• Mining activity may have to increase as much as 15x to satisfy demand in the energy transition
  • MineLife founder and analyst Gavin Wendt says copper prices need to go much higher to incentivise new production
  • Why the veteran analyst likes copper, gold and … oil in 2024

MineLife founder and resources analyst Gavin Wendt is one of the most experienced observers of the mining investment sector in Australia.

So when he says a boom in commodity demand is on our doorstep it pays to stand up and take notice.

“We’re talking about a period of enormous growth in commodity demand,” he told Stockhead.

Comparing the coming demand shift for commodities like copper, lithium, nickel, graphite and manganese to the China boom of the mid-2000s and Japan’s economic miracle in the 1970s and the reconstruction boom after the Second World War, the slow phase out of coal, oil and gas for renewables and EVs could lead to a 10-15 times increase in mining activity, Wendt says.

“We’re talking about an enormous upscaling in mining to replace the energy that’s coming from oil platforms offshore, that’s coming from coal mines, that’s coming from gas projects,” Wendt said.

“The solar panels, the wind turbines, the infrastructure that has to be upgraded to in order to take these enormous additional volumes of electricity, that’s going to lead to a massive expansion in mining.

“Somewhere between 10 to 15 times in terms of scale of what we saw in 2020 is likely by 2050.”

 

Copper Spring

Renewables accounted for around 23% of global energy production in 2020. By 2050 that will hit around 75%.

That’s going to be a challenge, given resources developed for more conventional uses like copper are already getting harder and more costly to find and develop.

“The world’s biggest copper mine is Escondida (owned by BHP and Rio Tinto) in terms of production. It’s massive. It sits in Chile and it produces an enormous amount of copper every year,” Wendt explains.

“It was discovered back in 1981 and it took about 10 years to get it into production, and we haven’t found or brought another Escondida into production since that time.”

On some demand outlooks, we’d need the equivalent of an extra Escondida (~1Mtpa) each year until 2030. Impossible. As Wendt says, mines like this don’t fall off trees.

“A lot of the low hanging fruit has already been found in the mining industry, and then you’ve got the challenges of actually securing funding, which isn’t easy,” he said.

“And then bringing those sorts of mining operations into production. And there are also extreme challenges these days around ESG, which is making it harder to develop mining operations.

“And so whilst we need commodities for the energy transition, at the same time a lot of governments around the world are making it harder to develop extractive industries.”

When it comes to EVs, Wendt estimates lithium consumption will increase 40 times by 2040, nickel, cobalt and graphite 20-25 times by then. Scary numbers.

 

So what about prices?

With shortages like that, the logical conclusion would be that prices would need to rise to bring on supply that otherwise wouldn’t be economic to develop, extend or expand.

Prices for many of the key commodities linked to the energy transition are sitting in no man’s land at the moment.

Copper, having been tipped by many investment banks to hit US$11,000/t or even US$12,000/t — record levels — has pottered around the low US$8000/t mark for much of the year due to depressed Chinese economic activity.

Nickel briefly dropped below US$20,000/t for the first time this year in August before rebounding to US$20,631, but has fallen around a third in 2023 as a massive ramp up in Indonesian production has tipped the market into what could be a 239,000t surplus.

Lithium prices remain extremely high but are less than half of last year’s record levels.

Outside of lithium the incentive isn’t really there to support margin supply right now. Wendt says that has to change.

“If we’re talking about copper, we’re going to be looking in my opinion at prices that are significantly higher than where they are now,” Wendt said.

“Why? Well simply because even if we look at the mines that are currently operating around the world, like the Escondidas etc., they’re mature operations.

“Escondida is now more than more than 30 years old in terms of its operating history and most of the big copper mines — most of the world’s major operating base metal mines if you’d like — are mature operations now.

“They haven’t been found in the last five or 10 years, they’re probably going back 20 or 30 years and the cost of operating those mines is getting more expensive.

