Good morning, everyone. My name is Freddie Fuller, and I'm the product specialist on the RBC European Equity team. Today we thought we would perform a deeper dive into a sector which has historically proved something of a conundrum for the sustainable investing world, namely that of metals and mining, and occasionally a paradox, I suppose, where pragmatism and purism can collide. To discuss this with me is a senior analyst on the desk, David Howells. Welcome, David.

Thanks, Freddie. Hello, everyone.

David, this is a sector you've looked at for a number of years now, and I suppose there are two elements that are worth exploring today. The first is how the sector has changed in recent years, especially with regard to critical or green mineral supplies, and then how that has affected companies' return profiles. The second is in some ways trying to avoid something, which is to get sucked into a rather reductive debate about whether metals and mining can be "sustainable", and instead look at specific elements within the sector, which can be examined pragmatically and perhaps improved to ensure the sector is operating within the bounds of best practice.

So, a long-winded intro. Perhaps we could start with, I'm sure, a far more concise overview of how the sector has changed, perhaps over the last decade or so.

Yes, of course. Metals and mining is far from a boring sector. Of course, it is very cyclical, and it is heavily exposed to macro. You get this constantly changing picture from Chinese super cycles and tight supply, huge CapEx increases to the inevitable oversupply. In the last couple of years, you've got these balance sheet cleanups and the distribution led. It's definitely been anything but dull. In the background, we've obviously had this very fluid and evolving story from an ESG standpoint, where the industry was, of course, immediately shunned as being one of the largest polluters – not wrong, by the way – before we started to see this much more constructive realisation that the only way to get these transition metals, the copper, the lithium, the nickel, the cobalt, is to mine them.

Perhaps these miners aren't actually the worst things in the world. I guess it's probably one of the unintended consequences of the invasion of Ukraine, is that it's really made people re-evaluate the original approach, moving away from these sweeping and archaic blacklists and realising that aerospace and defence, energy, mining, these sectors are imperative for our safety and our future.

This has led to a much more nuanced conversation. It's very nice to see some of these companies not only increasing the conversation on environmental issues, but they're allowed to. They're actually being leaders in that today.

Yes, it does feel like the ability for companies to speak more openly has shifted in the last year or so. Going back to your point on the need, the requirement for metals and minerals, once you look under the hood, you very quickly realise that they're the foundation of the future we're searching for. If you want 5G, you need silver. If you want fuel cells, it's platinum. EVs, it's lithium. Charging infrastructure, you need copper. You want steel, you need metallurgical coal, etc etc..the list goes on.

Another way of showing it is summed up by the extraordinary fact that each human being consumes around one and a half tonnes of mined materials a year and 350 kilos of metals. Now, this is obviously averaged out over the entire world and there'll be differences in areas, but effectively all of this points to a simple fact. We need metals and mining, albeit a historically challenging sector, in order to enter this era of decarbonisation successfully.

Yes, those numbers are huge. I love that fact on the amount of tonnes required. Excuse the pun, it's a seismic shift that we're asking for. It's not just the pure volume of materials that we're requiring for this transition. It's also the fact that some of these metals are actually really quite new to the mining game from a global perspective. If you take lithium, last year there was 10 times the amount produced than 30 years ago. It's no longer an industry where the conversation revolves around iron ore and Chinese steel demand.

I attended a conference earlier this year where the conversation was dominated by copper and the supply challenges there. For instance, currently, Chile is the largest producer globally, producing 30% of the global production, and in order to reach 2030 demand levels required for the transition, we need another Chile.

Extraordinary, isn't it? I had a good discussion on this topic recently which ended with a researcher stating that we're entering the age of the miner, which I thought actually felt rather at odds with much of the recent zeitgeist. I suspect that that points to a certain truth, which is that people still view this as a rather staid old economy sector, but in reality, it's really the opposite.

Oh, definitely. It's no longer the Wild West anymore. For a lot of people, mining remains the dumper truck and pickaxe industry, done in front of a cloud of pollution. Unsurprisingly, it's obviously, it's moved on a lot from a technological standpoint. Such is the level of automation these days that some mines you visit, there's barely a person on it. For an industry that's so imperative to the way that we currently and indeed want to lead our lives, the difference between perception and reality is stark. I think we're all a bit guilty, but the minute you hear the word ‘mining’, you still have this image of coal mines from 100 years ago in your mind.

Yes, I completely agree. Stepping back, we've looked at the demand side of it there and it appears fairly clear cut, at least in the short to medium term and putting positive technological shocks aside. Perhaps it's worth moving on to the supply side, i.e. individual companies. Perhaps you can talk a bit about the challenges that you think that they face.

