Latin America – the Cleantech Metal King
If carmakers are to get anywhere near their lofty electric vehicle promises, the world is going to need immense amounts of copper – and most of it will come from Latin America…
Last year, Tesla overtook Toyota to become the world’s most valuable carmaker. Elon Musk’s firm makes less than 3% of the cars than the Japanese industrial leader and barely 10% of the profit, but investors love Tesla’s head start in electric vehicles (EVs). In response conventional auto firms have drawn up dramatic EV plans. Toyota says it will offer electric or hybrid versions of all of its vehicles by 2024, while Volkswagen is committed to converting all of its 300 car and SUV models to electric by 2030. This isn’t a Damascene conversion of the conventional car industry – just a few years ago VW was fixing diesel emission tests – rather these companies are reacting to the new reality. Investors increasingly want to back electric vehicles, while rich-world governments are looking to ban internal combustion engines. For example, the UK government will prohibit the sale of new petrol and diesel cars by 2030.
Yet those lofty commitments may not be realistic, warns Michael W Scherb, CEO and founder of Appian Capital Advisory, a London-based private equity mining investment house. “We’ve all seen the statements, pledges and commitments from policymakers and carmakers, that by 2040 or 2050 there will be no more internal combustion engines [ICEs]. That’s a great target to have but it isn’t feasible from a copper supply standpoint. To replace all existing ICEs with electric vehicles would require using every piece of copper ever found.”
Latin America has an important role to play in the transition…"
Scherb doubts that those making the pledges fully comprehend the reality of global copper supply. “The problem is that policymakers don’t understand the mining sector well enough. They want to push EVs but they don’t even give a second thought to mining, or where the metal will come from. I think people focus on the technology and assume there will be enough materials.”
Within the industry miners are already rushing to develop copper projects but it won’t be easy to meet EV demand. “The standard response is that we have to find more copper”, says Scherb. “OK sure, but in the last ten years there has been just one major discovery – Kamoa in Congo. Yes, there are big mines that are about to come online but in terms of discovery most of the low-hanging fruit has already been picked.” Even where there are existing deposits, it will take a long time to develop them into operating mines. The structural problem, says Scherb, is the “perfect mismatch” between copper supply and EV demand. “You have ultra-fast changing technology supported by a slow, capital-intensive industry like mining.”
Cleantech in Latin America
With copper set to become the oil of the 21st century, investor-focus will turn to Latin America. Just two of the region’s countries, Chile and Peru, account for 40% of world copper production – a similar market share that 13-country Opec holds in oil. Meanwhile Argentina and Ecuador have vast, unexplored stretches of the world’s largest copper belt – the Andes mountain range.
“Latin America has an important role to play in the transition”, says Scherb, “as it has the world’s largest copper and lithium resources so it’s going to be the key supplier of cleantech materials for the energy transition. Every EV on the road uses four times as much copper as a traditional ICE-powered car, then when you think about the charging stations and grid upgrades it’s clear that Latin America’s copper will be in demand, with Chile and Peru in pole position. Moreover, the dominant NCM battery technology will require immense amounts of nickel, cobalt and manganese, which are all abundant in the region.” These aren’t mere platitudes, around 70% of the $750million Appian’s Fund 1, was deployed in Latin America. “For example, last year we brought Atlantic Nickel into production in Brazil, as one of the largest sustainable nickel sulphide producers globally.” And Appian will continue investing in the region. The oversubscribed Fund II, worth $775million plus additional co-investing pledges, has the same focus on Latin America.
“In the future there will be a Fund III and Fund IV, which will maintain our Latin America focus, so family offices or institutional investors in the region should contact us if they are looking for long-term mining returns. Our typical investors are tier-one, blue chip names that want exposure to cleantech metals. In particular they want the alpha you get from Appian managing and developing the projects – they don’t just want to be passive.” Investors who want to partner with Appian, or indeed project developers looking for capital, can email the firm at [email protected].
Sustainable mining
The paradox of the EV boom is that the same environmentally-friendly forces pushing miners to produce more copper will also restrict the number of new projects that can come online. US consultancy, McKinsey, estimates that mining could account for up to 7% of global CO2 emissions, making it a significant contributor to climate change. While as the search for copper pushes miners to more remote locations, there will be added scrutiny on the environmental impact of new mines.
