JD, we're so close to Christmas, so close to Christmas, but it
doesn't mean that the quality of our guests are diminishing
towards Christmas, They're increasing.
You've found someone very worthy to speak to today.
But I can't stop thinking about Christmas because Christmas
means time off, means Christmas drinks like we are.
We've got money of mine. Christmas party drinks at
BrewDog in Perth on the 16th of December.
It's a Tuesday. Couple weeks away. 5:00 PM.
If you want to be there, you've got to click the button in the
show notes. RSVP.
We've got to have an indication of numbers.
Love to see as many money miners as possible.
There mate, excited to have a beer with everyone.
Very excited and now tell me about the very thoughtful guest
that you've you've found for the money miners today.
Mate, we've got a wicked guest today, Thomas Nadrowski.
So he works out of New York and he runs the Ambass Terradin
Fund. So critical minerals and a real
buzz phrase, isn't it, of light. But he thinks about this stuff
super deeply, also from a geopolitical lens.
And I was fascinated. I've read a lot of the stuff
that he's done over the last little while and the idea of
turning these geopolitical thoughts into, you know,
positions in the market is something kind of you have to be
pretty thoughtful about. It's very pie in the sky type
stuff to think about all this macro stuff.
But actually positioning that is a hard thing to do.
And the funders had magnificent returns since they've started a
bit over a two year track record now and the funders up nearly
200% in those two years. So I was very curious to to
bring him on the show and as you get a flavor from in this
interview, he thinks about these things very deeply, is very
knowledgeable on a wide range of things.
I'm excited to share the conversation mate.
Super excited to, to, to listen to what Thomas has to say about
a whole host of, of things. So Thomas's fund returns 200% in
two years. Now we love that volatility in
the the mining stock universe, JD, but a lot of people who
invest in the mining stock universe, they don't like the
downside of that volatility. And there are other options for
for people out there. Exceed Capital is a group you
should check out Mate Commercial Property Management Group based
out of Brisbane, a bit over a 10 year track record at what they
do. And one of the reasons we like
these guys, Mate, is that they build alignment into everything
they do. So when you're getting on board
with them and you're looking at investing in their trusts,
you're investing alongside the management team there, which is
super important to us. We love alignment.
JD over $400 million in AUM now their flagship collective fund
mate, that's that's that's produced consistent cash returns
of of 8% and that's without a capital gain.
Their own internal rate of return is 20% plus.
And yeah, I think this is a a thoughtful A thoughtful way for
for people who are just trying to have a bit of diversity in
their portfolios. We love mining stocks but my God
mate, the the good times are great, the bad times are not so
great. Absolutely, to break it down
once, they're easier for people wondering what the hell property
is if you're so used to your mining stocks, we're talking
about an open-ended diversified fund investing in commercial
assets. Think shopping centres and these
sorts of things. They spread these bets across
sectors and across geographies, with distributions paid out
monthly. So if you need to mix up your
portfolio from specky mining bets, check out what Exceed
Capital does in the show notes. Indeed, thank you for partnering
with money. Mine exceed capital.
All right mate, let's let's go to the interview.
All righty. Thomas Nadrowski, hope I'm
saying that last name, right. It's a it's a pleasure to have
you on. We're very excited to chat about
geopolitics, commodities, critical minerals and everything
happening in our wider world. Thank you for joining us, mate.
Thank you, Janice. Travis, thanks for having me.
You, you think about the world very, very interestingly,
Thomas. So I want to kind of start the
conversation understanding about your kind of framework for
thinking about geopolitics and kind of most importantly, how
you actually translate that geopolitical thinking into
critical minerals investments. All right.
So these are two very different questions.
Let me start with with the second and I just walk back into
the geopolitics and mining in general.
I run a fund called Amvest Teradin Critical Minerals Fund
here in New York City, which focuses on is the name such as
Critical Minerals, the name itself, Amvest that relates to a
broker dealer firm that's related to this business.
Teradan stands for Terra Earth in Latin and Dan means
electricity in Japanese or Dian in Chinese.
So the idea is electricity drawn from the ground.
So that was the original idea to focus on those critical minerals
that are important for energy addition rather than transition.
But then it goes way beyond battery metals because anything
else, transducers, actuators, electric motors, magnets, that
relates to electric fields and magnetic fields and we need to
mine the materials for that. So that was the first idea a
couple of years ago during COVID.
What happened then is that in 2020, China came up with a new
legislation called Export Control Law.
And I read that and I thought, well, all this means that the
world will bifurcate. And unfortunately, five years
on, I was right. Unfortunately for everybody
else, fortunately for the fund, which is just at the spectacular
year, we are banking on that bifurcation because of what was
in that legislation. And ever since we've seen a lot
of restrictions, which really peaked this year.
Some people associate this with a broader trade war.
In my view is a little different.
While this is something that I had been cooking for many, many
years, probably 15 years if we go back to the first
geopolitical clash over Earth between Japan and and China, but
maybe even longer if I look at some of the other policies that
China had introduced way back late 90s, early 2000s.
So the idea was we're going to do a fund that completely
bypasses the Chinese value chain.
Not that easy, right? If you're in mining, especially
if you've been in mining the last 2025 years.
But that was the ambition, no Chinese equity, no Chinese debt,
no securities, no technology if possible, no offtake or at least
majority of the product would not be destined for China.
And so that was that was the original idea.
Now coming back to your first question, which is a broader
question about geopolitics and mining.
Well, I've been in this business for 1/4 of century now,
unfortunately. And of course geology matters
first. And I remember when I was giving
that portfolio in a, in a, in a large organization which had
many different other industries, I noticed one thing is in other
sectors you can just take the factory and go somewhere else.
And of course we are very much location bound in mining more
than anywhere else. So that's the geology part of
this, but the geology part of this is only underground.