Yes, I actually think we've touched on the big changes to the demand side, but I think there's arguably been more changes to the supply side in recent years. Obviously, the global ESG standpoint is it's these guys that are producing the metals to aid the energy transition, but it's the local ESG that is hugely impacting the supply side. It's been considerably more controversial in recent years.

Maybe it's worth, if you're able to just explain what you mean when you're talking about local ESG.

Yes, so I mean, this is all about the local communities really. If we look back historically, the focus from the local communities was much more on the positive side. These miners come in to typically neglected regions and they provide hundreds, if not thousands of jobs. They're very proactive on the infrastructure side. You see train lines, you see water desalination plants, you even see ports. They were very keen for these guys to come into their area, but increasingly you've seen this awareness of the negative impact on the community.

Therefore, the community expectations have increased and the permitting requirements have increased. They're so onerous these days. You've seen time to first production move from 5 to 10 years to 15 to 20 years today. This has obviously impacted the supply of projects coming online, and indeed it's probably the key foundation block for that commodity super cycle investment case you hear so much about.

It's fair to say that while these extensions might be frustrating for miners, they're almost certainly as a result of previous behaviour. I'm thinking particularly of events such as the Brumadinho dam disaster or the Yukon gorge destruction in Western Australia, these terrible events.

Definitely. That's very true. It's hard to have too much sympathy for these guys on the back of those, and you can't put a positive spin on them, but I think it's better that local communities these days have seen these and realised they don't want them to be replicated and they're coming out with those on day one and it's better aligning their goals with the company's goals. It can only be positive, looking into the longer term. There has been a shift in the process and you're seeing an increasing pressure to get the permitting perfect first time round.

This is to speed up the process, and this has material ramifications from an operational perspective. I would argue that it favours the majors who have considerably more experience and resources in doing these proposals and this should hold them in good stead. The risk, of course, from an industry perspective is that this delay time to production leads holes in people's production outlooks, and it leads companies to consider M&A to fill out their pipelines. Firstly, I'd say this does nothing to solve the global problem of undersupply. Secondly, this has never really been proved to be value accretive within mining, so it's not a trend that I'm particularly excited about.

It's important to note that we're talking about ESG concerns as well about miners, and they can have a material impact for businesses. It presents challenge to sector earnings, to multiples, accessing financing, to name but a few. In some ways, I think the interesting thing is the reputational aspect is asymmetrical now, given historical issues but in the longer term, that is going to become increasingly important as the sector as a whole hopefully continues to progress.

Let's be very clear, there is undoubtedly a need to progress, not just to avoid adverse events such as the two I mentioned earlier, but because the broader impact of the sector is significant. By its very nature, mining is resource-intensive, and it disrupts the natural environment. You think of the particularly emissions-intensive materials, coal being the most obvious example. On top of that, the sector as a whole, just to throw out some numbers, it makes up around 7% or so of global greenhouse gas emissions and 12% of global electricity usage, predominantly non-renewable being the important point.

All of which presents, to try and think of it positively, a big opportunity to address. Taking all of these components and things you mentioned before, how much of this do you think feeds into the sort of broader valuation question for the sector?

Yes, you obviously see miners as one of the cheapest from a sectoral perspective today, both historically as well, this has been the case for a long, long time. Obviously, you've touched on a fair few fair points on why it should be, and obviously, the cyclical nature means that it's never going to get the sky-high valuations. Whilst you should never bank on a re-rating, I do find it surprising given the very strong visibility you get earnings-wise with these guys. As they ever increasingly align with ESG, I think you've got a better overall environment for these guys, especially when you take the balance sheet cleanups that I mentioned earlier.

I think what's important and positive is the business case is just so, so much more aligned now with environmental goals. If you consider that it takes 20-odd years to permit a mine, and then they have a circa 50-year lifespan, how long does it take for these mines to turn NPV positive? The last thing you can afford is a stranded asset halfway through its lifespan, stopped off the fact it reaches some environmental limit. I think the two most prominent factors are the emissions and the water supply.

Yes, you were talking about Chile earlier. Antofagasta is a very good example within that.

Exactly. All of Antofagasta's mines are in Chile, and they're in areas of Chile that are exceedingly prone to droughts. Fortunately, this doesn't extend to the residents themselves, but it does hugely impact the industry in the area. Antos have now built these desalination plants alongside their operations, which ensures that water shortage won't be something that forces them to pause or even completely stop mining. It also gives this further optionality to sell this water to other industries. Obviously, great for ESG credentials, but it's also fantastic business sense as well.

Yes, and given a copper plant that processes 50,000 tonnes of copper ore per day requires 30,000 cubic meters of fresh water a day, these aren't insignificant projects to embark on. Much of this in effect feeds into that license to operate discussion we've slightly touched on already. From a societal standpoint, companies need this. It's about having the right strategies in place that are acceptable to local communities, but also the market and company stakeholders as well.