With ESG investing on the increase, miners will increasingly be judged on their environmental impact and CO2 emissions. Alfredo Mordezki, the manager of Santander Asset Management’s new ESG LatAm Fixed Income Fund, believes there is a place for responsible investing in the mining industry. “We would invest in miners. But they would have to meet the particular set of criteria that we have for mining companies. We put extra weighting on water management and climate change mitigation, very material factors for the sector. We also factor in health & safety policies, also relevant for their scores. We think it’s important to invest in the sectors that need to make big changes for the energy transition.”
Appian already implements environmental and social best practices at its mines, with Scherb convinced that is the future of the industry. “At the moment investors don’t pay a premium for environmentally-friendly miners but as ESG investing becomes more mainstream that will change. Most investors don’t realise that ESG and strong returns are synonymous. BlackRock is the world’s largest asset manager and its new environmental principles show the direction that institutional investors are heading. We will probably get to the stage where different industries are ranked according to their ESG credentials, so mining needs to improve its act if it wants to attract investment.”
Our investors know that the marginal dollar invested in Latin America under an ESG criteria, can make a bigger difference than one in a more industrialised, service-oriented economy… "
Moreover, given Latin America’s outsized role in providing the metals needed for the transition, Mordezki feels that ESG is particularly important in the region. “Because of the Latin American industrial set up, its natural exposure to commodities and natural resources, its place in the world as a reserve of water and wild forests, the ESG approach has a lot of relevance for the region. Our investors know that the marginal dollar invested in Latin America under an ESG criteria, can make a bigger difference than one in a more industrialised, service-oriented economy.”
Nick Mather, the outgoing CEO of London-listed, Ecuador-focused miner SolGold, believes that coronavirus did more for copper demand than just boost EVs. “Everywhere the government is printing money to fund infrastructure projects, which has a positive impact on both gold and copper prices. The money printing is good for gold, as that increases it price in paper money. Meanwhile infrastructure projects these days are increasingly electrically powered, which means a lot of copper.” SolGold is currently developing a copper-gold porphyry deposit in the Ecuadorian part of the Andes, that will be one of the world’s largest copper mines when production starts in 2026.
“The pandemic has focused more investor attention on green issues, while the public is approaching a tougher enforcement of environmental regulations. So, you have this situation where demand for copper is being sped up exactly as more restrictions over access to power, water and labour are placed on mining companies. That makes it more important for miners to produce copper in the most environmentally-friendly manner. At SolGold we want to power the Alpala project with hydroelectric plants as it will bring down operating costs and improve the emissions profile.”
Large companies and powerful nations, from Toyota to the EU, have made ambitious pledges to reduce CO2 emissions. For any of them to have a chance of meeting these commitments they need projects like Alpala to come online and provide the world with the fresh supplies of copper it needs.
Another supercycle?
Mather warns that not all metals have the same prospects. “I think it will be a supercycle for all metals connected with the infrastructure drive and its electrification. Yes, you will continue to need a lot of iron to build the infrastructure and copper to electrify it. Lithium is an important element in power storage and batteries so I can see that demand will continue to grow. However, perhaps a technological advance will create a replacement for lithium. Whereas I can’t see a replacement for iron and copper in my lifetime.”
Everywhere the government is printing money to fund infrastructure projects, which has a positive impact on both gold and copper prices… "
“All the leading indicators point to an upcycle”, says Scherb. “You have an intertwined feedback loop between US dollar movements, emerging market growth, a lack of supply and sharp demand spikes. But for that to turn into a supercycle for the whole industry you would need the generalist investors to revive their enthusiasm for the space.”
Instead Scherb highlights cleantech metals. “Of course, there will be bumps on the way, for example fresh Indonesian supply will threaten nickel, as will big production announcements of different metals. But in the medium to long-term the trend looks positive. Indeed, for copper it always has. The metal has had a 3.5% compound annual growth rate for 170 years so there is a fairly consistent demand expansion, but prices are volatile because of the lag and leap in supply. We are bullish about some commodities and less so about others but we have a broad-based diversification. I don’t believe in big portfolio diversification but prefer concentrated high conviction bets. If you have a portfolio with 65% cleantech metals and the rest in base metals, you will be well placed.”
It's striking that even those who stand to benefit from rising copper prices, are urging realism about EVs. Electrification is the most obvious way to reduce emissions, yet getting sufficient supplies of sustainably-mined copper will be more difficult than a lot of the politicians and carmakers realise. Those miners that manage to deliver clean, responsible copper projects will benefit from rising prices and cheaper funding while challenge for investors is to identify and back those firms. A good place for them to start looking is Latin America.