A more sustainable world needs a different, electrified energy system. If you start thinking about that you end up with the conclusion that this new system needs a lot of different metals and materials that have to be mined. So, investors could profit from taking a deeper look into mining. Together with Fabian Erismann of the Earth Resource Investment Group I made a deep dive into the mining sector and its pitfalls. We also discussed how mining could be sustainable.
We have discussed the following topics:
- Check out Interactive Brokers
- Introduction Fabian Erismannn
- The basis for the green transition
- Scaling in the mining industry
- The declining deposits quality & copper
- Trends that counter the decline in grade quality
- New technologies to improve mining efficiency
- Capital intensity in mining
- How capital is spent
- Scarcity & outlook on global demand trends
- Geological factors
- Mining types
- Reasons for being bullish about copper
- Phases of mining
- Project development & mistakes to avoid
- The timeframes of setting up mines
- Supply for VW & other car makers
- Noise vs. facts in exploring space
- Valuing of explorers
- Sustainability in mining
- Costs of building a mine
- Sources of funding for exploration projects
- Infrastructure needed around a mining project
- Costs of running a mine
- Correlations in the cost curve
- Renewable energy supplies in mining
- Workforce management in mining
- Possible failures in mining
- Community Exclusive: Best practice in sustainability
- The circular economy in copper mining
- Dealing with mining waste
- Evaluating long-running projects
- Upsides to long-running projects
- Liabilities & follow-up costs of closed projects
- The role of management in mining
- Dealing with volatility in the market
- Important leadership factors
- Closing remarks
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[00:00:00] Tilman Versch: This episode of Good Investing Talks is supported by Interactive Brokers. If you ever looking for a broker, Interactive Brokers is the place to go. I personally use their service because I think they have a great selection of stocks and markets you can access. They have super fair prices, and a great tracking system to track your performance. If you want to try out the offer of Interactive Brokers and support my channel, please click on the link below. There you will be directed to Interactive Brokers and can get an idea of what they offer you. I really liked that tool. And it’s high recommendation by me. And now, enjoy the video. The guest of Good Investing Talks.
Introduction Fabian Erismannn
[00:00:39] Tilman Versch: It’s great to have you back after a smaller summer break. Today I’m having Fabian Erismann. He’s a specialist in mining and sustainable mining. It’s a topic I haven’t covered in Good Investing Talks. But my idea is to give you insights into these topics because I think there’s something interesting happening in mining now. Because there’s a huge demand coming from especially the green transition to more electricity use. And I think there’s not enough capacity in this market, but we are trying to explore this with Fabian Erismann in the coming episode. So Fabian, maybe you can help us or Mr. Erismann, you can help us to understand a bit of your background more. So what is your background as a specialist in mining?
[00:01:30] Fabian Erismann: Good day, Mr. Versch. Good day, everyone. It’s a pleasure to be here. A little bit of myself and my direct background, I’m a geologist, and I’m graduate geologist. Since I graduated, I worked in the mining business all my professional life. I started my career in the deep South African gold fields. So in the deep gold mines in South Africa. Then I moved to Scandinavia, where I worked for multiple years for a Scandinavian mining company, Boliden, it’s one of the largest base metal miners in Europe.
And then I moved to Seeker and for 10 years, I lead the mining business for Seeker, which is a specialized material supplier to the mining industry and to the overall construction sector. For many years, I’m affiliated also on the financial side of the business. So I’m affiliated with a group, I’m currently working with and a partner with Earth Resource Investment Group. And we basically allocate deficient capital to the mining industry, exploration projects, and mining projects in precious metals, but also in the base metal fields.
[00:02:44] Tilman Versch: I will link your website below so people can find out more if they’re interested.
The basis for the green transition
I reached out to you because I found the green transition interesting. And this green transition leads to a higher impact or demand for green resources like copper. For instance, nickel, all these resources, maybe, do you have an overview of what we need for the green transition? There are some studies out there and what is actually there in production at the moment?
[00:03:18] Fabian Erismann: Well, it’s already quite a tough question. So what do we need for the green transition? I think, no one really knows because no one really knows what the technology will be maybe 10 years from now. So at the moment, we have a firm belief that solar, or wind will play a critical role in this energy transition, but to be honest, the technology will lead the way So eventually, we will have to look back and basically look back what happened with this whole energy transition. But what is clear, what’s planned now with… let’s take solar, let’s take wind, these are highly material intensive ways to produce energy and I can just give you a few examples, like an offshore wind turbine, producing maybe 10 to 15 megawatts of wind, they do contain well over 10 tons of copper, for example, and it’s equally material intensive, if not more when we look at electric drive motors, so the attached batteries to it so highly copper intensive, I would say and also nickel intensive.
The average Tesla battery or the average EV battery, so to speak is maybe 20, 30, 40 kilos of nickel inside. So this gives you the kind of material intensiveness we are dealing with. And from a supply side, we know the copper space extremely well. Also the nickel space or the zinc space. When we talk about copper, we talk here about 25 million tons of copper being produced every year. And a few very large mines play a critical role here. We talk about Escondido, Chuquicamata, El Teniente, the Grasberg. Now large operations in Mongolia coming online before Oyu Tolgoi. So a handful or a few handfuls of very large mines are responsible for the large chunk of supply of copper supply globally. And Latin America clearly plays here an extremely important role, particularly Chile and Peru.
Scaling in the mining industry
[00:05:35] Tilman Versch: If you talk about large mines, is there a certain benefit to operate at large scale in the mining industry? Or do also medium and mid-sized mines make sense economically?
[00:05:47] Fabian Erismann: Economically we, especially, like the smaller operations, which have big leverage to grow. So from an investment point of view, we like good quality deposits, such deposits with good grades, so good copper grades. We like deposits that are focused on the ground operation which have a small footprint, and don’t need to move a lot of earth, to attach the copper ores. And this is what we like from a purely economic perspective and how we look at companies, but the reality is obviously different in the 90s and late 80s. The world starts to develop these very large copper porphyry deposits, mainly located in Latin America, but also in North America and also in Southeast Asia.
And it was all about economies of scale, moving a maximum amount of tonnage at a low cost to access even lower-grade deposits. So what used to be 3% copper deposits in the 50s, 60s, and 70s or today, copper deposits of 0.5, 0.6% copper. So this reality and economies of scale certainly work to a certain amount. You can deploy large equipment, you can deploy large machines, can employ machine learning, and do things more efficiently. But there is always a level where you can’t push these costs further. And I think over the past decades, we have clearly seen that we have reached this limit at many deposits, including many deposits in Latin America.
The declining deposits quality & copper
[00:07:37] Tilman Versch: Maybe to follow up again, on the point you made. So how’s the quality of resources evolving? Are there still many low-hanging fruits in mining or like the great deposits already mined?
