make investments in upstream investment companies like lithium companies and different copper companies, and we think this trend is only going to accelerate from here. There's been a number of [these investments] announced in the last few months.

The U.S. Department of Energy has also extended some pretty sizable loans to different companies to produce lithium in places like Nevada, as well as to build material processing facilities and recycling processes.

So let's just go to this slide to try to quantify, and this comes from the International Energy Agency. This shows what their projections are for some of these key critical minerals in 2040 relative to the amount we used in 2020. You can see from the scale there on the left, that is in thousands of percent.

There are two different scenarios, the stated policies, which are all the policies that have been announced, then there are additional scenarios that are related to sustainable development. Even if you take the more conservative of the two, you can see that we're going to need significant amounts of things like lithium, graphite, copper, nickel, and so on. Even copper, which obviously has very widespread applications, we're going to need large amounts of copper to enable this transition to happen.

This has not been lost on governments around the world as well as car companies like General Motors and Stellantis and whatnot. We've seen just the whole slew of different pieces of legislation and partnerships being announced in the last year around trying to secure all these critical minerals. You're going to hear a lot of terms like reshoring, onshoring, and front shoring in the news. This is all about the West basically trying to build local supply chains for all of these different technologies and transitions.

Countries that do not have rich endowments of minerals – let's pick on one, like Germany – you see their politicians visiting Canada and Argentina and Chile, and basically trying to secure deals so that they can get these critical minerals, process them back home and build cars or wind turbines or whatever they're trying to do.

We think this is a really profound shift. We like to think of it as green industrial policy. Generally, governments don't really get too involved in free markets. They let the markets decide winners and losers. But we think all of these actions by governments around the world in the last year are clearly signaling a very big shift. With that shift, I think the money will follow. We're starting to see more and more examples of that. I'm going to pause now and pass it over to Ed Coyne.

Ed Coyne: Slides 21-25 Fund Overview

Ed Coyne: Thank you, John, and thank you all for joining us today on the webcast. I just want to take a few minutes before we shift gears and turn it over to Mark to talk about the index itself. Let's talk a bit about Sprott Energy Transition ETFs and give you a brief overview of the funds and what our thinking is within this suite of products.

The Sprott Energy Transition ETFs provide investors with pure-play investment exposure to the minerals, critical to the world's transition to clean energy. Through [these ETFs is] access to both mining companies and physical materials that are positioned to benefit from a quickly increasing demand, limited supply, and challenges of bringing minerals to market.

At Sprott, we are focused on the upstream component of the supply chain. We view this market as an opportunistic market, a long-term market, and we're aiming to give clients a pure-play exposure to this space, which in our view is direct access to the investable publicly listed securities that traffic in the energy transition marketplace. We are a firm that is a trusted provider in the precious metals and real asset and energy transition market with over four decades of experience.

We've packaged this in a convenient liquid ETF [format]. For those investors looking to get exposure to this space, we feel we've built a nice suite of ETF that give you that exposure. At Sprott, we offer that full suite, whether it's in the uranium market through our Sprott physical uranium trust or a full suite of individual metals and minerals with our key ETF SETM, giving you exposure to a basket of those metals.

For those looking to get a general exposure and not making a call on any one specific metal, we'd encourage you to take a look at SETM as a pure-play exposure to multiple metals. For those that want to dive a little deeper and be a little more surgical in their exposure, we have the Sprott Lithium Miners ETF, that's LITP. We have the Sprott Uranium Miners ETF, URNM. We have a Junior Mining Uranium ETF, which is URNJ.

Then we have a copper ETF, which is COPJ. Last but not least, we have a nickel ETF, NIKL. Each one of these will give you pure-play exposure to that space. With that, I'd like to turn it over now to Mark at Nasdaq to talk a bit about Sprott Energy Transition Materials Indexes and how they were created.

Mark Marex: Nasdaq Presentation

Mark Marex: Thank you so much, Ed. Thank you, everyone, for joining us today and giving us the opportunity to present to you. My name, again, is Mark Marex. I'm a director at Nasdaq in the Index Research and Development group. I want to spend a few minutes at least talking with you about the actual indexes that underlie all these different strategies, these passive strategies, to give you exposure to energy transition minerals.

