Chapter Thirteen: Efficient Investing in Inefficient Markets - Mining

Take a long term perspective and keep history in mind

Warren Buffet, John Templeton, Benjamin Graham enjoyed remarkable success as investors by buying stocks in profitable and well-managed companies growing at least in line with the economy and holding them for the long-term. In my opinion, there is no more certain way to achieve wealth through investments in publicly traded securities. No fad, no ETF, no “momentum investing”, no “60:40” portfolio theory, no “technical analysis” and no investment advisor can do a better job than common sense, which itself is uncommon.

Every investor needs at least a basic understanding of macroeconomics to have an reasonable chance of knowing whether a particular company is profitable and well-managed or capable of sustained growth. Why macroeconomics? The laws of supply and demand (first found as the subject of learned writings 1776 when Adam Smith published Wealth of Nations) are driven by macroeconomic trends, and those inturn are driven by innovation, population growth, labor force participation, fiscal and monetary policies and systems of government.

The development of the HTML and SMTL protocol that made the internet possible is likely the most important technological development of the past century or more. Tim Berners-Lee is the individual who was most responsible for the existence of the internet as we know it today, but many of the current generation have never heard his name and can’t answer the question “who invented the World Wide Web”. With the advent of the internet, information travels at the speed of light and the world’s largest library is at your keyboard.

The latest advances in artificial intelligence (AI) make it possible for anyone to scour the internet in plain language to ask questions about the macroeconomic condition and get sensible answers. Markets react to new information in seconds, but not always sensibly. Richard Thaler won the Nobel Prize for his behavioural finance work that showed that investors over-react to negative inputs, under-appreciate positive developments, and will give systematically wrong answers to simple questions depending on how the question is framed. The result is volatility in markets and poor outcomes for traders.

The macroeconomic environment today is being shaped by large forces emanating from world governments and technological advances. The electric vehicle (EV) is changing the demand for metals dramatically. The specious “climate change” narrative promoted by left wing politicians is curbing the supply of essential fossil fuels altering the supply-demand balance of these critical materials in ways that imply major shortages of coal, oil & gas on which the planet still depends for about 80% of the energy it consumes. Pretty well all of the road surfaces (asphalt), virtually all synthetic fabrics, plastics, and engineered materials, etc. are based on petrochemicals. Society cannot have cars, smartphones, personal computers, airplanes, clothing based on polyesters or cellulosics, or even products made of aluminum or steel without the anthracite needed to make steel, the fossil fuel feedstock for petrochemicals, or fossil fuel fired power still needed to fuel the Bayer process to make aluminum.

These forces are creating long term shortages of critical materials that will not only effect economic growth but also impact the price we will have to pay for those materials. I have often pointed out the reality that fossil fuel prices are more likely to rise than fall over the long term owing to artificially created shortages emanating from foolish policy decisions and there is no need to repeat that argument in this article. Metals are a different kettle of fish.

While it is government policy that has created the fossil fuel shortage, it is innovation that has created the shortage of metals, a shortage exacerbated by left wing policies that have or will limit supply from Canada, United States, Brazil and U.S.S.R. While it is “climate policy” and “carbon taxes” that have curtailed supplies of fossil fuels, it is “environmental policy” and taxpayer monies used to subsidize an accelerated rate of EV adoption that has created the shortage of metals.

Rapid expansion of EV production has and will continue to create the demand for battery metals like nickel, cobalt, lithium, copper, iron ore, graphite and molybdenum. Each EV uses three times the copper of an internal combustion engine (ICE) vehicle. But it is government policy that limits the supply of the metals listed.

Canada has the Impact Assessment Act, an outgrowth of Liberal government ideology with the laudable goal of “protecting the environment” but the hidden agenda of giving the Liberal cabinet or Minister of Environment more power to approve, delay or cancel proposed projects, and a mandated “consultation with First Nations” requirement that ensures the approval process can be delayed as long as any First Nation along the route to, from or near the site of a major project can put their oar in the water and hold up progress on a project to extract economic “rents” for their people. In many ways, the result is that Canada’s 1,048,045 First Nations people (2021 Census) have more power over the approval or rejection of mining projects than the 38,243,950 (2021 Census) Canadians who are not First Nations. This is our democracy at work.

I have no problem with First Nations people negotiating participation in mining projects that traverse their lands. But in “woke” Liberal Canada, “consultation” means giving one group a virtual veto and the remainder no voice at all. Fortunately, most First Nations leaders also consider themselves Canadians and negotiate in good faith but like all good negotiators take advantage of the power our Impact Assessment Act provides to garner a good result for their people, even if it takes years and drives the costs of the project up by billions. The TransMountain Pipeline Expansion (TMX) is a case in point, where the First Nations negotiations and environmenal activism by others included blockades, protests and some violence and possible sabotage by persons unknown and the project cost swelled from a few billion to over $30 billion, although it should be completed this year, a lot later than planned.

This article will focus on mining, not pipelines or energy. I completed a postgraduate diploma course in Mining Law, Finance and Sustainability in 2021 at Western Law School. In the course of that study, I learned that only one in 6,000 mining deposits makes it into production and that the time from discovery to operations in Canada runs from 15 to 30 years. The Impact Assessment Act was passed on the basis it will expedite the process of approval. It has done the opposite.

Since 2012, fifty-four mining projects were submitted for federal Impact Assessment. Four are under construction and none have commenced mining.