[00:07:49] Fabian Erismann: I think the great deposits have been mined or are currently being mined. And that’s the biggest problem of the industry is that we have a strongly declining quality of ore deposits. So if you take Escondido by far the largest copper deposit on the globe, producing well over a million tons of copper annually. Escondido started production in the 90s, in the early 90s. And mined the juiciest grade of the deposits about 3% copper, and over the last 30 years, this grade has declined well below a percent copper. So we have cut the grade by more than three times, but at the same time, in order to keep the copper production up, we need to move three times as much dirt as it used to move in the 90s.
And this just gives you an idea about the increased efficiencies you need to keep the costs down, but also in order to what you need to move that tonnage of material. It also gives you an idea about the capital intensiveness of the industry. And here billions that Escondido, tens of billions of US dollars had to be invested to keep this mine going and running.
Trends that counter the decline in grade quality
[00:09:12] Tilman Versch: Is there any trend working against like you said it’s going from 3 to 0.5 the concentration of copper? Is there also like you need a lot of more materials, but are there also technological trends like efficiency and production or better machines running against this trend?
[00:09:32] Fabian Erismann: Yeah, we have seen, I mean, especially over the last 30, 40 years. The industry came up with leaching oxide deposits, especially in Latin America. This obviously brought a large kick in additional copper supply, especially in the 90s and then towards the turn of the millennium. Froth flotation is quite a bit older. So how to treat proper sulfide ores for quite a long period of time and then also machine learning improved the way we maintain equipment, the way how we schedule equipment. And then last but not least, blockading has emerged in the industry. So the way how we can mine large underground ore bodies today is completely different than what was deployed 50 years ago.
And this has certainly helped to come up with more ore bodies, hidden ore bodies that don’t surface, that don’t start maybe if an open pit operation, but this large underground operation is caving operations that are planned now for Oyu Tolgoi for which is implemented now in Grasberg, in Chuquicamata and El Teniente and these are extremely complicated. And the risk, the operational risk attached to such blockades is immensely large and what is especially challenging for the industry it requires a huge amount of pre-production capital, and only a few very large companies in the mining space are actually able to provide and stem such large pre-production capex.
New technologies to improve mining efficiency
[00:11:16] Tilman Versch: Are there any companies an investor should look into that have interesting technology that might also be listed on the production side that might be as interesting investments?
[00:11:28] Fabian Erismann: Yeah, as we look from a technology perspective, I mean, they are a few new approaches how to treat special ores. There are a few private companies with patented or claim to have patent technologies to have come up to improve efficiency, especially in the oil recovery process. But then, I mean, obviously, there is a whole suite especially of material and equipment providers that usually are critical for the efficiency gains in the industry. So at the moment, obviously, the whole transition, from diesel-powered trucks to electrified trucks is also emerging in the mining industry.
For example, a good name is always Boliden. And Boliden in Scandinavia is at their large open pit operation at it call TV today they are installing a trolley system. So basically, when the trucks hold inside the pit, they generate electricity. And on the way up when they’re heavy, when they load the fifth ton of, maybe 500 tonnes of ore, they are basically attached to an overhead electricity line and like tram is then basically driving the way up fully electrically powered. So that’s an example. A few mining companies start to apply, as I said, new ways how to maximize ore extraction, for example, we have an example is Atalaya mining, is now deploying a new process that can liberate the zinc.
They are mining together with the copper ore which the zinc is currently going just into the copper concentrate, but they obviously would like to extract the zinc that they can sell them as ingots on the market which is an interesting approach. But many of these new technologies, again, are capital intensive, so you need to develop them. And then you need to test them on large scale and usually to scale-up is usually the most critical step in this long road of implementing such new technology, especially if it’s not used in a wide-scale, industry-wide.
Capital intensity in mining
[00:13:44] Tilman Versch: Can you maybe give some numbers to understand the capital intensity that is needed in the mining industry?
[00:13:51] Fabian Erismann: In the mining industry, if we talk about capex, we probably peaked 10 years ago. And the capital that has since been deployed to new mining projects started to decrease quite rapidly. So we are today, quite, I would say 20, 30% below the capex. We could have been spent, 10 years ago during the last full cycle, and this obviously is for future metal supply. This a picture that hints toward a challenge to the raw material supply in the not-so-distant future.
[00:14:40] Tilman Versch: Is there other any numbers like from what kind of base went on this 20, 40%? If you don’t have them…
[00:14:48] Fabian Erismann: No, I think for the nonfers? capex budget was something like 50 billion in purely capex-related items per year, I would say about six or seven years ago, and it came down quite a lot to about 20 or 30. So that’s the kind of decline we are dealing with. And it’s now, obviously, if the increasing commodity price is dispatched is now increasing again. So we see large companies, no smaller and mid-cap companies investing more in growth projects. But overall, the industry is very reluctant, investors want to see now after decades of overspending and minimal dividends to investors, the investors really want to see now that capital is returned to them. And they are very skeptical towards capital-intensive large projects, multi-generational projects that will bind a lot of capital and require a lot of capital to begin with.
How capital is spent
[00:15:52] Tilman Versch: So the industry got more and more capital efficient or got better capital allocation?
[00:15:58] Fabian Erismann: No, the industry at what we see now and this the case for the last few years, the industry got very conservative in how they’re going to spend capital. So the push from investors and the pressure from investors to get capital back from their investment is immense right now. So the boards of these large mining companies are or on pressure to really reallocate capital efficiently and return as much as possible profits to investors. That’s the flavor of the month of what we see. And it’s likely to continue that way, especially now with the cost inflation we see in the industry and the cost pressure we have right now.
Scarcity & outlook on global demand trends
[00:16:45] Tilman Versch: So we will see a bit more scarcity coming up and not like overspending and a lot of supply?
[00:16:51] Fabian Erismann: Exactly. We are talking here from a fairly conservative demand picture. So we still have, I don’t know, 1.2 billion people without electricity, we have way more people that still have no access to reliable electricity or power supply, and this will drive especially the copper demand further. And then the electrification of mobility and so on this thing comes on top. So we see, even if more conventional demand situation, we would be highly stressed and now with the whole electrification topic, the net zero targets of many companies and even states, I think the picture gets even more challenging, especially for critical materials such as copper, nickel, zinc, and quite a few others.
[00:17:52] Tilman Versch: So if you look on maps, I did study geography, so I have some basic geology knowledge, copper is often like in volcanic active spaces, and you have a concentration some areas of the world. How safe are these areas? If you think about like, not only copper supply, but also nickel and all the other minerals needed for the green transition.
[00:18:18] Fabian Erismann: I see. If you asked me how safe then this a multi-facetted questions, obviously. So you’re right, I mean, the biggest driver for copper mineralization in the Earth’s crust is volcanic or magnetic activity. So we are talking about these large, very large copper Porphyry deposits which have been triggered by subduction zones and volcanoes that erupted or stalled during the process of their formation. This certainly among the key drivers of copper mineralization in the youngers Earth’s crust. But then we shouldn’t forget there are also other deposits like steal, one of the largest contributed to the world copper supply is the Central African Copperbelt, which has acquired a different origin.
