Energy Revolution – Part 3

 

The  "Energy Revolution" as a Demand Driver for Minerals

16th of September, 2021 - torck capital management AG

Our first two articles on “The Need for an ‘Energy Revolution'” and “The Political Push for an ‘Energy Revolution’”, demonstrate that now more than ever governments feel the urgency to act on climate change and outline concrete political action taken by governments to accelerate the transition from fuel-intensive energy systems to more material-intensive energy systems that are powered by clean energy technology. In conclusion, renewables in combination with more energy efficiency now form the “leading edge” of a transformative global “Energy Revolution” that we see taking place.

 

Following on, this article brings junior mining companies into the picture of the Energy Revolution, demonstrates their critical role in the achievement of global climate goals by developing the resources necessary for the broad deployment of clean energy technologies and explains the investment thesis of the “Energy Revolution Fund”:

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What we can see from a recent IEA report on the role of critical minerals in the clean energy transition is that the average amount of minerals needed for a new unit of power generation capacity has increased by 50% since 2010 as low-carbon technologies take a growing share of investment in total capacity additions (see Figure 1). This development represents the critical role that junior mining companies, which explore and develop mineral and metal resources, play for an orderly clean energy transition that relies on an adequate supply of minerals.

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Ensuring an adequate supply of minerals becomes even more critical as the collective attempt by governments to get back on a path to net-zero emissions by 2050 and fulfil the terms of the 2015 Paris Agreement accelerates. As a consequence, the demand for minerals is estimated to increase by six times by 2040, according to the IEA report (see Figure 2).

In this scenario the IEA anticipates global energy demand to be around 8% lower than it is today due to higher efficiencies, even though the global economy is on track to increase by 40% by 2050. Almost 90% of electricity generation is forecasted to come from renewable sources, with wind and solar PV together accounting for almost 70% (see Figure 3). Most of the remaining electricity generation is attributed to nuclear power.

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However, today’s mineral supply and investment plans fall short of what is needed to transform the energy sector – a point that we raised and further elaborated on in our previous article. Our bet – in line with predictions from analysts at Goldman Sachs and JPMorgan – is that the world’s shift towards electric vehicles and renewable energy will create a new “super cycle” of rising mineral prices.

Mineral prices move in cycles because of mismatches in the pace of change between demand patterns and the development of new mining projects, as well as the ability of supply chains to respond to altering market dynamics. Previous responses to strains on the supply-demand balance – last seen at the beginning of the 2000s (see Figure 4), when China’s economic growth took off – have come with time lags and been accompanied by considerable price volatility. The reason for this is an average project development lead time of 16 years from discovery to production.

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The upcoming period of market tightness caused by a shift to more material-intensive energy systems could be aggravated further as some companies wait for deficits to emerge before committing to new projects or re-starting productions that were put on care and maintenance when low commodity prices made production uneconomic. This reinforces our belief that there is no better timing for us to launch an “Energy Revolution Fund” which invests in current early-stage exploration and near-term production companies.

The recent “In Gold We Trust Report” published by the independent investment boutique Incrementum AG further demonstrates the return potential from a prospective commodity price bull run. The report cites a long-term study by Ned Davis Research which found the average price increase in commodity bull markets over the past 200 years to be 217%. The assumption with an investment in junior mining companies is that the rising prices of the underlying commodities ceteris paribus translate into exponential stock price increases. This is because underlying commodity prices have a gearing effect on the profit margins of mining companies keeping their costs constant.

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The “Energy Revolution Fund” focusses on junior mining companies that explore and develop copper, lithium, nickel, REE and zinc resources. It is important to note that the type of mineral used varies widely by technology (see Figure 5) and therefore creates a broad range of investment opportunities in junior mining companies. The following blog articles will elaborate further on how the deployment of different clean energy technologies can be expected to translate into higher prices for the respective minerals required for their deployment and ultimately to drive investments into junior mining stocks.

A deeper look is also going to be taken at the potential within the uranium market as Western politicians are increasingly recognising that nuclear power can play an important role in achieving the climate goals set (see our last article). Therefore, uranium mining companies constitute another important component of the “Energy Revolution Fund”.

Continue reading with part 4 here.

About torck capital management

 

torck capital management is an asset management boutique based in Zurich. Well-established in the Swiss financial industry, our goal is for torck to become the leading boutique of choice for exponential opportunity investments. We aspire to both drive meaningful change with our investments and seize exponential return opportunities in times of market disruption. Our new “Energy Revolution Fund” – set to launch at the end of September – builds on the thesis that a worldwide clean energy transition will kick-start another “super cycle” of rising commodity prices, which was last seen in the early 2000s when China’s economic growth took off. With investments in hand-picked junior mining companies that ensure an adequate supply of minerals for the clean energy transition, we see the potential for our next exponential opportunity.

Follow our upcoming blog articles to learn more about how the clean energy transition will impact the demand for critical minerals and create a strong investment case for junior mining companies.