And as we know, complications start above ground for a variety
of reasons. Security of 10 year, you know,
security of cash flows, strategic flows, acts of God and
so on. And that would not be related to
geopolitics if we could just mine something and sell on the
spot, just like agriculture historically, right?
You produce something and you sell in the local market.
Mining is not like that if you just bracket out like the first
Bronze Age. It started in Mesopotamia and
Indus Valley because you could find both copper and tin in the
same place. But everything else required
long distance trade. So mankind actually owes to
mining long distance trading already in a in a Roman Empire
or ancient China, it was difficult to find tin and copper
in the same place to make bronze.
And so you are always exposed to geography to move this stuff.
And if you're exposed to geography, you're also exposed
to power and power play and that it's important how it plays out.
And of course, different regions have different solutions to
this. It's really fascinating to read
about how mining evolved in different parts of the world and
what we know about it and must know about Europe and and
mainland Asia. Looking far back and who
controlled the flows, whether it's the miner who controlled
the flows or who controlled the mine in the 1st place, that also
changed and, and the local markets and the distant markets
and transportation and security over the transportation and the
development of a contract law, lack of the such a development
and what it meant. And then it brings us to the
present day and I think we slowly are recognizing that we
are no longer in the world in which we all grew up, myself
here close to Wall Street in Manhattan and other people
active in this business and many others where we were in a
context of competition. I think the social operating
system is changing from competition to conflict.
And This is why if you ask someone to define what critical
minerals are, you know, people will tell you all because it's
for economic security or energy security or national security.
And the moment you have this term security, of course, we're
not talking about greed and competition or increasing the
pie. We're talking about conflict and
how we can protect ourselves against conflict.
So that's sort of a broader canvas, but it's an important
one because I think it's finally surfaced this year and we
haven't seen the last shot yet in this in this battle.
I think it's so, so clear to anyone listening how, how deeply
you're going to think about things already from that laying
of the land. I'm very curious about the, the
piece of legislation you mentioned, Thomas, about five
years ago, which kind of triggered in your mind what was
what was going to happen? We've seen countless bits of
legislation across, in particular in the Western world,
which don't really lead to an awful lot of change.
Why? Why was this thing the
instigator in in your mind you need to set up the fund and it
actually led to change in in the world.
It was so first, because already at that time China controlled
most of the refining and processing of these materials
and much of the mining. So it was important because it
also had, there was a precedent in 2010 of China weaponizing and
trying to weaponize where Earth flows to Japan.
I'm saying trying because actually delve into the data how
it all happened, it was not extremely successful.
It was a lot of smuggling out of China at that time, which
eventually led to dampening of the prices.
But the the Chinese government, especially the current
government. So since 20/12/2013 was when
there was a, a plenum, an important third plenum of the
Central Committee that decided to bring the state owned
enterprises to the forefront again.
And since then, two attempts to consolidate rare earth business
into conglomerates, 3 companies now dominating this space down
from, you know, countless dozens, hundreds in the late
90s, early 2000s. So that consolidation was
definitely a factor. You don't see that sort of
government activity anywhere else in the world.
But what's really important about that piece of legislation
is that that had a very, very clear national security
component and to enforce expert control law.
The the bodies that were itemized there were State
Council, which is the highest government entity in China, and
China Military Commission, CMC, which gives you an idea.
OK, well, there's a military extension to this.
So it's a serious matter. And you know, you can weaponize
commodity flows in two ways. One is market access.
And of course, Australia learned it the hard way after asking for
more clarity about the COVID sources when China refused to
buy coal from Australia. So that's one way to do this.
And the second way to do this, of course to weaponize the
flows, I mean, Russia sort of fine-tuned that with gas sold to
Europe and differential prices, differential quantities,
differential stockpiling or inventories that it's managed in
countries that were that were buying gas, natural gas from,
from from Moscow all the way up to the Ukrainian war.
So we have track record of using commodity flows this way, both
in terms of access on the demand side and in terms of supply.
Now this doesn't mean that we know exactly what the end game
here is. We don't all we're banking on.
And then our strategy is to benefit from the scarcity value
because whenever China imposes restrictions, there's a glut of
the product in China. And therefore it's not a very
smart idea to invest in those companies.
We need to focus on those that were trying to rebuild the value
chain in the West. And it's a it's a difficult
undertaking. And unfortunately it doesn't
seem like all the governments are really understanding Western
governments how to do this, because it cannot be just done
at the mind gate. It has to be really thoroughly
thought through in terms of what the different pieces in the
value chain are and what is missing and what needs public
money. But public mining itself was not
going to solve that problem. There's a there's there's a much
bigger task here had and I'm just afraid that the suspension
of the four out of 23 restrictions that we are seeing
since the agreement between the US and China and Pusan last
month, two months almost late October.
That suspension is valid only for 12 months and it is
conditional and we haven't seen the final agreement yet in
writing. So I would think that we might
not have the time to really build the beautiful value chain.
And we have to just, you know, learn as we as as we go along
and just identify the best projects and the projects that
are closest to cash and not something that's very on excise.
And you know, looking at 20332040, we're not sure we are
in charge of the calendar here. How do you, how do you get
comfortable with the, the investment thesis in, in some of
these, these, these, you know, future producers or producers
of, of critical minerals? When, when some of the policy
seems like it will lead to an oversupply of certain critical
minerals, like a decade long oversupply in some, in some
respects, especially if if there's, you know, no, no
ability to actually sell into China.
If if the demand isn't isn't there in the West or it's going
to take much longer. Like how do you get comfortable
with the investment case? Yeah.
So this is, this is a good point.
Will there be enough demand and especially in the civilian
market because people panic mostly about the military, which
is just a small chunk unless you move your economy into a sort of
a war footing, which is not the case.