[00:19:15] Tilman Versch: How was does these African Copperbelt built?
[00:19:19] Fabian Erismann: There is more redox reaction, like redox reaction that triggered base in white copper mineralization. So we see that in the Polish cook procedure, for example, it’s a German Polish deposit mined by Kagem mainly which is a very large copper deposit on the global scale or several copper deposits on a global scale. And then we talk about East African Copperbelt which run from the Democratic Republic of Congo, down to Zambia and then even into Botswana. So these are quite similar to the Polish Copper? which had very similar waste formation characteristics.
So but completely different from what we see in Latin America. And how safe? I mean, I guess you touch on geopolitical risk. In many of these countries you might touch on seismic risk, obviously. Latin America is a seismic hotspot because of these plate tectonics that are going on there, especially in also in Southeast Asia. But the risk is obviously one of the biggest topics when we talk about mining. So mostly people refer to geopolitical risk, but then we have quite a large portion of operational risk, because we are quite often deals with on the ground operations. And then of course, we have also the seismicity, the seismic risk especially in Latin America. So risk, it’s a complex theme, but immensely important when we talk about mining and the mining industry.
[00:21:06] Tilman Versch: So we just heard a bit about the different regions of mining to what kind of mining types that does this lead. So you have this open pit mining, where you’re mining like, open the surface of the earth and like kind of extract this from the open pit, but you also have to go sometimes you have to go down into the mountain or into the surface of the earth and mine underground. Is there any difference with the different regions, subduction zones and like the some in Africa?
[00:21:38] Fabian Erismann: Yeah. From a mine type, I mean, obviously, the large deposits on a global scale have been discovered because we call it outcropping. So they basically, the surface. So you see this, you see the staining copper, copper minerals, especially, copper oxides have a very distinct staining pattern. So you can identify them on the surface, if they surface. And this led to a lot of open pits activity, of course, because you can obviously move much larger tonnage when you can make a deposit on surface. So the technical challenge is probably a bit less than, or certainly, or a bit less than when you have to mine the same volume from an underground operation.
But what we see, and this now, not only in Latin America, but in Latin America, we see this trend towards on the ground. And this not only reflecting the ore bodies, which getting deeper and deeper, and they are blind discoveries, which they don’t surface anymore. So that’s why you need to go underground, but obviously, also from a sustainability point of view, obviously, the footprint if you mine a deposit on the ground is much smaller. So the amount of volume you move, disturbance in surface, the water that is required, and so on, you have a much better situation from an environmental footprint when you mine these deposits on the ground.
And this certainly adding to the underground activity we see today. And I would say this true for all world regions, we see that in Latin America, we also see that in Africa, many, many deposits are currently mined or started to be mined on the ground. And we also see it in Southeast Asia, in Australia. So with the advent of caving of blockading it became possible to mine these deposits in very large scale on the ground. And it is expected that about 20 to 30% of the global copper supply by 2030 will come from these very challenging on the ground deposits.
Reasons for being bullish about copper
[00:23:55] Tilman Versch: Going a bit away from or like I started with trying to map out the big picture on mining. And I want to go a bit deeper on production phases to understand like to go on the mine level. But as the last question for the big picture, on which minerals are you especially bullish personally?
[00:24:15] Fabian Erismann: Personally, I really like I’m an absolute copper bull, I see a great food future for this metal because at the end of the day you can’t beat physics, copper such nice property in terms of how it handles an electrical current, how it behaves with heat, so it’s an excellent conductor for heat. It’s an excellent conductor for electricity. And it has an excellent long term durability and stability. And at the end, you can’t beat these properties and you have to stick with these metals that can provide these properties for your needs. And when we talk about electrification, copper is certainly to go to metal, but also nickel.
Nickel is compared to copper much, much smaller market. Nickel mines tend to be much smaller much more condensed much harder to find. And they are just a handful new sizable projects out there that are dealing with nickel hence our bullishness about nickel, but we also believe the battery technology we have today which is immensely intensive for nickel needs to change. There is no way we can source the amount of nickel the battery outlook or the EV outlook that currently stands has to absorb and so we need also from the technology side what is required from an electrification point of view that certainly needs to change, but hence, we like nickel. Nickel is also a metal that has fascinating properties, but then also more standard minerals or metals like zinc, your valuable zinc, then silver.
Silver is used a lot, especially in solar applications for solar cells. And so, this kind of the core group of metals we really like but then also from probably more from a global finance perspective, or from a global macroeconomics perspective, gold isn’t always the metal we like because a lot of our team’s background is strongly affiliated to gold and gold mining. So I would say this the core group of metals that we really like at this stage.
Phases of mining
[00:26:44] Tilman Versch: And now I want to do a deeper dive on the mining level, and maybe we can keep a copper mine in mine, because it was the first mineral you said. What are typical phases of a mine? I think it’s exploring, building and operating in mine or if I missed something?
[00:27:03] Fabian Erismann: Yeah, closing the mine is probably equally important to all of the steps before these days. So it’s a good question actually. And actually, no one really asked me about this question before, but I think it goes to the core of what we are dealing with, because before it actually comes to mine. And before you actually start any kind of exploration work you should have a really good understanding with whom you’re dealing with, and with what you’re dealing with in a particular region, especially the communities occupying this property. Before a mining or exploration company even has come to ground is extremely important and extremely delicate.
So the better you deal with these communities, and the better you caught them in your prospective work, or then maybe later on in your development work, and to understand their needs, and to understand their situation is extremely important these days. If you don’t have the social license to operate either for the exploration work or for the development work, any kind of mine permitting is increasingly difficult these days. Especially as in developed countries like Australia, Canada, the states, many Latin American regions, the inclusion of first nations of indigenous groups of communities that border the mining or exploration project is extremely important. And I would say, if you don’t put a maximum amount of effort into this stage, everything that comes later will be burned or potentially will be burned because of you have neglected the critical steps early on.
And we say we see that many times that’s part of our daily work that we see mistakes that have been done in the past maybe different companies, different people and to correct these mistakes is immensely difficult. And I think good companies, if sound corporate practices really put their emphasis on their projects early on, and these are really the companies we like and we would like to support. And then yeah, of course, then later on, once you identify a sound project through exploration that is economically viable, but it’s also viable from an ethical point of view. So if you also include the governance, the social components, the environmental components, then a mine can be permitted and constructed. Obviously, the impact will be the longer the life of mine, the greater the impact will be on the region. So multi-generational projects, which has a certain scale can be very positive for the region or for a specific country, can be country makers, and we have seen mines like Oyu Tolgoi in Mongolia, Grasberg in Indonesia, those projects we’re defining cornerstone investments for whole countries, and they can have a lasting effect on societies and whole countries.
And closure, closure is extremely important these days. You need to have a sound closure plan. And not only what you see on surface or what you see when you look at the footprint, but closure, also including the communities around the mine. So, how you leave a certain society behind once the mining operation has long been closed. That’s a very tricky and challenging part of the whole process.