This is the high-level overview of that broad index, the one that gives you exposure to all the different materials within the space. You see the list here, uranium, copper, lithium, nickel, cobalt, graphite, manganese, rare earths, and silver. Those are all the different minerals and materials that you get exposure with in this index.

The thing that I think makes this a really unique and high value-add strategy compared to other strategies that you might find in the marketplace, is really the partnership that Nasdaq has with Sprott. Nasdaq, I think you know, is well known for things like the Nasdaq Composite, the NASDAQ 100. We've built out a pretty diverse lineup of indexes over the years, and we're pretty strong in a number of different thematic areas, especially within the technology space.

But we recognize that there are certain areas where you just need subject matter expertise, and it helps to bring in a trusted partner that has experience doing research and participating in a particular market or in a particular industry for ideally at least a few years and even better, several decades like Sprott has done with the metals space.

Sprott really does the heavy lifting with these indexes in terms of screening the universe, in terms of classifying, putting together their own classification of potential securities selected for inclusion. That means you have to be either a producer or a developer, an explorer, refiner, smelter, a couple of other different categories here. But the word that was mentioned was upstream.

What we don't see in these indexes is all the downstream exposure that you may find in certain competitive products, which we'll get into in a minute, where just because you're selling something that maybe has a lithium battery in it, doesn't necessarily mean that you should have exposure [to it] in a strategy that is looking to provide pure-play lithium exposure, as an example. Right?

In most recent reconstitution in this index, we had 112 constituents spread out across all these different categories. In terms of the eligibility criteria that Nasdaq looks at, we screen for things like minimum market cap. So you've got to have $100 million in market cap or 50 million if you've already made it to the index in a previous period. We have some minimum requirements around liquidity as well, seasoning and eligible exchanges.

The thing that's probably most interesting to me on this one is the weighting criteria. It's what you would call a modified free-flow market-cap weighting. We do look at market caps themselves to come up with the weights for the index, but all those market caps are theme adjusted. That basically means when Sprott screens the universe, and they determine what is the revenue exposure of any company that makes it into the index, that basically functions as an adjustment factor or an intensity score.

Where if you're 100% doing something related to lithium or nickel, you get that full market-cap weighting in the index. If you're not 100% pure play, maybe you're 80% and doing 20% something else, some other metal or mineral material, your weighting will be adjusted down proportionally. It really is trying to give you not just exposure to the most relevant names, but also give you gross-up exposure to the most pure-play names in the space.

I think that's really important for any thematic strategy. The other things to keep in mind here, we do have caps, max weighting per constituent is about 4.75%. There's also a cap on a single material. So, for every company that's classified as being a lithium producer or developer, altogether, that bucket of lithium names cannot exceed 25%. We have that same cap applied for all the individual materials on the list.

This is rebalanced semi-annually in June and December, along with the semi-annual reconstitutions that Sprott and Nasdaq implement together in those same months, twice a year. Let's talk a little bit about performance now. What I'm showing you here is a historical look back to December 2020 when several of these products were backtested to.

Most of them were launched live in December of 2022 or January of 2023. I've broken out for you that mostly backtested performance on the left-hand side. Now, the thing to note about the backtest is that unlike some multifactor, sophisticated selection methodology in terms of having a lot of different data inputs and calculations, going back historically with this type of strategy, we do feel our backtest is pretty robust because the universe doesn't change that much over time.

Once you're classified in a certain bucket, you'll probably stay there. So we do feel the backtest is pretty robust in this case. The things to highlight here are really two things. One is in the gray you see there toward the bottom of the line from that two-year period, December 2020 to 2022, the S&P was up only about 9%. There were a couple of single metal or single material products that were right around there, namely nickel and copper.

But you had a couple of areas outperform pretty dramatically. You had uranium there in the black up 77%, you had lithium up 131%. Then the broad-based Nasdaq's Sprott Energy Transition Materials Index was up about 40% over that time frame. So pretty meaningful outperformance versus the broader market. Then if you look at what we've had year to date, a similar story, although maybe some of the details are different.