In general, what we believe in most of these markets, and you
know, these are relatively small markets, we won't see, you know,
the 30 rare earth companies or the OR the 25 tungsten companies
or the 12 antimony companies being successful and generating
value. What we'll probably see in each
of those sectors is something like an oligopolistic structure
that is, you know, the first 3 or 4 that we'll get for the
finishing line that will probably capture most of the
price. And then hopefully we'll be able
to consolidate the space, which is something that's actually not
happening in our Earth right now yet.
Maybe it will start. We'll have to.
So, you know, one of the things about the positioning in the
fund is that we want to be as close to cash as possible,
especially at a relatively high interest rates environment.
You're penalized for a long duration to cash, so you cannot
be overexposed to you know early stage exploration.
I mean yes, there are some spectacular projects out there,
but it cannot be just the core of the of the portfolio.
And that also means that we started looking at some of the
processing place both in the West and Japan to look at, you
know, how can we get closer to the actual production.
That also, of course, is due to the fact that many of the
products are not mined per SE. But there are just those, you
know, remoras that that function alongside larger, larger
products that are mined and until recently were mined and
sold to China. China then would extract them
like gallium at home from from Australian bauxite.
Now we need the gallium on the western side of the divide as we
need many other byproducts of larger of larger reducer.
So, you know, suddenly it's interesting to look at zinc
smelter, so aluminum refineries and so on, or even copper
smelters, electrolytic copper for specific minor metals.
But you're right. I think the, the, the probably
the number one lesson that I can draw from the last two years is
that the mentality of exploration and development
companies, management has to change.
It's just not enough at least in this space to go out there and
drill couple of holes and say, OK, well that's fantastic.
Hey, market, look at that. The management has to think in
terms of the value chain we're building because you cannot sell
this stuff to China anymore or or you can if the Chinese
company buys you like Shanghai, but for rare earths, you cannot
really sell to China anymore. That's by the Chinese regulation
from February of this year. So they want to control both the
flows in and out and facilitate the, you know, acquisitions by
their agent of influence, Shanghai resources.
But overall, it means that if you are developing a perspective
deposit, you have to think about what exactly you're going to
sell. So in rare earths, it's going to
be concentrate, mixed carbonate, mixed oxide, and maybe you're
going to separate it somewhere. And if so, were who's going to
be the client? That has to come much sooner
than it used to come before in this sort of globalized era
where everybody could just basically dig something and sell
to China. Mostly, I think for these
materials which are of such critical importance for the West
to rebuild those value chains, those days are over.
So we tend to look at, OK, so how does this fit with whatever
we know? Let's just to use the rare earth
example, whatever, you know, about 5 sixth potential
separation plants around the world in addition to the
Malaysian and the Estonian one that exists right now.
And you know, does it fit those plants?
Does the management think about it?
Do they know exactly what that plant needs?
Because in fact, in some of these markets, the incentive
should come from that middle of the value chain that should send
a signal to the market that's exactly what we need, that's
what we want and please find us this or invest in a way that we
can have a material that's ready for our plant.
That's what should happen. I don't see the ad sort of on a
global scale, but there are a couple of companies that are
thinking systemically about it. Well, it makes me think of peak
rare earths. And you mentioned Shanghai there
there before. And I know when we spoke about
this earlier, Thomas, this was something kind of on your mind.
So I'm curious for you to kind of lay out exactly what you kind
of learnt along the process of this transaction with the
Chinese ultimately taking control of the asset in in
Tanzania? A couple of couple of different
handles on that. So the the model in which junior
explorers could benefit from the circled Chinese acquisition help
premium functioned pretty well in the late twenty 10s all the
way until 2022. That affects both the Australian
and Canadian market. The last transaction of this
sort until peak was consummated on February 5th, 2022 when Neo
Metals, the company that Neo lithium sorry company that owned
a very prospective lithium project in South America called
Tres Cabratas, was taken over by a Chinese entity.
And on the same day, Xi Jinping and Vladimir Putin signed No
Limits Partnership. And three weeks later, Canadian
government updated its Investment Canada Act that
tightened the rules and regulations regarding the
putative sales of Canadian controlled assets to Chinese
entities. Basically, the change meant that
any Chinese entity was not considered state owned.
That affected not only assets that were controlled by China by
Canadian companies inside Canada, but also those that
those companies controlled outside of Canada.
Ferb in some way seem to be trading in the same direction at
the time. 20/22/23 and 23. There was a longer debate about
this at the G7 meeting, plus South Korea, Australia, New
Zealand and Japan. The Japanese were keen and
developing a sort of a broader system for the elite nations,
kind of seeing the writing on the wall.
And Japan, we can come back to this later.
Japan is a country that actually has done its homework much
better than other Western countries.
And I'm using the term W functionally, not geographically
here. And so that didn't go much
further. And of course, we had a change
of administration here that's a little bit of spanner in the
works of some of those multilateral efforts to build a
common approach to this, to this problem ex China Peak itself.
Well, the first the company came through a couple of management
changes. So it's difficult to see a
linearity there, but it is true. Then 2022 when Appian was
selling its stake, the management back then struggled
to find a buyer in UK and elsewhere.
And you know, this is where Shanghai stepped in.
Since then I'm aware of discussions, maybe that's not
public at different levels, sort of trying to figure out how to
stop the creep. Giving that obviously Shanghai
is the chosen agent by the government in China to acquire
stakes in foreign entities. I mean, they still own the stake
and meet empty materials in US as well as others in Vietnam,
Tanzania from another Australian junior in Australia proper.
They tried also to get access to a material from Canada
unsuccessfully. The company hasn't had much
success. I'd say CNMC and NFC, it's it's
foreign arm have had a little more success in Madagascar in
Brazil last year. So Shanghai is not the only rare
earth player. But I am surprised that there
was not more effort, at least from what we know in the public
sphere from Ferb to block this. Just that it around the time
where, you know, high level preparations were taking place
for Australia US mineral deal, which I think was signed in
early October was it? So it is, it is a bit
surprising. Now there's an initial layer to
this is the Tanzania has a has a bit of a political problem right
now. This is not new.