Project development & mistakes to avoid
[00:31:15] Tilman Versch: And I’m going to ask you to call someone out, but what kind of mistakes have you observed that have caused problems for new and developing mining projects?
[00:31:27] Fabian Erismann: Many mining companies, they believe if they operate within the rules which were set by a country or a jurisdiction or by a certain agency. And if they comply with that law, they are free to operate. But if they neglect the people around the project which maybe don’t need to be included early on over the exploration phase of the project, but they should be because eventually the people that need to deal with that project. If you neglect this very important step, this a key mistake, because we have seen again, and again, you might have done a lot of exploration, because you’re allowed to, because the state says, Okay, you fulfil the rules, you can now start to drill your holes, but you always neglected the society around your project.
And then eventually you say, Okay, we identified a very nice copper deposit. And now we would like to start to mine this, and only now you start to engage with the people because now you need to come up with your environmental statement, you need to come up with your socio-economic studies. Now, it’s already too late because you have not included these people from the start. So this first set foot concept, which is really important today, especially in the mineral exploration and mining industry. This a key mistake many companies do.
The timeframes of setting up mines
[00:33:03] Tilman Versch: And maybe to come up with the big picture again, what time does a mine need from like, exploration to getting into production? What timeframes do you usually see?
[00:33:15] Fabian Erismann: More than 50 years, these days. More than 15 years.
[00:33:20] Tilman Versch: Fifteen years. So it’s not like making a snap, and then new demand comes on?
[00:33:23] Fabian Erismann: No, that’s not at all the case. And obviously, this what many automakers today make to have sleepless nights because they know we are dealing with such an amount such a common amount of metal demand in the years to come. And we know this project takes well over a decade to build so there is this obviously the supply gap that is looming in and many people especially from the industry side, I’m very worried about this supply gap.
Supply for VW & other car makers
[00:33:58] Tilman Versch: I think that even VW is thinking about buying mines right now to ensure supply for the EV production.
[00:34:07] Fabian Erismann: Yeah, I heard that too, that there was this visit to Canada obviously to line up some supply. And but I’m sure VW is not the only automaker that wants to do that. Elon Musk is the other one, he’s actively supporting organizing offtake agreements with, on the nickel side. There is a large project in the US, which is about to get might be developed in the not-so-distant future and so also Tesla is very active on that side.
Noise vs. facts in exploring space
[00:34:43] Tilman Versch: So let us take a look at the early stage of mine. If you do research and explore space where a lot of like mining explorers are clustered, as investors sometimes feels like your super noisy place, everyone is they’re talking about first class projects, and everyone is great and is a world class leading resource. There’s a lot of advertising and specialized media outlets are advertising for retail investors, it’s very easy to get access to CEO and some very interesting space. What are your observations here?
[00:35:20] Fabian Erismann: Yeah, I think you’re touching a very important point. I think the noise, especially in the small junior cap exploration space is extremely high. You need to see through the marketing talk and what is really of substance behind these names and attach to these projects. And I think the key really here is to do a proper bottom-up analysis. So really look at the projects, how do the technical details fit together? Is there really an expiration upside? Or is the expiration upside that largest companies are indicating? So these are really extremely important questions that you need to tackle early on. So we are a purely technical team.
So most of our teams are geologists, geophysics, geophysicist, mining engineers. So we really look at these projects, bottom up, and then we rank them, and we really try to filter through. And the few projects that remain they basically get a much closer look. We go to site frequently, we really start to work with these companies developing these projects, we model the projects from a geological point, but also from a financial point of view. And this how we get deeper and deeper into these projects, and eventually find hidden gems. But, as you said, many projects that are marketed these days, they are around for a very long time, different names, different management teams. So we obviously see this recycling of projects, every bull market.
And if you have certain experience in the sector, you obviously, you then start to know these projects, and I would say, we know, many projects out there. And so, for us, the longer we are in this industry, it’s also gets a bit easier to validate these projects and to select hopefully the right ones. We’re also not always right. And so we always, they’re always projects you really like and then eventually they will not get developed, they run into problems, or they disappoint also from the geological point of view. So the metals you expect are just not there. So that’s part of everyday life of a geologist in the mining space.
[00:37:58] Tilman Versch: But if you’re around in the exploring space, they often say there are a lot of world class resources around.
[00:38:04] Fabian Erismann: Again, everything is world class. That sounds familiar.
[00:38:09] Tilman Versch: So how does the financing of explorers work and why they take such a focus on retail investors?
[00:38:15] Fabian Erismann: Yeah, you first need to consider, there are thousands of listed explorations, exploraco, we call them as exploration companies listed on the mainly on the Canadian Stock Exchange, but also in London, but also in Australia. So the amount of companies that are active in this space is extremely large. So but most of these companies are also very small. And so that’s one thing. And then the second thing is compared to other sectors, the material sector is containing all these mining companies is it’s just a very, very small fraction. Let’s take the S&P 500, that the fraction of materials, I think, is in the order of below 2%. So this, it’s quite amazing.
So mining companies make up way less than 2% of the S&P 500. So that tells you, the sector is very small, but the sector is highly capital intensive, and for these junior exploration companies to survive, because they don’t have any income, they need sort of venture capital. And the retail investors have and still have and have been over the past be the very important contributor of such venture capital to keep these exploration companies going.
And you could say now, okay, most of these companies are run by gangsters and this just marketing talk. That’s blue sky potentially talking about there’s no substance behind, but the reality is also most new projects or identified and very often also developed by these junior exploration and mining companies. So they play a critical role in the future supply of these materials. And, despite all the negative comments that are around in the space these companies still have their space in this microcosmos, in this whole microcosmos of mining.
And they play, still a very important role, especially for these future projects we need. And retail investment, or retail money is a is an important source of funding for these, for these companies, especially at the very early stage when many funds would say, well, if I run a $2 billion pension fund, I can’t deploy money to a market cap company of five, $6 million. The amount I could contribute to this company would be insignificant for my assets undervalue. Hence, smaller, probably retail money or smaller funds, like ours can play this game a bit differently than the very large capital providers.
Valuing of explorers
[00:41:22] Tilman Versch: So what is your way to value exploring companies then, in your approach, economic value?
[00:41:36] Fabian Erismann: Depending on the stage of the project, the quality of an identified volume of metals or minerals, can be evaluated, and will have a certain quality. So, the more you drill, the more information you will get from a certain project, and the tighter you can build around in an economic model around such deposit. And so, we usually start with exploration results. So, we first see what kind of deposit is eventually involved in this exploration work the company’s doing, how does it fit in the academic understanding of such deposit, what characteristics are fulfilled, were very something missing, and then very important is how can we compare such deposits which both have seen before. So, all of us work with different mines, different deposits in the past, and to compare and to put it some yardstick, how big this could be and, how could this develop is very important from the beginning. And then the more capital is invested, mostly through drilling and geophysical surveys, the picture gets clearer and clearer. And eventually, we will start to build a financial model around this ore body.
