Cobalt prices grew by 119 per cent in 2021, data from Bloomberg LP show, while lithium jumped 280 per cent during the same period.Reuters Staff/Reuters
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Miners are moving quickly to ramp up supplies of critical elements needed for the low-carbon energy transition. That means opportunities for investors to benefit from that rapid shift are also rising fast.
There are currently very few mutual funds or exchange-traded funds (ETFs) available to Canadian investors composed specifically of commodities seen as crucial to the development of clean technologies – such as lithium, cobalt, tin and platinum – or the companies producing them.
Much of the exploration for new critical mineral deposits is carried out by the speculative junior mining sector. But experts say there are ways to identify the players that offer lower risks as other investment products focused on the energy transition are brought to market.
Part of the challenge today is the “still relatively new, small and very opaque” market for critical elements, says Katie Lachapelle, director of metals and mining equity research at Canaccord Genuity Global Capital Markets in Toronto.
“Pricing is still determined primarily through offtake contracts,” she says. “So, determining exactly what the price of, for example, lithium today versus the actual price that miners are realizing can be quite difficult.”
As a result, short-term price growth for certain commodities has been astronomical. Cobalt prices grew by 119 per cent in 2021, data from Bloomberg LP show, while lithium jumped 280 per cent during the same period.
Slowly but surely, investment products are starting to become available to address growing investor demand to capture some of that upside.
Ms. Lachapelle points to Global X Lithium & Battery Tech ETF LIT-A as one example, although one-third of its holdings are outside the mining sector with 18 per cent of the fund invested in information technology companies and another 15 per cent invested in the consumer discretionary space.
For those who consider nuclear power to be a part of the energy transition, Ms. Lachapelle highlights Sprott Uranium Miners ETF URNM-A and Global X Uranium ETF URA-A.
There are also funds focused on rare earth metals – such as Amplify Lithium & Battery Technology ETF BATT-A and Vaneck Rare Earth/Strategic Metals ETF REMX-A – although Ms. Lachapelle cautions they tend to trade at fairly low volumes.
Meanwhile, global research and consultancy firm Wood Mackenzie, through its partnership with U.S. ETF provider WisdomTree Investments Inc., is endeavouring to go a step further by developing an index of commodities exposed to the energy transition.
“They weigh the basket of commodities, rather than companies, based on their growth potential calculations for those commodities,” says James Whiteside, head of corporate, metals and mining at Wood Mackenzie in London, England.
“That gives you direct exposure to the commodities as opposed to the individual companies.”
WisdomTree launched two funds in Europe this past March tracking that index – WisdomTree Energy Transition Metals Commodity Index TR and the WisdomTree Battery Metals Commodity Index TR. Mr. Whiteside says both are planned to launch in North America by the end of this year.
He adds more opportunities lie with mid-tier miners as “most of the new capacity will be delivered by the incumbent producers.”
A report PricewaterhouseCoopers Canada (PwC) published in June says the global mining sector must “rapidly scale up its discovery and delivery of critical minerals” as there is currently “significant underinvestment” in that sector.
Citing recent estimates from the International Energy Agency, the report said annual demand for critical minerals from clean energy technologies will surpass US$400-billion by 2050, which is equivalent to the annual revenue of the current coal market.
Two names that Mr. Whiteside considers “real standout companies who are ticking all the boxes” include Fortescue Metals Group Ltd. FSUMF and Rio Tinto Group RIO-N.
Fortescue, which is known primarily as an Australia-based iron ore producer, has been moving into hydrogen production in recent years and has also set ambitious targets to reduce its scope three emissions, Mr. Whiteside says. Those refer to greenhouse gas emissions related to using extracted commodities further down their supply chains.
Meanwhile, Rio Tino has among the lowest-emission aluminum smelters in the world, Mr. Whitehouse says, adding its Alma smelter in the Saguenay–LacSaint-Jean region of Quebec is on the cutting edge of industry development.
Risks of investing in smaller miners
Perhaps the biggest challenge facing advisors looking to invest specifically in miners focused on critical energy transition minerals is that the bulk of the exploration work is being done by junior, micro-cap miners, according to Red Cloud Securities Inc. chief executive officer Bruce Tatters.
Not only do the smaller miners have a larger risk-reward profile, but most also lack the research analyst coverage advisors need to assess a potential investment properly.
“Even the independent brokers might research 100 mining companies, but 95 of them are over $500-million in market cap,” he says. “The whole reason for the Red Cloud model is that of the 100 companies we might have under research coverage, 80 of them are under $250-million in market cap.”
Canaccord, for its part, reports that it currently covers more than 180 mining stocks and within this group – about half (47 per cent) have a market cap below $500-million, while a third (32 per cent) have a market cap below $250-million.
For those who remain wary of the junior mining space, the PwC report says investors can gauge the suitability of mid-sized or large-cap miners in part by looking at how quickly they are transitioning their asset mix.
“There is significant underinvestment in these critical minerals” among the 40 largest miners in the world right now, the report says.
“Time is not on their side, and the future will favour those that can deploy their resources with agility, focus and speed.”
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Jameson Berkow