We saw it under the previous president who passed away during
the COVID pandemics. It seemed originally that under
sort of Hassan things would kind of quiet down.
The most recent election was mismanaged.
And I just spoke to another leader, an executive, another
company with assets in Tanzania. We don't know which way it goes
and what's going to happen to the to the licenses.
However, it does seem that China with a massive investment to
upgrade Tazara rail line in Tanzania will have pretty good
access to the government. And therefore with the structure
of the ownership prior to this final takeover, maybe from the
Tanzanian side, it would have been difficult to engineer
something else from the sellers. It is still surprising because
the the offer from the Florida unit was slightly higher, maybe
should have been much higher. And this is an entity with some
high profile, you know, ex politician participation in the
United States. So you would have thought that
there is a sufficient political support for that for that
counter bit. It wasn't really seriously taken
into consideration by peak. So very disappointing.
It is a, it is a decent asset. It's an asset that's closer to
production than any others, has an interesting breakdown in
terms of the rare earth elements.
We always have to look at that. And therefore I think it's a big
loss for, for the Western world. And I, I, I think I would
probably ascribe it to lack of coordination at the
intergovernmental level, more than just naivete of the of, of,
of the management who couldn't find alternative sources of
demand for that. But the issue didn't start this
year. It's probably three years ago
when the thing was was lost. Trevor, we're talking about some
pretty gnarly problems. China has managed to pull ahead
on a lot of its engineering know how, and it's a bit of a
challenge here. I mean, you know, people are
critical of the West's engineering capability, but I
think there's a solution. There is my because we actually
have some wonderful engineers here, here in Perth.
In fact, I know of a whole team of them mate and they are called
Switch Technologies. If you've got an idea and it
needs an engineering solution, the the limits of physics are
the only limits for Switch Technologies because they will
engineer it into reality. Doesn't matter how hard the
problem, they come up with an engineering solution.
You know, I love these guys mate.
They focus on reducing costs and improving efficiency.
Very simple. Everyone can wrap their head
around it and everyone wants it. If you've got a problem at your
mind site, you need it fixed. You don't have the bandwidth,
you don't have the time, you might not have the capability
within your team get switched to look after it for you.
There's a, there's always a commercial case for these
engineering solutions and you can think of one that kind of
comes to mind, the retrofitted like cat trucks with these
hybrid, hybrid retrofits. Very impressive.
Wouldn't have thought of it efficiency, say savings there.
And they started out with with the, the hybrid retrofit on a
Land Cruiser and then made it work on it on a cat truck.
Super impressive stuff. Yeah, and they can do more as
well. They have completely designed,
engineered and built a off grid electric truck charging depot as
well. So a whole bunch of different
problems that they can solve, be it mechanical, be it electrical,
be it software engineering capability that you need.
So if you're after a completely integrated solution from concept
to deployment, I reckon you should consider Switch
Technologies, Matt. Pitch your idea to switch, go
switch technologies, go switch. Totally.
The transaction slipped under the radar was not info like in
focus at all with the business publications in in Australia and
it just before you knew it, it had completed and and.
You're you're referring to the Appian Appian sale?
No, no, no. The yeah, Shanghai's acquisition
of of of peak, Yeah, it, it was, it was honestly just a, a deal
that really flew under the radar, made probably
intentionally as a strategy to to see it complete from all the
people who incentivized to to see that transaction like, you
know. Well, maybe, maybe that's, you
know, maybe that's the management's fault, maybe they
didn't do their the job properly.
I don't know. I don't know.
We're not close to that story enough to know.
In some respects, what is management's duty though?
Their duty is to maximize value for for shareholders.
And in Pig's case, where's the other buyer If if they're blocks
it, what's the alternative, right?
It's complicated, but there was another buyer.
There was another. Buyer, you're, you're correct,
Sorry. You're correct.
Yeah. There was another buyer with
about 4042 or 45,000,000 premium compared to the Chinese offer.
That's right. And that was dismissed, which is
really raising a question mark of why that was the case.
Shareholders got an uplift though from from Shanghai from
from memory. But yeah, you're right, I forgot
about that. There was that consortium, I
think was the funding kind of like the entity well known and
the funding kind of concrete. There was probably some
conditionality risk to that. But yeah, I.
Well, like I heard that there was a break fee, but if I looked
at it, the break fee was minimal, you know, by
comparison. So I don't, I, I really don't
know. I think, I think it was an
assumption that Shanghai would just, you know, run away with
this. You know, at the, at the
corporate level, it's not a huge loss.
There are some other interesting projects out there that are
either potentially in Western or Japanese control going forward.
It's a shame, however, that there's so much strategic
mismanagement in terms of thinking for that, because
you're right about shareholder value and the governments have
to factor that in, right? It's not just about the
blocking. That's what what you offer in
exchange, but it's, it's still in terms of how advanced this
project is, it's a it's a shame that it happened this way.
So if we then kind of zoom out and think about what the
government has done, particularly this year, Thomas,
like MP materialism and the deal that was structured with the
government there is, is the big one.
I'm, I'm super curious to hear how your, your kind of approach
to investing in the space has changed following that deal.
Was, was that kind of as significant as we interpreted it
to be here? And like just that the way in
which we think about how the the government is going to get
behind particularly assets that are domiciled within the United
States. Yeah.
So this is where this administration started, started
by looking at the domestic potential.
And I think I have to give them credit that it took them only
what, 8 months to learn that it's insufficient.
Too bad that they didn't know about it before.