The broad index, NSETM, that's in the middle there. It's been up as much as 20% at one point year to date. Pretty close to flat going into the end of March. You had copper outperforming, you had nickel and uranium a little bit underperforming. There's always going to be some dispersion in terms of specific materials and metals outperforming or underperforming others depending on what's happening in those on the commodity markets.

Next, I wanted to take a bit of a closer look as I alluded to in how this stacks up versus some of the competitor products out there. For this first index, the broad ETM index that gives you the multiple materials exposure, we've decided to look at MVIS, which is the index provider owned by VanEck, and compare it to their Global Rare Earth/Strategic Metals Index, ticker MVREMX.

When you read the methodology of this index, it sounds very similar from the get-go. It says it tracks the performance of the largest, most liquid companies in the global rare earths and strategic metals industry, it only includes companies that generate at least 50% of their revenue from rare earths and strategic metals with some nuances added in there. Okay, great. On its face, you would think these should be pretty similar products in terms of performance and exposure and all that.

But when you start to actually compare the constituents, the list of components in here, it's a really big difference. This other index has only 25 constituents versus 112 in the Nasdaq Sprott product. Even though it claims to represent 90% of the investable universe, I was not able to find on their website how that investable universe is defined. But to me, 25 is not 90% of 112. It's a much, much less diversified index, obviously, from an individual constituent perspective.

Then also the fact that it is capped at 8% each, per company, means that individual companies have a lot more idiosyncratic risk tied to the overall performance of the index. So those are already some pretty big distinctions right there. We do find, looking at the overlap, about 13 of the Nasdaq Sprott constituents overlap with the MVIS product. That's about 21% of the Nasdaq Sprott weight. Those same 13 constituents represent about 49% of the MVIS index weight.

Again, in terms of what they are claiming to track, we've only got 50% of their index represented here with Nasdaq Sprott and about 80% by index weight that doesn't overlap. Then finally, if you look at one by one, some of the major players that stuck out to me that are unique to the Nasdaq Sprott products, all of these have weighting of about 4% in Nasdaq Sprott. Albuquerque, which is I believe, the biggest Lithium player in the world.

Freeport-McMoRan which I'm sure folks have heard of, is a very, very long-standing big player in the copper industry. First Quantum Minerals, and a couple of others that stood out to me. Again, it's not clear because I wasn't able to find a detailed methodology why it is that certain companies like this would not make it into that MVIS product.

I'll do one more quick deep dive with you all here before handing it back, taking a look at... Sorry, before I even do that, just taking a look at performance, you can see big, big disparity. Again, you wouldn't be necessarily surprised to see this once you understand how different the exposures are. Nasdaq/Sprott brought up 117% over a backtested period of about five years from December 2017 through December 2022 versus only 27% for that MVIS Index.

Year-to-date performance is pretty similar. But that long-range outperformance really sticks out to me. I'll wrap by doing a quick deep dive here on the lithium product as well. I think it's probably the one that folks are most familiar with in terms of hearing about demand for lithium out-stripping supply recently for all the new batteries that are being built – not just for EVs, but for individual home use and industrial applications.

I think it's a really exciting space within the broader theme that we're speaking about. For this one, I wanted to point out as a competitor product, the Solactive Global Lithium Index Ticker, SOLLIT, which when you read their methodology, you find that it tracks a representation of companies active in lithium mining, exploration, or a closely related activity and or production of lithium batteries. That last part is really the key, and I'll get to that in a second.

When you compare the eligibility classifications from Solactive, the thing I've underlined here is that significant revenues are generated or expected to be generated from either a relative or absolute point of view to that specific company. To me, that is what results in a number of examples of non-overlapping constituents all the way there on the right, where if you look at 31 of the 40 names in the Solactive index, they don't appear in the Nasdaq's Sprott Lithium Miners product.

They are only unique to Solactive, and they include things like the four EV companies that I've listed out there that represent 15% of the index. So Tesla, Lucid Group, Rivian Automotive, BYD. They are in there because of their battery businesses. They are in there because they are downstream users of lithium and not involved in the actual pure-play materials production, exploration, refinement, and all that good stuff.

