Remi Piet (Embellie Advisory)

communities, reaching ESG goals in the process.

On the Social performance front, best practices have been developed by select mining companies around Latin America, each tackling a specific need of mining communities, for example: fighting against illiteracy, narrowing the gender gap and support to entrepreneurship through comprehensive local content and economic diversification strategies. Those could be replicated in other jurisdictions by their peers. In the case of projects impacting indigenous communities, a specific approach to inclusive development is needed and several good practices guides are available. The challenges are higher around concessions plagued by security concerns, but specific protocols have been developed and are well enforced by several companies, particularly in Colombia and Mexico. Regarding contribution to good governance, several positive developments should also be noted. In terms of regulations, some countries such as Peru have clarified the steps for prior consultation processes and others could follow relatively soon, such as Ecuador and Colombia. In parallel, at national levels, the transposition of global transparency norms into national recommendations and standards also made progress thanks to EITI and the IFC among other actors. Funding sources are also available for innovative solutions bridging the data gap.

The most interesting development however is the confirmation that technology and innovation is catching up to help us bridge the governance gap. There are now a handful of solid options in community participation platforms – or geographically localised social media – such as CitizenLab or Bang The Table. Those can back traditional community relations initiatives. If managed by a trusted facilitator, they can be especially useful to shift ESG communication narratives, build bottom-up initiatives and establish a trusted dialogue.

Remi Piet

For more questions, reach out to the author; Remi Piet, Ph.D. MBA:

Co-founder and senior partner, Embellie Advisory Extractive industry advisor, Emerging Markets Investors Alliance (EMIA) Faculty member, HEC Paris, University of Miami & Devonshire Initiative

remipiet@embellieadvisory.me r.piet@umiami.edu

Copper, gold, and a false choice – Part 2

Natural resources investment advisor Matt Geiger returns with a follow-up article on the copper-gold ratio in 2021

It’s been exactly one year since ‘Copper, Gold, and a False Choice’ was published in RGN’s July 2020 issue. At the time, precious metals were screaming higher in the wake of the coronavirus sell off – with gold reaching an all-time high near US$2,100 per ounce just over a month later. Meanwhile, the price of copper was treading water near $2.75 per pound and seemed to be going nowhere fast, with much of the world still in lockdown.

While the prevailing narratives at the time suggested otherwise, the piece argued that “those bullish on gold should rationally also be bullish on copper, at least over the medium term.” This conviction stemmed from the fact that, at that time, gold was more expensive relative to copper than at any point in the last 40 years – with the copper-to-gold ratio sitting at 0.000094, well below the 40-year mean of 0.000160. This disparity in value between the two metals – especially when

Matt Geiger

Mr. Geiger is managing partner at MJG Capital, a limited partnership specialising in natural resource investments.

The partnership is long-only and holds a concentrated portfolio of resource equities. Investments include explorers, developers, producers, and royalty companies focused on precious metals, energy metals, industrial metals, and ag minerals.

Matt is a graduate of the Wharton School at the University of Pennsylvania and previously founded a venture-backed technology company most recently valued at US$150 million.

Source: Copper to Gold Ratio. Longtermtrends. https://www.longtermtrends.net/copper-gold-ratio/ Source: ‘The Commodity Bull Needs $10,000-Plus-Copper’. Bloomberg Intelligence. 5/14/21.

one considered copper’s irreplaceable role in the ongoing decarbonisation of the global economy – didn’t appear sustainable. As noted in last July’s RGN issue:

“Put simply, this means that if gold stood still at $1,900 an ounce for the next five years while the copper-togold ratio reverts to its 40year mean, we are looking at roughly $4.75 copper once the process has run its course. This doesn’t take into account the possibility that the mean reversion pendulum overshoots as is often the case, nor does it consider the possibility that gold prices also rise as the copper-to-gold ratio normalises.”

As many readers will be aware, the tables have turned dramatically in the months since. Due in part to a weakening US Dollar, COVIDrelated mine disruptions, and the anticipation of significant infrastructure spending across the developed world, the copper price has rallied by over 50% since last summer – reaching an all-time high of $4.79 per pound in early May. Copper-focused equities, from the explorers to the major producers, have in many cases

significantly outperformed the metal during this move.

Precious metals, on the other hand, have spent this period consolidating last year’s gains – with the gold price sitting roughly 13% below its level in August of last year. This has resulted in a sharp spike in the copper to gold ratio from 0.000094 last July to 0.000145 today. (In other words, the value of copper relative to gold has increased by over 50% during this period.) In the wake of this move, the ratio between the two metals now sits just below the 40-year mean of 0.000160.

I will readily admit to having been surprised at how quickly this process of mean reversion has played out – noting previously that “it’s unrealistic to expect the copper-to-gold ratio to revert to its mean overnight” and that “the process will take conviction and years of patience.” This clearly did not end up being the case. What insights can be gleaned, if any, from this sudden reversal? To start, it’s accurate to say that copper is now fairly valued relative to gold – at least by historical standards. This does not however preclude the mean reversion pendulum from overshooting, as so often happens in practice. In an extreme scenario where the copper-to-gold ratio overshoots to levels last seen at the height of the last commodity super cycle, copper could in theory be priced north of $10 per pound even if gold were to not budge an inch from the $1,900 level. While this scenario does not seem particularly likely, history tells us that it is within the realm of possibility.