But of course, the, you know, the deal with Australia and I
can count Brazil, Argentina, Malaysia, Cambodia and Japan,
Kazakhstan. I mean, there's just every every
bilateral meeting, Saudi Arabia, every bilateral meeting that the
administration has is going to be about critical minerals these
days. So it's not just domestic
resources and we know it. And and of course, you know,
Australian investors know it too, because there are some high
profile Australian cases that are stuck in the courtroom in
the United States. Takes forever to get things off
the ground on that particular deal.
There are a lot of lot of levers.
There are a lot of lot of pieces.
Not all of these make sense. This is not a company that
controls an asset with heavy rare earths, which is exactly
what's what's needed right now. A company with several holes in
the value chain still unresolved.
However, it would really matter it and we're you know, it's
symptomatic that you mentioned that it it had, you know, sent
some ripples through the Australian marketplace was the
floor price, the floor price, the floor price under neodymium,
preziodymium index, let's say it anyway, this is not an index.
It's not like Rotterdam warehouses where we have this
sort of first inkling of the non Chinese prices.
But this is a signal from the government and it's an important
one. And of course that price still
means very little for empty materials, at least did for the
third quarter calendar of this year.
But it means a lot for the market.
Why is that? Because the Chinese price is
irrelevant. It's relevant not because of
some machinations of the Chinese government's, because of the
structure of the Chinese demand, domestic demand, which is much
more elastic than the Western demand.
The Western demand is very inelastic and we are confronted
of this in many minerals where the Chinese producers cuff up
product at benthic abysmal demersal level prices.
This is possible only if you have segmented markets from
macroeconomics and that's what happens.
That's what happens in graphite, that's what happens in cobalt,
that's what happens in in rare earths.
So why would let's assume for a moment that there is competition
among players for the in the domestic market in in China.
It's because of that demand curve that's so different.
Why would that price be applied to the Western market?
The only reason it does is because there is no volume to
determine the prices in the West.
Now there is an effort now to start building volumes and you
know there are different ways to do it and not all ideas are
good. I mean, the other day a, an
executive of a very prominent lithium company in North America
suggested that an equivalent floor price for lithium
carbonate would be based on cost plus basis.
I mean, this is the worst idea. I can I, I, I can imagine,
right, For any business to have a cost plus guaranteed.
That's, that's what destroyed defense industry in this
country, unfortunately. So that's not what should
happen. Maybe maximum guarantee price,
some kind of a ceiling and transfer pricing to, to, to
share the risk as the value chain is being rebuilt.
Or maybe floor and ceiling and slowly you just expand it as as
as you go forward and companies can take more risk, but not cost
plus. So there is, I think still sort
of testing. I know how this new market in
the West would function, what it would mean to have a price that
actually incentivizes the production because the Chinese
prices doesn't incentivize not so much production per SE, but
capital spending, of course, because that's that has been
tested by, you know, Chinese monopolies and many other
sectors. And you know, steel and, and
pharmaceuticals and, and chemicals and so on, of course,
and, and minerals as well. There's this, there's this gap
between what the capital intensity is and what the
operating costs are. So once you have lost your
capacity to build something and to produce something, it's very
difficult to bring capital back. That's not just the problem of
policy making. It's because of the capital
retreat from the space. And I'm speaking here as an
American, you know, mining is just so peripheral here and then
critical minerals are periphery of the periphery.
So there is a real problem with the capital market just not
simply picking up the, the, the opportunity, but that's probably
because there's no incentive. And that's, that brings me to a
different issue about about the pre production cost of capital
in in this space, because as we all know, that relies heavily on
equity and mostly public equity and public equity for you know,
75% of companies around the world either in Sydney or in
Toronto. Why is that?
And then I'm asking this because this is conclusion in the book
that I just written about it entitled Mineral War.
Why is that that there is no incentive for 40 trillion worth
of capital market in the United States to invest in companies
that are developing these critical minerals critical for
national security also of the United States in the countries
such as Australia, Canada and the UK, which by American law
are Title 3 Defense Production Act countries.
What does it mean? It means that anything produced
in Australia, Canada, UK counts as domestic source for U.S.
economic and national security. And yet there is no tax
incentive for U.S. equity funds to invest in those places, which
would be a wonderful thing to have.
Because just imagine that for a for a moment that a couple of,
you know, hundreds of billions of dollars are landing in the
sectors instead of all these companies diluting themselves
for three or four years between one spike in the market, another
spike in the market like this one we have this year.
So we're less concerned about it now.
But overall, the cost of equity of these companies are way too
high, especially if they have to compete against state owned or
state backed enterprises, you know, in Africa or South America
or elsewhere. And yet this is not happening
yet. So hopefully, you know when my
book will be out in January, people will start discussing it.
That's my big hope. If, if, if, if, if the juniors
in in Australia got access to that capital, there'd be a lot
more fancy steak dinners in Perth every night, mate,
there's. I don't know, maybe some good at
the back of it too. There'd be some good, the cost
of capital. Absolutely, yeah.
Lowers I, I, I do, I do think a fair bit about the, the, the
weird kind of geographical dispersion of where capital kind
of has just, has just formed. But it's like it's a network
effect of the, the cities in which have become, you know,
natural resource fundraising cities in many ways.
You've got the whole the whole build out of that ecosystem.
Tax incentive seems like a strategy to make a big
difference in attracting different sorts of.
Capital, but you know, there's going to, we're going to do a
lot of a lot of convincing because for now the opposite is
happening. So this year Canada, which is,
you know, another important source of financing for for
juniors, has already hammered $126 billion in equity funding
going work down South here, mostly Silicon Valley, big tech
companies. That's not great for mining
finance in Canada and I tell you why I'm concerned.
You know, we'll see when mineral war comes out what what, what
the reaction will be, right. But one of the things that
happened during this Australia US critical mineral discussion
was that superannuation fund will have easier access to the
US market right now. I'm sure you noticed that.