Canada is a world leader in mining but the delays in permitting and the political ideology pretending CO2 is harmful and compelling First Nations involvement makes mining in Canada a low return, high risk endeavour. Since 2010, the Canadian mining industry in aggregate has lost money according to Boston Consulting Group, with total shareholder returns of negative 3.8% for the period versus a positive return of 14% for the S&P 500.

With left wing governments now promoting a “transition” away from fossil fuels (a physical impossibility) and encouraging the growth of the EV industry, the macroeconomic outlook for mines is turning positive. Prices for nickel, copper, cobalt, lithium, iron ore, and coal have been rising and there is opportunity for investors bold enough to risk capital in an industry under the thumb of a Liberal cabinet in Canada but less restricted abroad. This YouTube presentation by Mark Mills published very recently sets out the materials implications of the “transition” making the point that the transition is not possible owing to the inability to supply the materials it implies are needed. But governments are so dug in on their “climate policy” agenda that they will try to force a square peg into a round hole for the next few decades and that will create opportunities in mining possibly greater than in human history.

Investment in mines in Nevada or Michigan carries few of the same risks as those in Canada despite a Democrat administration since the U.S. is recognizing the need to source key metals domestically or be left behind in the EV industry growth. Canadian leaders mouth similar views but the words and music don’t go together. The Impact Assessment Act is the barrier. Other jurisdictions in developing countries recognize the value of mine development - Chile, Peru, and many countries in Africa encourge mining.

Canada is a disappointment.

The massive Prosperity copper deposit in the interior of B.C. was axed by the Liberal cabinet on January 1, 2023 after the Tsilhqot'in First Nation objected to its potential impact on their fishing rights. The Tsilhqot'in First Nation has a population of 377 people. Prosperity could have paid every family in that First Nation $1 million without damaging the economics of the project, and in any fair arms length negotiation the indigenous group would have come out a big winner with concerns about fishing paling in comparison to their new economic reality.

The real reason the Liberal cabinet axed development of one of the world’s largest undeveloped copper deposits with the potential to put Canada on the map of copper production for EV’s was its propaganda value in pandering to First Nations voters and touting the mantra of “protecting the environment”. The needed copper will likely come from Chile and Peru.

The James Bay Lithium project was approved by the Trudeau government January 16, 2023 but subjected to 271 conditions that pretty well assure it will not proceed on time or on budget and will be late to the EV party if it ever gets into production. The approval has the hallmarks of a propaganda piece devoid of the substance. Don’t expect to see that project become an operating mine any time soon.

The long delays in approvals by the Impact Assessment Act are intentional. Rather than have an environmental act targeted at major projects and staffed with people whose job it is to move the process to completion in a timely way, the Impact Assessment Act is being used to review the “impact” of picayune “projects” including maintenance of buildings and runways, culvert repairs, erection of public monuments and repairing buildings owned by government or existing on federal lands. Here are a few examples listed on the Impact Assessment Act registry:

• Project 84411 Public monument

  

• Project 81566 Pavement repair

  

Project 81572 Roof repair

Staff of the Impact Assessment Agency that administers the Impact Assessment Act are being tasked with reviews of routine repair and maintenance as if they were on the same level of importance as major energy or mining projects and staff have had over 80,000 applications for review since the predecessor Act was amended in 2012. Tying up scarce resources and flooding them with over 150 applications a week for “projects” that would normally be reviewed and approved by municipal governments (or subjected to no environmental approval process at all) is a travesty inflicted on Canadian resource industries by government. I am quite confident Canadians can repair their driveways or leaking roofs without involving the federal government’s Impact Assessment Agency and that LGBTQ+ Canadians neither want nor need a monument added to the annual “Pride” parades to celebrate their complete acceptance into Canadian society, long since achieved.

Notwithstanding the damage being done by Liberal governments, Canadian mining companies operate in other jurisdictions, are well managed, and have a bright future outside of Canada.

I see significant potential for Nickel28 (NKL.TO) whose foundation is cash flow from a nickel-cobalt mine in Papua New Guineau bolstered by a 1.75% Net Smelter Royalty (NSR) on the already permitted Dumont nickel deposit in Quebec. Dumont is among a handful of world class nickel deposits permitted and ready for construction and the NSR alone will provide over $500 million cash flow to Nickel28 over the life of the mine once built. Since it was permitted in 2012 and since purchased by a private company it is no longer before the Liberal government and is likely to proceed to construction once the private owners find financial partners or sell the project to a mining major.

Lundin Mining (LUN.TO) has projects in Argentina, Brazil, Chile, Sweden and the United States that will serve investors well as the commodity cycle strengthens demand for battery metals.

Hudson Bay Mining (HBM.TO) has copper projects not only in Canada but also in the United States and Peru which are well situated to profit from higher demand for copper.

Ivanhoe Mines (IVN.TO) led by famed financier Robert Friedland has carved out a handful of world class copper projects in Africa.

Capstone Copper (CS.TO) has large operations in Arizona, Mexico and Chile that will generate significant profits at today’s copper prices and much more as both production and prices rise.

These are but a few examples of companies that will enjoy extraordinary opportunities. There are many more.

It is a sad truth that Canadian companies are driven to other jurisdictions by Liberal environmental, tax and energy policies but investors don’t have to miss out - just choose the companies managed by Canadians with demonstrated track records of accomplishment who have had the courage to venture abroad and establish themselves as world leading miners.