The rapid onset of the green energy revolution could be stunted by pervasive structural issues in the finance sector spilling over to mining. It hinders capital formation, especially for junior mineral explorers, CPM Group managing partner Jeffrey Christian recently told The Northern Miner’s Global Mining Symposium.
Chief among the issues constraining capital formation is a lack of enthusiasm among investors for the industry, given its recent history of wholesale value destruction and the relative underperformance of mining equities versus other competing sectors, such as technology.
“The dividends tend to be minor compared with other sectors, and in good times, the mining executives have tended to focus on mergers and acquisitions and operations, rather than their shareholder value. So, I think that these are some factors that are causing institutional and non-institutional investors to pivot away from mining,” said Christian.
CPM Group has undertaken in-depth research on the matter and has concluded there were several structural issues on the institutional investment side and the capital market side, and on the equity side that are much more negative for investing in mining than anything specific to mining.
“And what they are, they’re specifically negative for investing in individual companies, and in smaller companies. And I hate to say it, but even the largest gold mining companies’ market caps make them look like small-cap companies for most of the largest institutional asset managers,” he said.
Back in 2000, Christian undertook research that looked at the top 25 asset management companies in the world and concluded that if any one of them said, ‘For something to be significant to me in my portfolio, I need to have 2% of my portfolio in that asset. If I want to put 2% of my assets into the gold mining industry, I have to buy all of the shares of the top ten gold mining companies, and I probably will not get the 2%.’
“So, they said, ‘Sorry, it’s not worth our while,'” said Christian. “And I remember being with the founder of one of the largest gold mining companies, and at the time, one of the institutions that we were meeting with said, ‘Yeah, you have to understand you’re a small-cap company for me.'”
“We don’t see copper as the major constraint to a rapid transition to a new energy environment. What we see is capital constraints for development, not only of the mines to supply the raw materials but for the entire value chain”
CPM Group managing partner Jeffrey Christian
Now, 21 years later, Christian sees the gap has gotten that much more extensive, compounded by significant structural changes on the institutional investor side.
According to Christian, these large investors continue to move away from active portfolio management, favouring index-linked investment funds.
“The senior management at institutional investors are saying: ‘Okay, we’re under pressure from our investors to perform better.’ And quite frankly, a lot of index funds have been outperforming human-managed funds for most of the last few years. That changed a little bit in 2019 to 2020, and so far in 2021.
“But over the last, say, ten years, the index funds have beaten the funds that have brains on them. And so, the senior management is saying: ‘Okay, I got to get rid of my analysts, I got to get rid of my human-managed funds, I’ve got to get rid of my trading desk, I’ve got to cut my costs, because my clients, my investors, are complaining about my high fees for managed funds, where an index fund is a fraction of the cost,” Christian said.
“So, you’ve got this movement away from looking at individual companies, let alone mining companies or smaller companies to index funds. And there’s pressure on that.”
Christian has also observed these very sentiments feeding into the sell-side too. “So, suddenly, the institutions say: ‘I’m paying you trading fees, but my portfolio managers are going on the computer and trading? Yeah, they are using your platform, but it’s not like I’ve got a guy taking me golfing every week, you know, there are no golf fees here. There are no dinners to pay for. Why am I paying such fees?’
“So the buy-side is under a lot of pressure and changing in ways that are negative to investing in individual companies. And the sell-side is under financial pressure because the buy-side is squeezing them. And all of that’s bad for investing in individual companies,” said Christian.
“You essentially increasingly have the equity markets moving from the place where corporations go for capital formation to the place where investors go to gamble. That’s what it is. And that has problems across the industries, as well as mining.”
Christian believes the struggles for companies to raise capital in traditional markets are posing risks for the green energy transition. The companies that need to find resources and develop mines today for production at the projected height of the battery metals demand from 2030 onwards are falling behind.
Christian floated a figure of an estimated investment requirement of more than $170 trillion across the globe to construct the green-energy infrastructure required to make electric vehicles genuinely sustainable to reduce global carbon dioxide emissions.
“We don’t see copper as the major constraint to a rapid transition to a new energy environment. What we see is capital constraints for development, not only of the mines to supply the raw materials but for the entire value chain,” he said.
CPM Group sees three significant headwinds for the transition to EVs.
The first is capital formation constraints for the companies needed to build everything to make that transition happen.
The second is insufficient electricity supplies. “We already see brown-outs in existing grids with the addition of 2% of EVs on the road. Now 4% and 5% of EVs, and if you try to make a rapid transition to 30%, or 50% market share of EVs, there’s simply not enough electricity in most parts of the world to accommodate those levels of market penetration by 2030,” said Christian.
He stressed that there is a divide between the aspirational goals of metal producers and CEOs, of governments, and CEOs of auto companies, as opposed to a realistic scenario for that transition.
The third challenge is stable grids, and the fourth is political and social backlash.
“You know, if you look at EVs, and you consider the carbon dioxide generated by lithium mining, processing lithium into batteries, generating fuel and electricity (which mostly still comes from coal, and oil and natural gas), and you look at the total carbon dioxide output of an EV versus a petroleum burning vehicle, it’s roughly equivalent,” Christian said.
“And you have half of the EVs that were bought last year were bought by people who are worried about climate change. And if they should wake up to the fact that while EVs have a lot of environmental benefits, they’re not going to significantly reduce carbon dioxide and slow climate change until you have green energy, electricity from solar, wind and nuclear.
“Sorry to say you could have a real backlash, sort of like the backlash you saw in Europe after the European Union said ‘Hello, let’s all move to diesel fuel because it’s cleaner than petrol,’ only to find out that it wasn’t cleaner. And a lot of people said, ‘Thanks. I just spent a premium on my diesel vehicle, thank you very much.”
“So, I think that you have a risk of political and social backlash. If half of the people that want to buy electric vehicles say, ‘wait for a second, this doesn’t solve our problem,’ the industry could face tough existential questions,” said Christian.
(This article first appeared in The Northern Miner)
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