We put a capex figure behind, we put a cost behind, and we eventually put the life of mine behind, and eventually such a project then we’ll meet an investment hurdle and might get developed further. And this how we come up with a target price of such a project, and if this target price is attractive in our view obviously, then an investment could be done into this company. And if we think, well, this target price is now reflecting borderline value in our view, then we’d probably stand on the break, and then would say, well, it’s not meeting our investment criteria.
Sustainability in mining
[00:44:01] Tilman Versch: What are ways to make an exploration project sustainable?
[00:44:05] Fabian Erismann: The first we need to address the question, sustainability in the raw material sector, so sustainability in mining, can mining be sustainable? So because it’s a finite resource, we are mining, so, it won’t sustain production for an endless amount of time. We are firm believers that a mining project can be sustainable, it can have an extremely positive impact on societies, on the jurisdiction the project is located, and a lasting impact even beyond the life of mine. And it starts with exploration as you say, the exploration sets the stage for the whole project and its first set foot concept is critical.
So the better the terms from the very start with the communities around, how the whole work is integrated into the daily life of these people, how nature is reflected at the final stage of the mining project, this can be already sketched very early on and it’s an extremely important step. So the more diligent this exploration is constructed and carried out, the higher the benefit for the overall project later on, and hence, the exploration stage is absolutely critical.
Costs of building a mine
[00:45:37] Tilman Versch: So let’s take the next step and look at the stages of building in mine. What are typical costs of building a mine, like think of a copper mine, for instance?
[00:45:51] Fabian Erismann: Well, if you have, like, let’s say, if you build a small mining project, and small we talking here, maybe 50, 40, 50,000 tons of copper per year through a small open pit, having limited impact on land and requiring a limited amount of capital for equipment and food processing facility, we are talking here, maybe between 2 and 400 million US dollars, capex wise, but if we then talk about these very large projects, projects that really have an impact on global supply, they usually start between I would say, 2 to 400,000 tons of copper, and they will have significant capital requirements, we talking here between 1 to 5 billion US dollars, but these are the nodes the multi-generational project. So they will be mined for 20, 30, 40 years. And so, this the kind of capital range we are talking about, strongly dependent, obviously, on the scale and size of the project.
Sources of funding for exploration projects
[00:47:02] Tilman Versch: Like, especially for the smaller or mid-sized projects, where does the funding usually come from?
[00:47:09] Fabian Erismann: Yeah, this then obviously, for junior companies which have a very interesting project, but which are still small by market cap, this is usually a problem. So if you’re a hundred million market cap exploration company, and you need to find 500 million capex for your project, that’s quite a sporty gap. And this usually then results in quite significant dilution to shareholders. So the company need to raise money first to keep the development work going, to cover the costs for studies for further drilling. And at some stage, then we will talk about project financing. So this could be debt.
What is often done these days, because usually ore deposits are not just containing a single metal. So in copper, we usually also have gold credit, we might have silver credit, we might have other base metal credit lights like zinc or potentially even nickel depending on the style of mineralization. You can then do like streaming deals. So especially for the precious metal the streaming deals have become very popular over the last few years. So a streamer like we have many of these streaming companies, they would provide you upfront capital to receive then such a life of mine stream on this operation and this could then provide additional capital to close this funding gap.
And then a very important factor obviously, especially for juniors or jayvees, especially for large projects. So juniors are then obviously also always or not always but very often juniors need to engage into joint ventures with large mining companies. These joint ventures are usually quite tricky for junior mining companies because usually they involve some sort of participation and the risk of being squeezed out of business because you can’t meet these investments further down the line is then quite a risk to these junior companies. But jayvees are also quite an important part of the development phase of such large mining projects these days.
Infrastructure needed around a mining project
[00:49:40] Tilman Versch: So let’s think of physical infrastructure you need to build at the place of the mine. What does it like a copper mine usually need when setting up the production?
[00:49:52] Fabian Erismann: The obvious copper, we have two different ways of extracting the copper and processing the copper. So if you talk about copper oxides, you can leach it, it’s quite simple. You mine the oxides, you pile them up on impermeable liner which is usually high density polyethylene, and you then irrigate this material with the sulfuric acid, the sulfur gas takes up the copper and what do we call them this pregnant solution is then treated in an electro milling plant and element copper is basically produced out of this solution. So because it’s a fairly simple setup, the capex requirements is comparatively low when we compare this with copper sulfide, so, really non oxidized material in the earth that contains copper.
This requires, a lot of crushing, milling, froth flotation, so the process is much more capital intensive, but it’s also easier to scale up and eventually most oxide deposits will transition into sulfide deposit. So lift the decreasing oxidized deposits and surface because they have been found and mined already. Sulfidic ore is getting more and more common, and more and more mines today are mining and milling and concentrating fresh copper ore these days. So we have these two different ways of mining these copper deposits, one is a bit less capital intensive, and the other one is higher in the capital intensity.
[00:51:41] Tilman Versch: So if you think about the area around the exploration space, how important is access to infrastructure there, especially, like also trains and ships to ship the goods?
[00:51:53] Fabian Erismann: Yeah, I think infrastructure is critical. I mean, if the further away you are from your power tie in, from the ports to export your concentrates, from roads in Latin America, water is a critical issue, the further away you are from these items, and these critical infrastructure components, the trickier it gets to develop such a project because the costs are increasing exponentially if you don’t have access to these components, or you’re very far away from these components. The prime example would be the development of the Grasberg deposit in West Papua or in Irian Jaya back in the day, when it was called.
So the amount of infrastructure that had to be put in place to just access the mine, power the mine, then supply the mine was just demands. And if companies will rate projects accordingly, if a company has a list of projects that they could develop, they will always go for the ones which are easier to access than the ones will mature in a complete greenfield terrain in the middle of nowhere. And also, from an ESG point of view, from a sustainability point of view, it’s much better to develop projects within reach of existing infrastructure than develop these purely greenfield projects far away from everything.
Costs of running a mine
[00:53:29] Tilman Versch: So let’s say you’ve started the mine and it’s operating now, what are typical costs of a mine, to run it like if you see the costs a mine has to produce copper?
[00:53:45] Fabian Erismann: It’s a good question because of economies of scale, when you utilize these very large haul trucks. Mining costs for very large operation, they can be below $1 a ton. So to blast, to mine, to move it and then on the processing side, we talk about a few tens of dollar per ton or even below. So these are kinds of costs that are involved with mining the deposit and processing the deposits and then they cost for such large operations are then neglectable because the sheer mass you’re moving is then basically the impact of GNA is not that large.
But really the important thing is really the mining costs because a large volume of material is involved and the processing side of the business which is energy intensive, and we all know energy prices are going through the roof right now. Huge problem for the mining industry, which is a large consumer of energy. And so these are, by far the two largest cost components, but then obviously also what these companies’ paying taxes and royalties, this is then the other side, but not related to the operational side of the business.