It is also safe to say that copper can no longer be considered a contrarian investment like it was last year. Generalist and ESG-focused investors have descended into the copper arena in recent months, spurred in part by a Goldman Sachs report published in April declaring that ‘Copper Is The New Oil’. Vancouver and Perth

have caught onto this surge of interest, and we’re now seeing newly spawned copperfocused juniors spring into life with unsettling regularity. This ‘flavour of the month’ status should serve to temper the expectations of even the most ardent copper bulls, at least in the short term.

It is notable that the copper price is more correlated to the broader stock market than at any point in the past five years – with a correlation of roughly 0.50 to the S&P 500. Similarly, the 0.65 correlation between the commodity complex (as measured by the Bloomberg Commodity Spot Index) and the S&P 500 is near its highest level since 1960, according to Bloomberg Intelligence. The implication is that when the stock market next rolls over, the price of copper will be particularly susceptible to a sharp retracement. This will have no bearing on the metal’s long-term prospects, but many investors – especially those who have only recently entered the mining space – will throw in the towel regardless.

With these near-term considerations in mind, the red metal’s prospects in the medium to long-term remain exceptional. Given its prevalence of uses and limited substitution risk, there is no more obvious beneficiary in the ongoing decarbonisation of the global economy. Glencore projects that a 1 million tonnes per annum copper annual average growth rate will be required to satiate global demand over the next 30 years, which would be double the industry’s growth rate between 2010-2019.

It’s difficult to see where the supply will come from, at least over this coming decade. Freeport-McMoRan CEO Richard Adkerson is on record saying that copper prices could double again from current levels and that it would still take his company five years to bring online any substantiative additional supply. While there have indeed been discoveries made in the recent past at projects like Filo del Sol, Warintza, Boda, and Stavely, it’s unlikely that we’ll see any of these assets reach production until the end of this decade. And that’s optimistically.

From an investment perspective, the mantra remains very much the same. This business is about backing exceptional people working on quality assets with enough scale to make a difference. Despite some bias towards copper over gold in the longer term, the MJG partnership is more than comfortable investing in companies focused on either metal assuming the right companyspecific boxes are checked. Copper and gold are the two highest weighted metals within the MJG partnership by a healthy margin – together comprising just under 50% of the overall portfolio – and it’s likely to remain this way for the foreseeable future.

ELECTRIC MINE CONSORTIUM

The overarching aim of the 2016 Paris Agreement on climate change was for all 196 participating countries to work together to limit global warming to well below 2 °C above pre-industrial levels. The landmark accords stated that this could by achieved by nations reducing carbon emissions as soon as possible and achieving net-zero emissions in the second half of the 21st century. In the five years that have passed since the agreement was ratified, governments, scientists and entrepreneurs have committed huge resources into alternative technologies to power the global economy, with electrification identified as a key route into decarbonising the colossal transport and energy sectors, amongst other areas. The mining sector will play a vital role in the successful electrification of the global economy, via the ongoing supply of a plethora of critical minerals and metals to power grids, wind turbines and electric vehicle (EV) batteries, to give three examples. However, the entire extractives industry has taken plenty of flack for its own carbon footprint – not just the coal mining sector. In response to building pressure from modern-day ESG investors, almost all mining companies have already taken progressive steps towards disclosing and reducing their Scope 1 and 2 emissions, but the biggest – and almost total – reductions can be gained by designing, building and acquiring 100% electric mines, according to latest research. In early 2021, a new collaborative organisation – Electric Mine Consortium - was created to accelerate the transition towards fully electric mine sites, which offer not just environmental benefits, but also cost reductions to the operators and health improvements to its employees.

The first seeds of the Electric Mine Consortium were planted in a 2020 research report published by the State of Play platform (a partnership between global consulting company VCI and the University of Western Australia). Simply titled ‘Electrification’, the paper was sponsored by the Future Battery Industries Cooperative Research Centre (FBICRC), METS Ignited and Project 412, with the aim to identify the drivers and barriers of mine electrification along with key enabling technologies.

“That research was collaborative with quite a few miners and service companies, but what became pretty apparent through it was that the benefit of electrification was profound and pretty inevitable,” says State of Play’s co-founder Graeme Stanway. “When we got to the end of that research piece, we asked the original mining members if they were interested in taking it forward and they selfselected around the original members, and the acceleration of the Consortium went from there. But even in the last 18 months the interest in this has stripped initial expectations.”

Original members of the Consortium include well-

known players from the mining, services and OEM sectors, including the likes of: Sandvik, Epiroc, OZ Minerals, South32, Gold Fields, Safescape, Dassault Systemes, Energy Vault, Hahn, Horizon Power, 3ME, IGO and Barminco.

More recent additions reveal wide-reaching demand for membership to the Consortium, with major Australian producer Evolution Mining recently joining smaller nickel-gold junior Blackstone Minerals on the team. Meanwhile, electric mining light vehicle developer Zero Automotive and hybrid power generation company Zenith Energy have also signed up to the Consortium, showing the breadth of the organisation across the value chain.

“The mining members and partners we have in place are leading the process,” Stanway says. “Just simply the composition of the membership has given

GRAEME STANWAY, STATE OF PLAY CO-FOUNDER