Belt conveyor in an underground mine trying to meet raw material demand

Take Advantage of Raw Material Demand During the Energy Transition

by kirkcoburn
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Raw material demand will balloon as we aim for a net zero carbon future. As of September 2022, we’re already witnessing demand for materials like nickel, copper, cobalt, and lithium skyrocketing. 

No one has a crystal ball, not one that works to tell the future. And that means we need to perform our due diligence when investing in mining corporations

Today, we’ll look at what financial experts say about raw material demand and investing during the energy transition. If you’re wondering if this is the right time to invest in materials, the short answer is “yes.”

But it’s a bit more complicated than that, so we’ll explain how to qualify a good investment. We’ll also take a look at different levels of mining organizations you might find appealing, from the biggest dogs to the thousands of puppies coming up.

About the Demand for Materials During the Energy Transition

The energy transition is a shift from a fossil fuel-based energy market to a mineral market. We’ve written much about the specific metals, mining methods, and potential replacement materials lately. Also, we’ve discussed how the energy transition will put the metals and mining sector to the ultimate test. 

There’s no crystal ball, but we know some of the most sought-after raw materials in the next decades include:

  • Cobalt and lithium
  • Nickel
  • Copper
  • And probably increasing amounts of silver, gold, iron, and aluminum, which are used in alloys

Mineral Demand Statistics

Estimates for increasing raw material demand vary from one source to the next, and some are frankly contradictory. But some significant ones include:

  • Demand for lithium will increase from 500,000 metric tons in 2021 to possibly 4,000,000 metric tons by 2030. 
  • Demand for nickel will continue to grow about 10% year after year.
  • Copper demand will continue to increase, doubling by 2035 and possibly becoming a crisis by 2050.

Most of this increasing demand is related to the growing need for energy storage in lithium-ion batteries. We’ll need huge amounts of it for solar arrays, wind turbines, and electric vehicles (EVs). We’ll continue to rely on a smaller (but recognizable) amount of minerals and materials for personal technology — things like laptops, tablets, cell phones, technology in gas-powered vehicles, and so on. 

But politics and policies can change, and it’s always good to have a backup plan. The energy transition might fizzle out somewhat. As we’ve mentioned before, a truly net zero carbon reality might not be entirely environmentally sound nor wholly sustainable in the long run. 

What the Experts Say About Investing in Mining in 2022 and 2023

It should be simple to make money investing in mining and metals. First, know that demand for metals and raw materials is typically cyclical, and the market highs and lows are generally apparent to even inexperienced investors.

Often, other parties are willing to liquidate their assets at low prices when times are tough. As you’re undoubtedly aware, we’re either in a recession or approaching one. At least, it feels that way to 76% of Americans. This means there should be stocks available for reasonable prices for those who want to own some. 

But one shouldn’t buy up a bunch of stocks without doing some homework. Mining Insider published an article detailing five steps for successful investing, and we’ve created an abridged version for your reference below. 

Mining Insider’s 5 Steps to Successful Investing in Mining & Metals (Abridged)

  1. Assess the extraction of reserves. Investors should get the gist of the physical parameters defining the extraction of resources at specific sites. We’re talking about plant yield and material movement, for example. There’s a lot of data out there, so get familiar with the fine print of Australian JORC statements and 43-101 reports for projects in Canada. 
  2. Define your view of future costs. There will always be inevitable low points in any commodity cycle. Low costs are ideal, and low relative costs imply more resilience during the inevitable low points. The experts at Mining Insider prefer a well-managed business with high-cost assets — which can still generate excellent long-term returns — over a company with high-cost assets that spends all the capital quickly rather than returning it to shareholders. 
  3. Assess earnings at long-term average prices and sustainable material movement costs. The volatility of mineral prices is a unique challenge in this sector, especially in 2022-23. Skyrocketing diesel fuel costs and changing energy costs should also be considered. Mining Insider suggests you use the average real price over the last 20 years as a starting point. We’d advise you also to consider current inflation trends and political upheaval. 
  4. Invest in organizations with little debt. Considering the volatility of commodities and today’s turbulent raw material demand, these experts prefer organizations with low debt to equity and low debt to earnings. Debt and volatile prices are a dangerous mix.
  5. Consciously and continually assess the management team and board of directors. Specifically, look for a record of adequate capital allocation throughout the cycle and a track record of shareholder returns. Mining Insider says an investor should also look for the board and management’s skills and experience in consolidating assets during the commodity cycle. 