Correlations in the cost curve
[00:55:09] Tilman Versch: Like on the cost curve, do you sometimes see cost curves of different mines? Which are there any projects that come to your mind that are especially, like cheap in production and why are they the cheap?
[00:55:21] Fabian Erismann: I mean, the cost curve correlates directly with the quality of the deposit. If you can mine a 2% copper deposit from surface, I mean, the costs will be so much lower than if you need to mine a deposit that 0.5% copper. The strip ratio is what we’re referring to the amount of waste to the amount of ore at a very high strip ratio. So the quality of the deposit is directly affecting the cost that is involved in mining these deposits, and the lowest cost mines we see today are also the highest grade mine. So for example, Kamoa-Kakula, now developed in the DRC, as in the Democratic Republic of Congo, has very low cash costs to develop a ton of ore.
We are talking here about the costs, total costs to mine and treat your ore maybe $1.20, $1.30. $1.40. So if you compare this to the copper price, it’s low and it’s very attractive for the company to mine at these levels. But then when we have a copper mine in Latin America, which has 0.4, 0.5 copper in it, you can easily then get, if you’re lacking efficiencies and you have high power costs, if you have labour shortages, if you have shortages in supply and cost inflation, you might easily be trapped in a cost that is very close to the current spot, or even above the spot price of copper and this is then in a very uncomfortable situation.
Renewable energy supplies in mining
[00:57:03] Tilman Versch: What can companies do to reduce energy costs?
[00:57:07] Fabian Erismann: Here for copper projects, it’s a bit easier to find alternatives because, as I said, copper mines have usually a much larger life of mine than precious metal projects or, like precious metal projects. So if you have a copper operation that will continue for the next 30 years, you can think about solar, you can think about wind, you might think alternative power supplies, and but if you have a very short life of mine, installing a large solar power plant might just not be economic. So I think the longer your time horizon, the more you can do about alternative energy sources, and obviously shield yourself a little bit from these very increased the power costs.
[00:57:58] Tilman Versch: And is there anything like wind and solar, we currently have a problem like that. It’s not all the time they produce energy at the same level, but their peak loads and when a lot of wind blows and a lot of sunshine. Is this a problem with mines that they have or like with copper mines? And then if certain processes that have to run 24/7, seven days a week, otherwise they would be like you can’t keep them up or is it just like they could do more production when the sun shines a lot, or the wind blows a lot?
[00:58:31] Fabian Erismann: No, your mine has a certain energy drawer, and you can fulfil this energy supply through alternative sources, but you always need your baseload, like Raglan, Glencore Raglan like mine in the Canadian Arctic is an example, they have a few wind towers, so they produce wind energy, but they always have a base load, supplied by preferably from the grid or then through power generation through these lower heavy oil or gas.
So you always need this baseload, as exactly as you as you mentioned, if the wind is not blowing, and if the sun is not shining, especially in the Canadian Arctic, I don’t think it’s going to be a very wise idea to have a lot of solar capacity because well over half of the year, you will not have any output from that solar capacity. So you always need to ensure you have a base load, preferably from the grid, but then obviously, facing in solar and wind might be a good idea. And many mining companies are doing this these days. We have companies in Spain, in Australia, in Latin America, they all think certainly thinking about solar, maybe also thinking about when maybe tie into the gas grid, these are all part of their daily business and they’re thinking strongly, especially in this price environments, how to bring these, these power costs.
In Russia, a few examples now from the small modular reactors from powered by nuclear fuels, this might equally well be also a component of the future, where we have much smaller modular reactors that can power individual mining project or other industrial projects, especially in remote sites.
Workforce management in mining
[1:00:33] Tilman Versch: And if you think about the workforce, especially from the background that you said that capex investments went down, and investments in new prices went down, is this might just be a problem to find good geologists and people working in mines that are specialized?
[1:00:53] Fabian Erismann: Yeah, absolutely. If you talk to mining companies in Australia, this one of the biggest issues today: finding people, finding contractors, finding especially also qualified people to do the job. Working on mines, for the new generations, the millennials and generation Y, and how they’re all called, it’s not the most sexy thing these days, so the labor shortage in the mining industry is intensifying now for well over 10 years. So I remember the discussion more than 10 years ago where this discussion came up we can’t find enough people to do these flying flounds to these remote mine sites, because they all have families, they want to have a work life balance and so on. So finding the right amount of people for these immensely complex projects is getting a challenge but I guess it’s not only so for mining, but it’s also for many other industrial sectors these days and what I hear from the news and from research reports.
Possible failures in mining
[1:02:05] Tilman Versch: What could go wrong running a mine, like think of accidents or other things that you saw as mistakes in your career?
[1:02:15] Fabian Erismann: Many. The list of things that can go wrong in a mining operation is long and most things can be prevented by proper planning, by best demonstrated practices, by good stewardship and good governments, but there is always… if you work in such a large industrialized area, employing large equipment, moving large amounts of rock masses there is always risk that something can go wrong. We saw pit failure so where entire flanks of an open pit start to collapse. You can prevent it sometimes it’s everything is according to design, but something happens because you’re still dealing with nature.
There is always a risk factor when dealing with nature. And Bingham Canyon, one of the largest copper mines in the US had such a pit wall failure quite a few years ago. And this is well known as the mine to be in the most, on the highest standard industry standards and but such pit failures occur every now and again. And for us it’s more important how you deal with such a matter even if it occurs, what are your steps taken to prevent from happening again, what are your lessons learned? How do you employ and deploy your skills that you learn from such exercises that’s much more important to us that we have this dialogue also with the management teams that we understand what caused such a failure.
And obviously mining you hear it every now and then in the news also fatalities. Sometimes people die in these mining environments because the equipment we are dealing with nature, full of ground, we are deep down in the earth, we have stresses that often we can’t 100% control these stresses and despite the technologies we have today we’ve shot creek with dealing on the ground support with bolts with mechanized folding rakes and everything. You can’t prevent 100% of things happening in such an environment. But this not only for mining, this also the case for every industrial environment. But it’s about the culture, how you handle these risks, and how you communicate this risk. Now, every employee in your organization is aware or what can happen and how he needs to report and prevent such risks is much more important than the knowledge should actually something could happen.
Community Exclusive: Best practice in sustainability
Hey, Tilman here. I’m sure you’re curious about the answer to this question. But this ad is exclusive to the members of my community, Good Investing Plus. Good Investing Plus, it’s a place where we help each other to get better as investors day by day. If you are ambitious, long term-oriented investor that likes to share, please apply for Good Investing Plus, just go to good-investing.net/plus. You can also find this link in the show notes. I’m waiting for the application. And without further ado, let’s go back to the conversation.
Without further ado, let’s go back to the conversation.
[1:05:11] Tilman Versch: What kind of mining projects or companies come in mine when I say best practice in sustainability? What are names that people should look into?