Well, that's not great because it's only one way We need the US
capital to flow to Australia. It's extremely difficult still
for a retail investor in this country to invest in an
Australian company. It's a lot easier to invest in
the Chinese company, believe it or not.
And actually I got a write off from my taxes if I invest in a
solar panel, even if it's made in China.
So there is a quixotic contradiction here.
But the most recent incentives for other countries to invest
into Uus, that's from a macroeconomic perspective, it
doesn't make much sense and not for the for the US economy.
And definitely I understand that there is a draw for the big, big
tech companies and so on. But we need to make sure that
capital and large capital is available where the opportunity
is. And right now it is, you know,
Sydney, Toronto, lesser extent London.
When when you think about the, you know, the the rest of the
world, putting these Western countries aside that you kind of
mentioned there, you think about Africa, Central Asia, these
sorts of countries where China's belt and Rd. initiative has seen
them just pick up asset after asset for for 10 plus years now.
Do you think a lot of those places are kind of lost to to
West investors to Western governments?
Or do you, do you have confidence that like you
mentioned where the US administration is going,
Kazakhstan, Saudi, all these sorts of places that they can be
kind of one back in a sense and we can see minerals from those
countries come to come to the West?
I'm not optimistic. Here's why.
When I worked at Angler Gold in Johannesburg, this was shortly
after we lost. I mean, probably veterans
remember the contested acquisition over Normandy,
Robert Decrappeni eventually sold it to Franco and and
Newmont. So we lost that that contest and
instead of trying with a South African paper and a discount
that was, you know, probably preventing Arbs from sitting on
the, you know, with shorts during a contested acquisition
on us, we decided to develop a new strategy, which was let's
just go around the world and look at assets and invest in
juniors to replace the South African reserves, which was
oxymoronic in itself. But you know, let's try because
we cannot compete against North American paper for large assets,
attractive assets such as Normandy's.
And so I worked very closely with head of exploration and in
that office in downtown Johannesburg, his office was
covered with postcards that he used to send to his secretary
from about 60 countries. And soon enough, as I was in
charge of risk evaluation for, for, for essential acquisitions,
I went to those sixty countries or 50 or whatever on just every
single continent. If I look at the world map right
now, 20 years later, a fraction of these are available, not only
because there is a war in 13 African countries right now, in
13 African countries, there is a, there's a, there's a
conflict, kinetic conflict. It's because we have moved away
from globalization simply because the liberal model just
didn't work for those countries. I'm not saying that the new one
will work or whatever that is is a new model, but we're just not
going to invest in places where the Chinese companies go.
Iran, Sudan, Afghanistan, Russia, Belarus, Zimbabwe,
massively. Maybe someone can survive there,
but the Chinese are very dominant and many, many others.
So yes, the world has shrunken. There are a couple of
jurisdictions which are contested.
There are always 2 levels. There's the national level.
And let's say in South America right now, there's definitely
sort of a pendulum swinging back from left to right, with the
exception of Brazil on federal level.
And so, you know, I don't think Russians and Chinese will
develop lithium in Bolivia anymore, right?
So Bolivia after 20 years as alliance with socialism is
probably coming back to sort of middle of the road policy
making. Brazil is a is is is a question
mark. I don't know what's going to
happen next election there. But then it's a good example so
that you can operate as a junior company or a developer in a
country large enough, like a federal country like Brazil, and
not be too bothered by the, by the federal level.
Because what matters is actually the state and the, and the
locality. And, and, and Brazil has a
couple of localities that are, you know, top notch and operate
much better than many here in the United States.
So you have to be more selective.
And if I was working today and you know, company that deals
with say gold, which is more or less ubiquitous and small, small
quantities in many places, then that map would be, would be much
smaller. Once you start talking about
some of these critical minerals, then it's even smaller than
that. It's, I don't expect the world
to to go back to the sort of open kumbaya plus competition
type of operating system, Not because I wouldn't love to.
I would love to, but we're not necessarily the only people here
with agency. You know, China has agency too,
and it has its own plans. In in a lot of ways, Thomas,
the, the world has has caught up with your world view and you,
you positioned A portfolio accordingly.
But with, with policy actions and the like, a lot of the, a
lot of the investment opportunities have have re rated
substantially. Does your positioning change?
Do you, do you just see the theme continuing?
Like do you, is there a point in time where you where you change
the strategy of the fund or the assumptions that we set up from
with? I think we're still in the early
stages of this rebirth and it's a painful rebirth.
And for, you know, every success story, there are two or three
flunkies that are just don't don't really add up.
We are, you know, when, when you think about critical minerals as
such, I mean, what makes them critical?
First, of course, structural demand.
And there's a lot of things from the demand side that are
happening now, both in terms of on, on the energy side and on
the, on the construction hardware that we need to develop
to just live up to the, to the demands of AI and new
technologies and robotics and everything else, in addition to
of course, to the, to the massive rearmament effort in
both in Asia and in Europe. So there's demand.
The second thing is, of course, supply disruptions.
And like I said before, I don't expect supply disruption to
disappear. As I said, out of the 23
different restrictions China just suspended for has LED a lot
more that are still there and many more could be added to
this. The third area is substitution.
And here you got to be very careful because it's no longer
like when I worked in gold, right?
If you just find something and you know, the helicopter takes
it to the rent refinery or or you know, to Switzerland and
that's it, you don't deal with this anymore.
Maybe you do some marketing, you know, with ready models in
India, but that's it. Here you have to be actually
cognizant of what was happening there.
Who's going to use this beryllium on this floor spar or
that boron and for what? And is there any risk that if
there's not enough of this, there's going to be a demand
destruction? So it's it's different thinking
about the portfolio. We will actually follow very
closely developments in many spaces including semiconductor
space. What it actually means, you know
what's where, where's the problem?