So to me, that dilutes the theme. If you're looking for more of that pure play, you need a strategy whose methodology is written out that way so that you don't end up diluting your exposure with companies that are in different sectors like consumer discretionary staples, energy, industrials, technology. Those are all sector exposures that you get with the Solactive index that you do not get with the Nasdaq Sprott Lithium [Miners Index].

Very little overlap between these two products as well. When you look at the performance differential, again, pretty similar story. This is a slightly shorter backtest. This goes back to December 2020, but over the course of two years, leading up to the index launch this past December, Nasdaq's Sprott Lithium [Miners Index] was up 146% total return. Solactive lithium was up 13%. Very big difference.

Again, it's important for everyone, I think, considering investments to track the space, understand what's an active product, what's passive, what's got a robust index methodology behind it. If it's a really specialized space where it's good to have subject matter expertise and experience, really understanding the investable universe, it really helps to have a partner like Sprott to play it correctly. Thanks all for listening. I hope that was informative and look forward to Q&A. With that, I'll turn it back.

Q&A

Ed Coyne: Thank you, Mark. This is once again, Ed Coyne. And before we shift to the Q&A, I'd like to just highlight today's key takeaways for you all to consider as you look to Sprott for your allocation to the energy transition market.

Why Sprott or why these particular ETFs? The Sprott Energy Transition ETFs offer a few key points in my mind. First and foremost, we offer pure-play critical minerals ETFs. We believe that these provide pure-play access to a range of critical minerals necessary for the global clean energy transition.

We also feel that you're getting increased investment driving the growth. Government net-zero or reduced emission mandates have led to increased investment. As John mentioned earlier, over $1 trillion globally was invested in the energy transition sector simply in 2022, we think that's going to continue and expand. In addition, we're seeing substantial investment for the foreseeable future in this space.

To meet net-zero targets globally, investments may need to accelerate to a yearly average of close to $3 trillion by 2023 to 2030. We're seeing tremendous opportunity in this particular space.

We believe that Sprott is well-positioned. We're looking at well-positioned companies, companies that are upstream in the supply chain, may be well-positioned to benefit from the increased investment in the critical minerals necessary for clean energy transition.

And then last but not least, as John mentioned also, from a security and reassuring standpoint, governments are supporting the production and the processing of critical minerals. If you look at the Inflation Reduction Act, the Bipartisan Infrastructure Law, and sustainable finance policies, all roads are really pointing to tremendous opportunity. And we believe that the Sprott Energy Transition Suite of ETFs allow you to allocate to that space.

Let's talk for a minute about how these critical minerals may fit into your investment portfolio. We are very familiar with this space. We've been doing precious metals and real assets for over four decades. The typical allocation to gold or silver is something that many of our investors know and understand. But when it comes to critical minerals, it's a little less clear right now.

Depending on your investment type and the investment portfolio mandate, critical minerals can fit into several categories. Simply put, in the energy transition market, view this as an alternative to fossil fuels, or maybe even an addition to fossil fuels as you're looking at that space.

Commodities in general… this certainly fits the general commodity bucket. So, for those looking to allocate to or increase your allocation to commodities, we believe the energy transition market fits into that space quite nicely.

Materials and mining in general. Clearly, this gives you direct exposure or pure-play exposure to that space. And then thematically, those that are looking to capture the opportunities in electric vehicles, renewable energy, and decarbonization, we feel that this space in particular and the products we offer give you direct exposure from a thematic standpoint.

Then last but not least, those that are more ESG-focused on their portfolio, we believe shifting gears into a more energy transition marketplace or a battery marketplace is appropriate for those that are looking at the ESG space.

Questions and Answers

Ed Coyne: With that, I'm going to pause for a moment and shift gears here and look at some of the questions that have been coming in since the start of the webcast. The first one -- and we'll shift gears between Mark and/or John on who answers these.-- but this one, I think, really goes to supply and demand. So we'll start with you, John.