The circular economy in copper mining
Like the resources needed to do good. If you want to electrify everything, you need copper and like new batteries, it’s a quite challenging thing to maneuver. But like the last weeks have shown that energy is a topic again in Europe, especially. If you think about mines, there’s also this idea of mine life like, not extinction, but like expansion, and also the idea of reuse of mines that have been already processed, but there’s some good way you might with new technologies get some more ore or copper out of it. Like, how often does this happen that you can like, if you already have like in project explorer that something is next to it, you could also extend the mine life to this with the new infill, or how you can use like process goods again and get more copper out with new technologies.
[1:07:06] Fabian Erismann: Yeah, in ESG, or when in lifting the sustainability discussion, we talk about circular economy, which is extremely important in mining. So as I said, again, the copper industry is dominated by a few handful of very large operations, some of them are already over 100 years old, I mentioned Chuquicamata, El Teniente, being hand carrying well over 100 years old. And what they did in the past was certainly not down to the level what we do today in terms of processing. So there is ample opportunity around that you can process these stockpiles, to process these tailings, extract further minerals with the technologies we have today.
And it’s done at several operations. El Teniente, for example, there is a special company actually retreating the tailings to extract more copper. So if it can be done in an economic way, it will be done. And if it’s not, if it’s not possible to do it in an economic way, people will stand away from such an endeavour or such an operation, but it is done frequently. South Africa as well is one of these hotspots of reworking tailings especially on the gold and platinum side. But also in Latin America, it’s done quite frequently. The other thing is how are you dealing with the waste, obviously, when mining and processing, you will just extract the fraction of the total volume that is being mined.
A few percent in the copper industry and the large mess that is remaining is finally grinded waste material will end up on landfills will be called the tailings storage facilities. If you have an underground operation, you can take maybe half of this volume to use it as space backfill assists, mix it with cement and water and pump it back on the ground as a structural amount, structural fill, but you can also use these tailings. If they are viable, you could produce construction materials, you could produce mortars, you could produce bricks, you might even use this as an alternative binder. So we have now project in Scandinavia, where the smelter slag so the waste product of the smelters is activated through grinding and used as an alternative binder, so you don’t use cement anymore.
You now use these waste products, and you might know cement is one of the key drivers for CO2 emissions on the globe, about six, 7% of global CO2 emissions are caused by the production and use of cement. And obviously, if you can come up with such an alternative hypothesis from your mining operation, this will have a dramatic impact on your operation, because you certainly are more or less your two, you might end up as a CO2 neutral operation. But the impact on the industry as a whole might also be quite dramatic, because such a best demonstrated practice from one side could be implemented all over the globe, where you have similar type of preconditions.
And so the circular economy is, especially mining, is important because it reduces the footprint, again, of the mine. The footprint, very important for everything for permitting for operating the mine, and also in terms of energy use. So this circular economy is extremely important. And I would say mining companies are really specialists in the circular economy or are becoming specialists because they had to do it from the early days on. They had to think about how can we use the stuff that we mined in large quantities every day, every hour, every minute. How can we use this? How we how can we put this material for good-to-good use?
Dealing with mining waste
[1:11:14] Tilman Versch: Could some mining companies make this as a source of revenue that they sell the products they get while exploring copper?
[1:11:25] Fabian Erismann: Yeah, it’s a question. Obviously, if you also worked for a material supplier, so we produced a lot of these materials that we sold to the industry, to mining companies and so on. I think the business model would be more the mining industry gets rid of waste. And this waste can be used by other companies to produce other products. So this would be a win situation, because in many countries, you are charged on the amount of waste you’re putting on landfills and tailings storage facilities. So if you’re able to reduce that amount of, again, the footprint, you will be charged less money by the regulator. This can be a large benefit for many companies.
Evaluating long-running projects
[1:12:13] Tilman Versch: How do you value in operating mine like to find out the economic value and also having in mind that this mines something that runs out so as it doesn’t get better? Over time it gets worse, and you have to take care of like the closing costs and the liabilities just might come after you have done the mining?
[1:12:35] Fabian Erismann: I can tell you, it’s a hot topic right now. How to best evaluate, especially, long life of mine projects, like these blockades, I mentioned. If you have a project that runs for 40, 50 years, a discounted cash flow model will look not so attractive, because you’re investing billions of dollars early on, before you start producing. And once you start producing, let’s say in 10, 15 years’ time, using a discount rate of 5, 6, 7, 8%, you will have a fully discounted cash flows from year 10 to whatever 40, 50 will be fully discard.
So a mining company will tell you, well, if I use a discounted cash flow model, I would not build these big projects anymore, because it just doesn’t make sense. But if we talk about, short lives, 9, 10, 15, 20 years, I would say discounted cash flow model is certainly the standard. So you build your model, if your capital requirements, and the tradeoff is basically the revenue you get from your metals that you sell. And if this NPV, this net, net present value of this operation is then positive or intermediate your investment, then such a project and will be developed or not. So that’s the standard way of evaluating the mining project, just based by the financial figures, but for us, much more important is, the exploration of site.
What’s in here that is not yet reflected in the share price. So is there good potential to find much more, eventually. Can we double the resources maybe over the next five years? What’s the potential for that? Does this sound familiar to what we have seen elsewhere? Do we like the geology? Do we like the vectors that we already have. So for us this is much more important when we look at a project especially exploration project, and this will eventually guide if we like certain project or not,
Upsides to long-running projects
[1:14:49] Tilman Versch: How often have mining companies made it to like, they have a project, it runs out of the lifetime, and they were able to extend the lifetime or buy something new, or how often is it just like, the end of lifetime has happened, and now, they have to close the project and it’s gone?
[1:15:09] Fabian Erismann: The vast majority of mines run much longer than the initial project life of mine. Mexico is a prime example, 10, 15 years ago, Mexican mines always had three year or two-year life of mine, it was always two years that the operation was running since 50 years, but always two years remaining life of mine, because it’s just silver mines in Mexico usually, fairly small, quite complicated from a structural point of view. And it’s quite hard to drill a large amount of resources like 10, 15 years of resources to add to the mining life.
And these Mexican miners were extremely skilled just to mine from, these two, three years life of mine, but continue these operations for decades to come. And this now an extreme example, but the vast majority of mining projects, they do run much longer than which was initially stated in the feasibility study or when the decision was taken to build the mine. But it’s still its nature and nature is unpredictable in that way, these ore deposits can grow much larger, or these deposits can suddenly stop because of a certain structure that consider for because the fertile fluids were just not recharging the system.
So in that sense, nature is unpredictable, and you need to understand what has formed this deposit quite well in order to make a qualified judgment on the size, or the potential or future size of such a system.
[1:17:07] Tilman Versch: But it’s also like from an economic perspective, it’s quite destructive, if you already have this initial investment of setting up all the infrastructure, which is extremely costly, and then to explore around it.
[1:17:18] Fabian Erismann: You know the best way to find a new mine is in the shadow of an old headframe. So that’s the saying in the mining industry, so if you have an existing mine or mine which has closed, the best opportunity to find the extension to this mine or to find a new way is in the vicinity of this operations which might still running or which might have closed decades ago, but this is what is done. If you can do it as a junior exploration company, you will start with that step.