I mean even in that, you know, this was probably under
reported, but during those three weeks of the most severe quasi
embargo on experts of different minerals between October 9 and
October 28th, Applied Materials which is an important developer
of hardware for semiconductor production, they were screaming
that their inventory was running low.
We don't know on which materials, but it was a problem.
IFML in the Netherlands was also kind of a flashing red light.
So it's, it's, it's not just the batteries, it's not just the
magnets, it's a, it's a much broader story that you might not
be able to easily substitute for many of these, but some yes.
And so you have to be, you have to be careful and you have to
you have to watch the developments and of course look
at what the speed is moving from, you know, a, a really
pretty idea in a lab into something that's a proper pile
up and proper demo. And then, you know, potentially
commercialized. In the US we still have pretty
good R&D and many of these things.
And of course we are committing the cardinal sin of not being
able to scale it up to commercial production because
the VC sector never had to care about it And everything that was
high tech, high end hardware migrated to Taiwan, South Korea
or Japan. And then of course, large scale,
low margin, big volume metallurgy ended up in China and
hence the problem in the middle of the value chain.
So yes, we, you know, you're right, there'll be different
stages there, but I think stage 1 is not, we're not at the end
of that yet at all. It's only starting.
If we if we break down the specific commodities that
constitute critical minerals, there's many ways to, you know,
to evaluate their relevance in this multi polar world.
One one way that is, is simple to think about on just a bar
chart is is, yeah, like how much like how much we depend on them
from from China versus the rest of the world.
When when you just identify the the most attractive commodities
to go searching for for investment opportunities like
what, what ranks near the top of the the the list for you,
Thomas. You know what I'm in love with
these days? The table of elements because
it's it's, it's not only because it brings me back to school, but
also how it actually makes such perfect sense like few other
things in nature. And you can, you can see how
things connect in the market. So I strongly encourage people
to go back to that, to the source.
So we tend to view the market as three different segments with
their own rules and regulations. If you wish rare earths is a
sort of 1 sector is sufficiently rich, right, with 17, if we wish
actually 16 elements, 15 or 14 lanthanides +2.
And we have, you know, we very much a focus on the heavies plus
samarium, atrium and gadolinium for specific demand reasons.
You have a source between different types of geology, of
course. But at the end of the day, if
someone finds really, you know, high itch room xenotime and it's
not owned by the Japanese and still you can actually leverage
this in the equity market. I'll be, you know, a happy
taker, so please let me know. The second second segment is
battery materials, very unhappy sub sector in the last three
years until probably two months ago.
On lithium side, the cobalt is difficult to read because it's
been a tug of war between DRC and PRC this year.
So we don't know what's, you know, how, how Kinshasa will
play with the with, with, with the quotas going forward.
Technically like an argument that quotas are illegal from the
perspective of the World Trade Organization.
But then, you know, we've had a lot of quotas and I don't think
many people are rushing to with Lausanne and Geneva anymore to
to fight their cases. But, you know, graphite,
manganese, vanadium, nickel, all in pretty bad space right now.
Some of these might not go back to the, you know, heyday of
excitement of better materials for, say, NCM chemistry.
So got to be cautious. But it looks like lithium is
going to have a better year in this excitement over over energy
storage. And then there's this third
area, which is the specialty materials, which we tend to kind
of dissociate between those that are directly mined.
And there's tungsten, there's antimony, that's tin,
increasingly titanium, but for metal, titanium sponge, not not
dioxide. And then of course a number of
by products, gallium, germanium, Indium, what else hafnium that
comes with zirconium usually maybe an opportunity there is
zirconium production might not continue to grow.
So by products are usually might benefit from this.
We like floor spar for a variety of reasons, not only because of
hexafluoride, you know, nasty piece of toxic thing without
which graphite production is not possible, but also because it's
an important element in the, in the nuclear cycle.
We're not exposed directly to the large markets such as, you
know, uranium and copper, but we do look at things that matter
for the uranium cycle. SRMS and and and low and rich
actually use different metals out there and some of them, you
know, some of these markets are tighter than others.
Is, is the decision to not play in spaces like copper because
that's a quite a competitive space?
Is that by mandate of the of the fund?
How do you think about that? So not a hard mandate, but I
think there's a lot of products, there's a lot of opportunities
to invest in copper straight. We, we actually have one
position right now and I'm very happy about that position.
And you know, it's a, it's a story that we strongly believe
in, but we wouldn't like to have, you know, the core of the
of, of the portfolio in it. So it's sort of marginal in the
in the grand scheme of things. Why not those?
We didn't believe that China would be weaponizing copper or
uranium percent. We might change our view as now
70% of copper smelting is in China.
So we're getting slowly to the point, you know, where China
might be in a position depending how the TCRC problem is resolved
between Chile and, and, and China at the moment.
It's it's a very artificial market right now.
But let's not forget, you know, we look at copper prices, which
is refined price and not concentrate.
And therefore it's more important to smelt and refined
this stuff. Then who minds just to say that,
you know, out of 10 largest copper mines around the world, 8
are controlled by Western interests and only two by the
Chinese is not enough if we don't smell and refine this
stuff. So we'll be watching this space,
but it's not, this is not how we pitch the the funds to to our
investors. And uranium of course is, you
know, there's so many other opportunities to invest,
including the sequestration funds and so on.
So we might have exposure to it because someone produces, say,
something else in uranium, but that's that's only as far as it
goes. In, in Antimony, we noticed like
a, a couple of months ago the a bid by US antimony Co-op to, to
acquire Lovato effectively. It looks, it looks a bit more
complicated now that their script has peeled off, not too
dissimilar from what might have happened with, with Anglo and
Normandy back in the day. I I suspect.
But is this a trend that we're going to see more and more of
these US kind of companies bidding for, for the Wild West's
like assets? Can we like, do you think this
will be the first of many of these types of of deals to pop
up on our radar? Well, I would hope so they will
see some meaningful consolidation in the space and
that consolidation in this case will be vertical.