And the question is simply this: Since it takes so long to get new mines up and running, what are some of the projections or the pricing that you see in supply and demand over the coming years as it relates to copper, silver and other metals out there?

John Ciampaglia: I think governments are finally acknowledging that they are part of the problem in terms of very onerous permitting processes. That's not to suggest we're trying to cut corners and do things on a non-sustainable basis. But I think governments are really good at creating a lot of bureaucracy and multiple layers of permitting steps.

I think it's great when I see politicians saying that they need to review a lot of this permitting. It's everything from the environmental permitting process and general permits to build a new mine and things like building transmission lines. I was shocked to find out that it could take between eight and 15 years to get new electricity lines built in some cases due to onerous regulations. Obviously, there's always a lot of resistance locally.

But I think in the commodity markets, the right way to think of it is if you want a supply response, which is what all of this is going to demand, you need a commodity price response. Meaning, you need to have the right incentive level, economic level of pricing that is going to basically incentivize these very large capital investments that will be made in order to de-risk these projects.

We've seen this with a number of different commodities in the last couple of years. There was a period of time when lithium was by far the best-performing commodity in the world for a two-year period because we had a supply crunch due to lack of investment four or five years ago. You can kick the can down the road for so long, but eventually, it catches up to you.

I think we need to see commodity prices for things like copper and uranium and lithium remain or increase to levels that are going to support the infrastructure and capital expense that's going to be required to expand production.

At the same time, it's getting more and more expensive to build new mines. It's very capital-intensive. Investors obviously aren't going to put their capital into these projects unless they feel they're getting a sufficient return on their investment. I think that's one of the reasons why governments are trying to crowd in investments and de-risk some of these projects.

Ed Coyne: Thank you, John. And let's stick with you for a minute because this one comes in more specific to one of our funds. On SETM, the question is, what is the current allocation to all the minerals within that ETF, and why?

John Ciampaglia: Okay, that's a great question. Well, right now, the fund is obviously skewed to the deepest and the most liquid companies that are involved in the sector. And so, you're going to see the largest weights being in the copper, lithium, and uranium markets and to a lesser degree in rare earths and nickel and silver and graphite.

It's very hard to get pure-play exposure to some of these companies. If you're wondering why the allocation to something like Manganese is is only 1%, and the reason is it's almost impossible to get exposure to pure-play companies. We don't want to add in a company that has manganese production, for example, but its primary business is really about iron ore.

But the companies that we're focused on are obviously focused on upstream development, and we've tried to make these indexes as pure-play as possible. The other thing we did not include in the index methodology is we did not include any China A shares.

You often will see those companies related to lithium and cobalt production, and we just could not get our heads around the idea of including them in the index for a number of different reasons. We've decided to exclude those particular companies.

But I think it's fair to say that unlike some of the competitor ETFs, which are a mixture of different upstream, midstream, and downstream companies, our indexes are very focused on the key producers, developers, and expiration companies in this thematic.

Ed Coyne: Thank you, John. This next one, it might be a little unfair because it's asking you to pick your favorite child, I suspect. But it just says, within the energy transition movement, in your estimation, what is probably the number one commodity to see this become a reality?

John Ciampaglia: Yeah, that's a really great question. Well, they all have their roles. Some are star players and some are in supporting roles. But in terms of some of our favorite commodities, we're obviously very bullish on uranium. We've made significant investments in that area as a company in the last two years, and we see two really big things happening.

One, you’ve got a sector that basically doesn’t produce enough uranium to just keep the existing fleet of nuclear actors operational today. You’ve got a supply deficit. At the same time, the world is pivoting back to nuclear energy. That’s very exciting because I think it’s a technology that has been ignored for a number of years and for a number of reasons, and some of those reasons were not good reasons.

We think uranium, even though the price has doubled in the last two years, we think it has a lot more room to grow over the coming years in order to incentivize new greenfield production. When we talk about greenfields, we're talking about new mines versus basically turning on a lot of the mines that have been on care and maintenance.