The good news is now that this is front and centre of the permitting process, which I think is so important because this isn't greenwashing investors or a way for companies to get cheap funding through green bonds. This is literally imperative in order to do business.

Now, this is an industry which will undoubtedly be a laggard from a global sense. These mines and all the equipment cost millions and millions of dollars, and they can't just be swapped over for a newer, greener version in a couple of years. It will be slow, but it's about those incremental steps, and hopefully we get technological improvements which will be an important aspect to get us there.

That's an interesting point. Maybe we can explore the technology side a bit further. You and I have talked about this, and we do at the desk a lot, as we're searching for how technology, and we're analysing how technology can transform even the most seemingly archaic industry, and mining does seem to be an exemplar of this, especially as it's often viewed as less digitally mature. The business case is fairly obvious. It increases efficiency, whether that means that they can now mine deeper or for longer, or whether it's a purely variable cost argument around fewer workers, for example.

Sure. The advantages are obviously huge, and from a financial aspect, it can help these guys increase their supply, reduce cost curves, allows mines to operate that were previously untenable, either materials that are too hard to previously reach or too expensive a region. For instance, Boliden operate their mines in Western Europe, a region that is so uncompetitive from a labour cost perspective, that technology has allowed them to compete on that cost curve.

It's not just the financials. This increasing reliance on technology also means a lower reliance on human and therefore human error, which is something that has blighted this industry. You obviously touched on a couple of disasters in the past where this was a material factor. Technology is here to stay. It's not just in mining, of course, but it's very easy for us to sit here and get very excited about the short-term impacts and the margin expansion and this and that, but there's so much game changing expertise out there, whether you're thinking copper leaching, direct lithium extraction, DRI steel, or removing the gang from iron ore to improve its grade.

This pace of innovation is so exciting, and it's coming from an industry that's perceived as quite archaic. Obviously, it's maybe not as quick as we'd like. I'm certainly not the best person to tell you when you're going to be seeing this technology in a mine, but it just shows that the innovation is alive and well, and tomorrow's an exciting place to be.

Yes. Sorry, without labouring the technology point, but one final bit on its benefits is given the increasing operating expenses that mines experience, the longer they last, and principally due to declining grades of the mine substance, i.e. its quality falls, and therefore more tonnage is required to offset this issue. Another example, the introduction of tech can be a welcome financial offset.

Maybe we could conclude by reexamining the question posed at the start of the episode. Where does the inclusion of these companies fit within our broader discussion of sustainability?

Yes, I think we've danced around the subject a few times accidentally. I think the key point really is, well, certainly, I believe it's so short-sighted to blacklist these companies from an ESG perspective, when without them, there is no energy transition. Just because they're not consumer-facing, you tend to disaggregate and you forget that these are the people who are building the foundations, the EDF and Tesla etc; producing these wind farms and electric vehicles, they get all that green credit.

I think, obviously the conversation is evolving and I think if we had this conversation a couple of years ago, I think you could make a solid pushback on the local ESG point, when you look at those incidents, and you look at the least perceived lack of remorse. I genuinely do believe that we've turned that corner and we are a bit more constructive in that manner. Now, of course, I'm not going to sit here and say, there will be no more incidents and no more controversies, but I think I don't think you can really say that about any industry out there.

So, I do feel a bit more mitigated by this increase in permitting process and the company improvements, and looking forward there's obviously a list of things that these companies can improve with. If you look at the water usage, the carbon emissions reduction, the pollutants, the social side, the community engagement, the tech that we touched on, and I think at the core you need to see an increase in setting out these long-term plans with concrete and measurable targets in place.

Yes, I think that's completely right. Your point on how the conversation has shifted is an interesting one. I promised at the start we wouldn't get sucked into the debate around what is acceptable from a sustainable investing perspective but maybe we could end by saying this, that in some respects this conversation can be viewed as much about the sector itself as it is about how the dynamics of the sustainable investing conversation have changed. It's that Lewis Perelman line that ‘Dogma is the sacrifice of wisdom to consistency’ and there have been moments in the last few years where there has been a tendency to reductiveness and risk avoidance when approaching entire industries or sectors. As is always the case, it's the detail and the approach that matters ultimately and in this instance, the overriding movement has ultimately proved positive, I think, and brought the necessary pressure to bear on a complex and sometimes murky industry but it's taken externalities to shake our own industry into a pragmatic approach to achieving this.

On that note, a hopefully positive note, I think we should conclude, so thank you very much David for joining us and for our listeners for tuning in. Goodbye.

Goodbye, everyone.