And that's exactly where the Chinese are beating us.
Because, you know, we kind of in, in mining in general and not
just mining, we, we espouse this, this gospel about 25 years
ago that you have to just be good at one node in the value
chain and nothing else. And it works perfect in
semiconductors. We thought it works fine in
mining until you realize that, you know, one company drills,
another company moves the trucks and yet another company owns the
space, but someone else is trading for them.
You know, very few companies do the whole thing.
Meanwhile, you know, a a Chinese SPV goes to Africa and
everything is taking care of, including future off take and
financing. And therefore you don't have an
off take risk, don't have jurisdictional risk because it's
under, you know, Focock in Africa.
I'll see like in in South America, you don't have a price
risk, you don't have a cycle risk, you can't compete with
this. And in addition to it, you know,
cost of capital below inflation and below GDP and growth level
in China. So that's that's for the
vertically integrated system. And so I would hope so that's
one reason why I hope so. Secondly, many of these U.S.
companies are not particularly good.
So for them to have access to decent assets would be a
positive thing. You know, recently a very
shadowy U.S. company acquired A metallization play in UK,
actually the only western rare earth metallization factory.
And thanks God they did because honestly they had very poor
assets, you know, a nondescript rare earth potential asset in
Texas and an old Hitachi plant without software.
So not a great way to start, you know, building a rare earth
business. But now they have metallization
plant. So I think, you know, probably
MP materials will have the currency to do something.
We know that Linus is very averse to anything in terms of
consolidation in general. That's a shame.
I think it would be an interesting, interesting role
for them. Your performance would be
another one there. You know, they, they have to
find material that's not Russian and sooner rather than later.
So it's there, there are opportunities there.
Definitely. I think we should see more of
this. And then the question is going
to be of, you know, the value and what, what the alternatives
are. But we we do hope to start
seeing that as as, as the place matures a bit.
And when you look across the the three buckets that you described
and and look at some of those elements, are there other
pockets or specific elements that you're particularly excited
about at the moment? I mean we're, we're excited
about specific. So we start always looking at
the at the macro level and the commodity level and then we're
looking, you know, at relative value of course and, and other
drivers and whether there is a significant commitment to the
Western value chain. But at the end of the day, it's
really about the the asset itself, right, because there is
no futures market where these prices you know are gyrating and
that you're going to bank on something as a high beta equity
exposure proxy to that price. Therefore, you know, the asset
itself has to make sense that some of these assets are new and
in development, say floor spar and some others like beryllium
are mature or you know, high periodic warts are mature and
absolutely critical and strategic for the, for the
Western value chain. And so we, you know, we, we, we
tend to kind of look across across the space and we, you
know, we, we probably a little less optimistic about some of
the battery materials. I think there's some, there's
some disconnect here in general in, in in this space and what
happened with the bifurcation between the Western slash
Japanese car markets and the and and the Chinese market.
But that happened for an entirely different reason.
Has not absolutely nothing to do with commercial rationale.
It's is the way China wanted to reduce their dependence on
liquid fuels imported from the Middle East and transported from
Malacca Straits, which is, you know, strategic rationale and
not not commercial rationale at all.
So that's the electrification of their transportation.
Yeah, yeah, Yeah, totally. Final question from from me.
Thomas, you, you've noted at some point that the number of
funds in the mining space, we've kind of spoken around this topic
quite a bit today is down dramatically, I think down by
75% over the last decade alone. Is that a, you know, the, the
quantum of money seeking opportunities that that you look
at? Is that something you think will
will grow? Will we see more specialized
mining funds, more funds seeking at critical minerals exposure
specifically in in the coming five years say?
Right. So first looking at the peso,
I'm not sure if it's 70%. I had those numbers between 2010
and 2023. So for london-based specialist
funds, which was back in the day the largest source, that shrank
from 40 billion U.S. dollars in assets under management to 12.
And in Canada over the same period of time from 16 or 17
billion to about two. So quite dramatic.
Let's say 23 was not glorious. You're I'm not sure it's much
better right now. There's a couple of reasons for
that. First, of course, the ETFs, you
know, there's an entire new generation of investors that
just are not comfortable with sort of funds managed by by
humans because of the fee structure, because of the gates,
because of this, because of that ETF such as easy liquid and so
on. But of course, because they are
easy and liquid, they're not going to nurture a new industry
because essentially we're talking about new industry, you
know, juniors going through this birth canal of critical minerals
desert. It's going to take a while.
And you cannot raise money for ETFs if you don't have a broker
and a real fund specialist on the other side.
So that's a problem. It's a generational problem.
I think 1 area of hope is that mining and critical minerals are
becoming a real topic here in the United States.
I mean, it's really front page news now.
There's constantly something about this space.
And so people are becoming curious, you know, start, you
know, calling and asking questions.
And this is one of the reason why I decided to write the book,
because they didn't necessarily understand this space.
So you can find a sneak peek on the mineralwar.com.
But it's it's just, it's an attempt to explain to potential
allocators what the challenges and why this space will matter
more and more and why this demand is so structurally
important across a variety of different industries.
We don't really usually think about it as minors, but we have
to start thinking about it because otherwise we won't be
able to redevelop those value chains.
Thank you so much, Thomas. It's a great place to leave this
conversation. We've enjoyed it thoroughly.
Appreciate your time, Thomas. Super.
Thank you. Thank you for having.
Me big thank you to Thomas for sharing his wisdom mate.
I really enjoyed that one. Love the geopolitical and the
macro kind of ideations and thinking that goes on behind the
scenes there. He's clearly thought about it
quite a bit. And I'll extend our thank yous
to Sandbicrand. Support focus the platform by
market Tech Interlinks. Check them out in the show
notes, as well as Switch Technologies and Exceed Capital.
Uduru money Monas Uduru. Go Australia.
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