If you take these steps, you’ll make well-informed decisions in mining and materials. 

Which Mineral Companies Are the Hottest Investments Right Now?

Mine operations growing to meet raw material demand

Here, we’ll outline the players. If you’re interested in taking advantage of the raw minerals demand throughout the energy transition, look to the big dogs in the business first.

The Big Dogs

The top three mining organizations to consider during the energy transition are:

  • BHP Group (NYSE:BHP), which manages a variety of diversified mining operations
  • Barrick Gold (NYSE:GOLD), which does mostly copper and gold mining
  • And Rio Tinto (NYSE:RIO), which focuses on industrial metals and raw materials

Because these are well-established mining companies with many holdings, the investments won’t be cheap. But there are thousands of other options if you’re looking for a riskier choice.

The Puppies

The newest and smallest (and riskiest) mining organizations in the exploration stage are called “junior mining stocks.” These (relatively) small organizations are defined by a small market cap under $500 million. If you like to gamble, intense volatility makes these exciting. There are currently more than 3,000 companies in this bracket.

Then there are mid-stage companies. As “post-discovery” companies, these organizations have found significant amounts of ore, but they aren’t sure exactly how much. They’re qualified by a yearly revenue between $50 million and $500 million and are a significantly less risky investment than junior companies.

The Majors

Like the three big dogs we listed above, major mining companies are usually diversified. They have multiple holdings, often in several countries, and may produce several types of material. These are the lowest-risk investments, which makes their stocks expensive. But new mineral discoveries have little impact on their stock.

Major miners are distinguished from junior and mid-tier companies by their:

  • Revenue above $500 million per year
  • Market cap (greater than $1 billion)
  • Diversification
  • Stable cash flow
  • Financial ability and experience-based ability to launch new mine sites quickly and efficiently

In 2022, BHP, Rio Tinto, Glencore, and AngloAmerican are the top mining companies in terms of revenue and market cap. BHP and Rio Tinto are both based in the UK and Australia. Glencore is based in Switzerland and the UK, and AngloAmerican is also UK-based.

There are a few Chinese organizations in the majors, as well. These include:

  • Jiangxi Copper
  • China Minmetals Corp
  • China Shenhua Energy
  • Yanzhou Coal Mining
  • And Zijin Mining

Now, let’s consider some factors affecting raw material demand outside the global energy transition.

How the Russia-Ukraine Crisis Affects Mineral Prices

You’ve already felt the effects of skyrocketing gasoline and diesel fuel costs, wheat and grain shortages, and fertilizer and pesticide shortages related to current events in Ukraine. Expect more of that and more raw material demand in the market. 

Historically, Russia provided the world with:

  • Aluminum, needed in metal alloys for the energy transition and battery manufacturing
  • Nickel, used as cathodes in EV batteries, as well as metal alloys like stainless steel 
  • Palladium, used in catalytic converters to lower emissions
  • Vanadium, which is used in nuclear reactors and might become more valuable as the energy transition moves forward

Between Russia’s focus on Ukraine and various sanctions on their exports, we’re learning that we need to diversify our sources for raw materials. 

Nickel and aluminum are the materials experiencing the biggest pinch right now, which is expected to continue through the immediate future. But there is some progress in the US toward domestic nickel production, and we’ve written about that before. Rio Tinto, for instance, is trying to launch new nickel mining operations in Minnesota. Also, we have a feeling the US government might attempt to purchase, own, and manage mining operations.

Would that be communism? Pretty much. But the general public might be attracted to high-paying jobs and reasonable prices for energy storage associated with US-owned mines. So that’s an article for another day (and it’s all the more reason to invest in raw materials now).

Related Reading & Resources About Raw Material Demand:

McKinsey.com: The Raw-Materials Challenge: How the Metals and Mining Sector Will Be at the Core of Enabling the Energy Transition

Minnesotareformer.com: Would Minnesota Mining End US Reliance on Russian Nickel? Experts Say Probably Not

Sfa.oxford.com: 2040 Nickel Market Outlook

Fool.com: Best Mining Stocks to Buy in 2022

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