[1:17:53] Tilman Versch: As also like attractive because you have a mine that has a cash flow, and this cash flow can be invested in exploration around the area, and they know it’s comfortable to travel to this spot, and it’s like they already have the high capital cost of investment.
[1:18:13] Fabian Erismann: Absolutely. And the metallurgy might be similar. Yeah, you have the electricity is tied in, you have the roads going there, you have the water connection, you might have permits already, you have a labor force in the vicinity that might support you. So there’s a lot of positive things when you work in an environment. We call it in the Brownfields environment that has seen mining activity before.
Liabilities & follow-up costs of closed projects
[1:18:41] Tilman Versch: Let’s think a bit about the afterlife of the mine. And are there any like if you’ve lost operation, are there any liabilities you have to pay for? Sometimes, it’s not like copper exploration, but if you think about like oil sands and stuff like this, you have these huge seas of toxic water and stuff like this is something also like an topic in the copper space?
[1:19:08] Fabian Erismann: Yeah. So most regulators especially invest in nation state required to have a reclamation bond in place. So basically money you put the sound aside, for the expected closure cost of the mine. And a closure cost is not just it ends with closing the hole or closing down the operation, these reclamation costs usually they go on for decades, because once you have created the scar in the ground, sulfide, so sulfidic ore is exposed to weathering, so to oxygen and water. And as these sulfide starts to oxidize, we call it acid mine drainage. So these there is a natural process triggered, to produce these acids that will be released into the environment and to control this acid drainage. Quite the long-term monitoring is usually required for these large operations.
[1:20:08] Tilman Versch: So there are some follow up costs?
[1:20:11] Fabian Erismann: There are follow up costs. And but usually this is well organized, especially in mining jurisdictions that are familiar with their problem. And the problems we see today are usually from operations that have been closed decades ago. So these are legacy projects, no one is really responsible anymore. And this where we usually see the big problems. And these projects that end up in the press and that have negative press and associated feelings towards them.
[1:20:40] Tilman Versch: Yeah, there was this one that still fascinates me. And it was just one coal mine in Denver. In January, there were these fires hitting Denver and some outskirts. And I think they might have been also caused by this coal mine, which was burning, like, for 200 years on the ground because there was a fire. So it’s not like the copper space. But mining is fascinating. This way, what it can cause.
[1:21:03] Fabian Erismann: Copper ore doesn’t burn, usually.
[1:21:05] Tilman Versch: So it’s a good thing.
[1:21:07] Fabian Erismann: But coal, I mean, you’re touching on coal. I mean, everyone hates coal these days. But Germany is burning this year, as much coal as they did in ’84, 1984. So ‘21 was a record year for coal production. And ‘22 will be another record year for coal production. So despite the very negative press towards coal, it looks like to be the savior during these years when we have a shortage in energy. And so yeah, so the society these days is very hypocritical towards these energy sources. So and certainly no one cares about the climate anymore, as it seems. And this is to me, sometimes quite disturbing.
The role of management in mining
[1:21:52] Tilman Versch: It’s the last two years have been lessons in things you haven’t read about in fiction that happened now in reality. Let’s come back to my last questions on the mining space. What role does management play for you in the analysis of mining companies, you have these physical structures, that data mined a lot, and you also have to play with nature as a key component in a mining investment? But what role does management play, usually, like in my investing space have been before management is like, a lot or everything sometimes, what is the importance of management in mining?
[1:22:34] Fabian Erismann: I think management, you know, track record of management is very important, especially in this junior space. So we need to feel comfortable about the management. There are quite a few teams, we will not go close by because we know their history, and their track record in the past. So management team is certainly very important for us. So we need to feel comfortable with these people. Preferably we know them for a long time, this is usually the case because we are well connected with the industry. But it is only one side, the nature, the deposit side needs to be equally good.
And if you have this merger of good management, team skills, hungry teams, they know what they’re doing, they’ve done it before. And a good foundation with good exploration grounds with good deposit, preferably already. I think this a really good combination to hit the road and to get going and to create some real excitement.
Dealing with volatility in the market
[1:23:40] Tilman Versch: Is there a big chance in mining to profit from the volatility you have in the sector, because if you think about like, economic downturns and like, copper prices going down a lot and some mines get attractive takeover targets at the current prices and stuff like this, other people who are just like acquirers in this space knowing that they take chances off the volatilities?
[1:24:08] Fabian Erismann: Yeah, I mean the activity in this space is still fairly active. I mean, we just said now also minerals, which BHP made an offer, we had the Rio Tinto made an offer for Turquoise Hill, we had the Agnico-Kirkland merger. So that activity, I mean, the activity is I would say is healthy might already be a bit of might be elevated already. But this also not surprising, considering the elevated raw material prices we have seen over the last couple months years. So M&D for us is clearly an important driver for the performance of our products. And but the reality is you need to live with the cyclical nature of the industry.
If you cure for high prices or high prices, usually if the prices are high, supply gets motivated, gets nourished, and this new supply will then obviously will have an impact on prices again. Despite the speculations we have now about the future and the lack of supply, it won’t be any different in the future, but we are firm believers that we have now a little bit of a perfect storm for these commodities that they might go much higher than what we see today. And this certainly very attractive for mining related equities that are mining these commodities.
Important leadership factors
[1:25:43] Tilman Versch: Can you maybe name some very impressive management teams, or companies in the mining space?
[1:25:49] Fabian Erismann: I don’t want to mention here too many names. But we like skinning the game, we like personal interest in their companies that also put money on the table to develop, especially in the junior space, where this capital is required to get these companies going and keeping the lights on. And track record is important. So if you have found that a junior company, you have identified a deposit, this was a successful story, it was brought into production, these people know what they’re doing. They have tacit knowledge, what I often refer to. So they have done critical steps over and over again, and I think it’s critical in any business to have such kind of experience. And those are the people we follow as well that’s I think there’s no secret about it.
[1:26:48] Tilman Versch: What do you see as skin in the game? Like, usually, if you have an exploration company, if someone has like granted $1 million in stocks?
[1:26:57] Fabian Erismann: Yeah. But that’s what we don’t. If the founder of an exploration company is just in for the stock options, that’s not something we like, but if during the IPO, he put up, I don’t know, 3, 4% of equity at the issue price, this a commitment. We see this as a true belief meant that this stock, or this company, could be much more successful in the future. And we want people in these companies that believe in their future and that they are not just in for the free ride.
[1:27:38] Tilman Versch: Then thank you very much for answering all my questions, like for the end of our interview and I give you the chance to add anything. Is there anything you want to add?
[1:27:46] Fabian Erismann: No, that was a pleasure. This was a good hour with you. And I think well put questions, and I hope I could shed some light into the world of mining.
[1:28:04] Tilman Versch: Yeah, you did, for sure. And it was very helpful. Thank you very much. And thank you very much for the audience staying till here. Bye, bye.
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