I guess the other one that I would highlight is lithium. It is the common element across every battery chemistry. It's concentrated in a small number of countries. There is a real push underway to try to develop lithium in the United States, predominantly in Nevada. As we saw in the last two years, when there's a shortage of lithium, the price can go really parabolic on you.

We think lithium has a very bright future because it's the one that's going to need the most significant. I think the sleeper in the mix is copper. I think the world is really woken up to the fact that many of our copper mines are getting very old, the ore graves are falling, and that we need a whole lot more new copper development. There's been a real big push institutionally in terms of interest in copper mining in the last, say, six months or so.

Ed Coyne This one starts out as a statement and then finishes with the question. Thank you for saying this. Whoever put this question in, we've clearly spelled out the opportunities in this space. But the question is, what about the risk? As an investor looked at this space, what should they be concerned with or be thinking about?

John Ciampaglia:  Yeah, it's a great question. There are a number of risks. These are companies involved in extractive industries, so you have to be sensitive about things about sustainability at the company level. Companies need to be good stewards in order to continue to maintain either environmental permits or social license in their local communities. Anything related to mining, you do have heightened risks. I think it's very important at the company level.

I'd say the other big risk here is that the transition does not happen as quickly as everybody hoped or planned. That could be related to bottlenecks in terms of capacity, and processing of minerals. That is a risk. That is something that we will have to see.

I would say the last thing that's starting to become a bit of an issue is related to geopolitics. We're seeing, I think, the world bifurcates into two camps. Unfortunately, since the invasion of Ukraine, commodity markets are starting to bifurcate across many different energy markets and mineral markets.

There is a bit of a rising tide around resource nationalism, which basically means countries like Chile and Indonesia and Peru, those governments which have these rich mineral endowments want to ensure they get their fair share of the economic pie here.

If they're going to allow foreign companies on their soil to develop these resources, they want to make sure that the economic benefits stay in the country in terms of creating jobs or perhaps providing more midstream activities like processing of materials before they move on to gigafactories and whatnot.

I think those are some of the natural risks around the rate of the transition. Always heightened risks with mining and then resource nationalism are something we're watching carefully.

Ed Coyne: John, the next one comes to supply, and it speaks really to basically the question of recycling. How important or how relevant is recycling when you're talking about supply in all these metals?

John Ciampaglia: Yeah, it's a really great question. I think this whole notion of circular economy is incredibly important. Many of the investors I talk to around the world are very focused on sustainability and recycling in terms of the supply chains. There are some companies that are clearly developing technologies to extract these materials at end of life, but it's still quite early days.

Meaning, many of the cars, the EVs, for example, on the road are still quite new. But as they age and come to end of life, I think facilities, including in the United States, are getting geared up to build the capacity to basically extract whatever minerals they can and put them back into the system.

Ed Coyne: At that point, we're sitting at close to top of the hour. Let me just scroll through. I see a couple of other questions coming in here. Let's just see here. I think that's probably it for right now. Any other questions that do come in, we're certainly going to be replying to via email and or phone call. We appreciate everyone's time on that. At this time, I'd like to turn it back to Mark to wrap up the webcast.

Wrap Up

Mark Bruno: Great. Thank you, everybody. I appreciate it, Ed, and appreciate it to all. Thank you to all of our panelists for what was a really enlightening and incredible webinar here this afternoon. I found the presentation to be really robust, really important, and really timely. I also was able to see some of the questions that were coming in here, and I thought there were some excellent questions.

Thank you again to our entire panel here this afternoon for the presentation and fielding as many questions from the wealthmanagement.com audience as possible. Again, thank you to our sponsors for today's webinar, Nasdaq, and also thank you very much for the Sprott team for joining us as well.

A replay of this webinar will be available on demand. So if you missed a portion of it or if you wanted to share it with a coworker or colleague, we will be circulating that link to everybody who registered for the webinar here today.

Again, on behalf of wealthmanagement.com, thank you very much to Nasdaq and to Sprott, and thank you to everyone for attending today's webinar here today. I'm Mark Bruno. Take care. Have a great rest of the day, everyone.

 

*Edward C. Coyne is a Registered Representative of Sprott Global Resources Investments Ltd.