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Wednesday, December 6, 2023

The Energy Transition is Happening, Here's How Experts are Investing

Raw materials demand from the electric vehicle and energy storage segments is on the rise, and market participants see opportunities for companies that can come online with new sources of supply.

“As we stand now, there is definitely a big demand/supply mismatch,” Swiss Asia Capital’s Amelin Wong said during a panel discussion at Vertical Events’ Future Facing Commodities conference in Singapore.

“We’ve been pounding the table for a long time now, saying there is simply no supply of key commodities because we haven’t been putting enough capital to work to do exploration,” she added. “In the natural resources game, it’s not just throwing a lot of money at it and you will get the solution tomorrow. It takes a very, very long time.”

The European Union has set an ambitious goal of phasing out all internal combustion engine cars by 2035, with the US aiming for at least half of all new vehicle sales to be zero-emission machines by 2030. But there are no electric vehicles without batteries, and there are no batteries without steady and secure raw materials supply.

“The reality is, we’re not going to meet those timelines. We need actual incentive pricing for more supply to come to the market,” Wong said. “At the end of the day, price is a factor. So we either need to dampen demand, or we need to increase supply — there’s no two ways around it.”

Another critical minerals trend seen in the past few years is the increasing involvement of governments in building out supply chains that are less dependent on Asia. China in particular dominates many aspects of the supply chain, controlling about 80 percent of critical minerals refining capacity.

“I don’t necessarily subscribe to the view that you can decouple your supply chain from China,” said Franklin Templeton’s Anthony Tse, who is the former CEO of lithium producer Galaxy Resources, now known as Allkem (ASX:AKE,OTC Pink:OROCF). “China has come so far because it started early.”

For Tse, building out stronger regional resiliency is helpful for decarbonization. That’s because globalized supply chains mean materials and components have to travel a long way.

“I do think it’s important to actually build resiliency, but also you need to build resiliency off the back of investors willing to deploy capital once the project’s been sufficiently derisked,” he said.

For junior mining companies trying to get their projects up and running, one of the main challenges has been permitting.

“In the context of Canada, it takes five years at least to permit a project. That’s after you’ve proven a deposit is economic,” Wong said. “Then … after that, you’ve got to get the capital. So it just goes on and on and on. It is a real problem.”

For Tse, apart from the permitting, a critical factor is the limited availability of human capital.

“There simply isn’t enough technical expertise to develop these projects — (people) who’ve actually taken the project from developmental-stage exploration through feasibility through construction, commissioning, operating and then ramp-up,” he said. “I think partnerships are continually going to be the way to go.”

How can investors play the energy transition?

When asked to share his thoughts on how to play the energy transition today, Sadiq Currimbhoy of Vulpes Investment Management said his organization thinks about sustainability in the long term.

“We don’t really use ESG scores because what we care about is the resilience of the portfolio,” he said. “We spend a lot of time understanding the asset as much as we can, and understanding idiosyncratic risk, as well as the opportunity that the asset allows us to do.”

Currimbhoy also touched on the learning aspect that investing in the energy transition has for generalist investors.

“When you start to look and work with industry specialists, you understand how each transition for each industry is different,” he said. “There’s some similarities, there’s some commonalities, but the interesting element is that each industry has different pressure points about how decisions are made or not made.”

For her part, Wong shared that Swiss Asia Capital looks at the energy transition and plays that thematic through the underlying metals that are needed to get to net zero. “Primarily, we look at the metals such as copper, nickel, lithium and uranium,” she said. “We run a variety of investment mandates with different risk parameters. … For more risk-averse mandates, we only look to invest in the cash-flowing companies.”

The founder and head of asset management explained that to fine-tune those investments her firm looks at tier-one companies. “Corporate governance for us is key, a good balance sheet strength, good margins and high free cash flow yields,” she noted.

“For those investment mandates that like to take on a bit more risk, we run what we call a barbell strategy.” In that strategy, Swiss Capital includes not only cash-flowing companies, but also introduces advanced exploration companies with tier-one deposits.

“These are the deposits that sit in the right jurisdictions, because political risks really are an issue for us, and they have the ability to be bought out eventually by the majors if they don’t have their own development capability to do so,” Wong said.

Sharing Tribeca’s perspective was David Aylward, who said his firm tends to invest with a quality/institutional framework.

“A lot of what we’re talking about here is development, so it is probably an earlier stage than what we have historically been used to,” he said. “We’re having to come to terms with building new partnerships, working out ways that we can maybe deploy capital a little earlier in the development of a project, with not wanting to let too much of that opportunity slide by. But at the same time, not changing too much the risk profile that we offer our ultimate investors.”

He also talked about the duration of investments when looking at the energy transition thematic.

“This is going to take a period of time. It will be volatile on the way through, and I think the best gains are going to be made for those that can have the most patient capital,” Aylward said.

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Securities Disclosure: I, Priscila Barrera, hold no direct investment interest in any company mentioned in this article.

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