“The mines are getting deeper, the deeper you go the more costly it is to bring the ore to surface. The grades are typically dropping at these sorts of mines. So the margins for mining companies are dropping.”

Lithium’s 2022 surge serves as an example of what can happen when demand becomes as inelastic as it could over the coming decades.

“We’ve seen incredible volatility with lithium prices. Lithium is this commodity that no one really knew about probably two or three years ago,” Wendt said.

“It had medicinal uses, but nobody really knew about lithium beyond that.

“But there’s been a tremendous growth in terms of lithium consumption and lithium demand as a result of EVs and lithium-ion batteries.

“It’s come from a very low base, and we’ve seen lithium prices go through the roof. They’re starting to steady off, but we need those higher prices in order to incentivise production at the end of the day.”

 

Commodities and stocks for 2024

We are, somehow, two-thirds of the way through 2023, making it a great time to start taking stock and asking what might happen in 2024.

Wendt likes three commodities in particular, and they aren’t necessarily wedded directly the battery metals thematic.

The first is gold, which has been out of favour with equity investors of late, but has risen from around US$300/oz in the late ’90s to as much as US$2075/oz three years ago, fetching around US$1940/oz on Friday.

Debt levels have been rising steeply in recent years, which has prompted a run from central banks to gold as an alternative form of currency.

“Central banks have been buying a lot of gold, they’re buying gold at record levels, private investors are buying gold too,” Wendt said.

“So I think gold is ready to outperform again, probably the last 12-18 months has been difficult for the gold price because we’ve had rising inflation and rising US interest rates, and typically those two things aren’t great for gold.

“We’re approaching the peak I believe in terms of interest rates and a rise in the US dollar… that is good for gold.”

Wendt likes copper for all the supply side challenges mentioned above.

The other he sees as a good 2024 bet is less common for mining investors — crude oil.

“The world is actually consuming it in record volumes. Demand has bounced back to where it was prior to COVID,” he said.

“The world economy has opened up once again, the Saudis and the Russians and the rest of OPEC are managing the supply side as far as oil is concerned, and that’s provided really stable prices around US$80 per barrel mark.

“If you have a look at what’s happening in the United States, as a result of ESG … oil companies over there are the most profitable sector on the US stock market and they’re also trading at the lowest multiples. So heavyweight investors like Warren Buffett, for example, are piling into oil stocks.

“You can’t take all the internal combustion vehicles, trucks, cars, tradies’ utes etc off the road tomorrow. The economy just wouldn’t function. So I’m very, very positive on the crude oil price.”

 

And what about small caps?

If you’re looking for big gains and early stage entry, for the most part they need to be found in the speculative junior end of the market.

But that is where the most risk is, making it a dicey game to play.

Wendt says Australia is a great place for junior resources companies. Geology is a mystery, so to sort the wheat from the chaff he says one of the best strategies is to look for companies with good people.

Companies tied to noted small cap investors like Mark Creasy and Tim Goyder, Wendt said, have proven to have a higher hit rate than the general market.

“They’re legends in the Australian mining industry, because they run their companies on the smell of an oily rag,” he said.

“They look after the shareholders, they’re major shareholders in their companies themselves. So they understand what the market likes to see.”

Wendt has been looking closely at the Goyder stable, which includes $6m capped lithium mine builder Liontown Resources (ASX:LTR) and $1.25 billion nickel and PGE hopeful Chalice Mining (ASX:CHN), though its shares have cratered this week on a negative response to the scoping study for its proposed Gonneville mine.

Both have seen massive share price increases since making surprise discoveries in WA. His stable also includes uranium explorer DevEx (ASX:DEV) and Liontown spinoff Minerals 260 (ASX:MI6) both far cheaper at $120m and $100m market caps respectively.

“You back good people in the resources space and typically if you back good people then you should be successful,” Wendt said.

Read MoreBattery MetalsCobaltCopperLithiumNickel

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