Active Edge: Why Experience Matters in Metals and Mining Investing

Welcome to Metals in Motion.

I'm Steve Schoff, director of ETF product management at Sprat Asset Management.

Geopolitics, innovations, and increasing demand for many metals are leading to resource nationalism and opportunities for investors.

On today's episode, we'll focus on investment opportunities in the mining sector.

Joining me today is Justin Tolman, a senior portfolio manager and economic geologist with Sprat.

Justin, welcome to the show. >> Thank you, Steve.

It's nice to be here. >> We recently launched the Sprat Active Metals and Miners ETF, ticker MEL, or metal as we've come to calling it.

Uh, metal is the only ETF that provides active exposure to miners of a diverse group of metals.

Uh, and not only do those metals include critical materials, but it also has exposure to things like steel, platinum, palladium, and has a broader mandate to invest in more diversified metals.

Justin, not only are you one of the senior portfolio managers for metal, but you're also an economic geologist.

Could you talk a little bit about your background? >> I grew up in mining towns.

You know, my dad did his time as an apprentice underground in copper mines in Australia.

My granddad, too.

So, it's kind of natural.

I gravitated towards a career in metals and mining.

I liked solving puzzles.

Uh, I was naturally curious.

So geology was kind of a natural fit.

What I did a little bit different perhaps was I was fortunate to have lots of different opportunities early.

It would be wrong to call it a plan.

It was more about just saying yes to things.

But what it meant was I had the chance to work in open cut mines, underground mines, doing geostatistics and building resource estimates exploration, taking different projects all the way from discovery through to the studies to show their economic through to production.

I ended up working for some of the world's biggest miners like New Pneumont, helping to run junior explorers, uh ultimately doing a lot of corporate development work, analyzing other deposits as potential acquisitions.

So I sort of ended up as a Renaissance geologist with a broad set of skills and I didn't know it at the time but it was actually very well suited for analyzing metals and mining investments and you know I've been fortunate to be able to hone that here with the team at SPR for the last seven or eight years as a portfolio manager and an investment strategist And you know, if you'll indulge me, the team that we have as co-ps at Sprat is very complimentary.

We've got Shri Kaka who's just a wizard on financial analysis and markets and Maria Smanova who's one of the world authorities on silver markets if you ask me and you know work directly with luminaries like Eric Sprat.

So, you know, we've got a very well put together team that I think is one of the best anywhere. >> Yeah.

And that really ties into our heritage at Sprat.

Um, I think that's one of the things that really sets us apart from other asset managers.

Uh, our expertise really is in the metals and mining space and we have, you know, at a corporate level, we have decades of experience uh in that, but you know, folks like yourself have much more specialized experience within the sector and uh we do have a very deep bench of investment professionals.

Um can you describe a little bit about the team's investment process and what that looks like in an active strategy? >> We like to characterize it as the intersection on the vin diagram of topdown sector analysis where that overlaps with bottomup stock selection.

You know we work in a cyclical industry.

All commodities go through boom and bust periods of varying lengths and intensities.

But in the metals universe, it's not all at the same time.

One mineral or industry can be very much in vogue while another languishes in purgatory.

So the starting point from a top down has to be understanding where you are in a given cycle and what the supply demand fundamentals are.

And then once you've identified the industries and themes you think are positioned for success and investable, you have to have both, then you need to select your investments.

And you know, it's worth saying at the outset that I have a bias towards quality and I have a bias towards value.

There's a time and a place for leverage at different stages in the market for turnaround stories, but I'm always going to be most comfortable when I feel like we've backed, you know, the very best management teams, the best discoveries, you know, the sorts of projects that are so good that other companies will ultimately feel like they have to own this and be willing to pay a premium for it. and where those things come together, you know, you look for well-run businesses which, you know, have ethical management with relevant experience, companies with clean balance sheets, strong share structures, holding high quality assets. >> Yeah.

And I think one of the main differentiators that, you know, you from a geology perspective, but as well as other members of the investment team really bring to the table is, uh, you're actually doing site visits.

Um, you know, we've talked before, uh, you and other members of the team have visited more than 40 countries and on average you do up to 30 site visits a year.

Um, can you talk a little bit about what that evaluation process looks like when you go to these mine sites? >> You know, the site visit is one of the key differentiators of some of our actively managed products.

And even after doing these for decades, I still find new ways to pull out value and help shape our investment decisions, our investment sizing.

You know, before we even get to site, there's a lot of screening that happens.

There's a lot of due diligence to get to the point where it's like, all right, well, we need to try to resolve this.

But ultimately the whole process is about minimizing risk and maximizing returns.

One of the best ways to minimize the risk is to be able to go deeper and deeper and deeper with your due diligence.

You know, whereas somebody who comes from a purely financial and accounting background would be able to look at profits and losses and you know, we do that also.

But if you're able to understand the controls to what one of these miners is trying to mine and see how they've put together their estimate of the resources and understand where they've been aggressive or conservative in their assumptions, that's a powerful insight to have for thinking about what they'll be able to achieve.

There's some things that you can only see through the lens of experience.

Uh I'll anonymize the companies in the examples perhaps but I remember you know going to a site where a project was under construction and the company had told the public that they were going to be producing concentrate in 3 to 6 months and they had a percentage of completion out there which when I went and looked at it there was just no way you know they didn't have nearly enough structural steel fill out.

There wasn't concrete floors in the workshops.

There was delays on mining projects are a big deal.

They cost money.

You know, often you've got debt providers who want to get paid back.

So, you know, I formed an opinion that that was not going to happen and we were able to adjust accordingly.

There's times where well at all times culture is important and culture is you know not something you can pick up across a 20 minute speed day at a conference.

It's one of the things you see better when you're in it.

There's been times where we've visited a site thinking the comp thinking that the company was overvalued and maybe a potential cell, but you get there, you talk to management, you realize that there's a shared vision across different departments.

You see the mill foreman talking about how he's got an inexpensive fix that can lift recoveries.

You see the technical services team working together to optimize the mind plan in real time because there's changes dayto day and you know everyone's not just you know they're not arguing about where the goal line is.

They all know that they're arguing about how to get there fastest and you know there's times we've left site thinking it's a cell but realizing it's not it's not it's actually an ad.

And you know, these guys do have some uncertainty in what they're doing, but they're all pulling in the same direction, and we needed to be part of that.

So, you know, these are some soft things and hard things that you can only get from site visits. >> Yeah.

And on this channel, we spend a lot of time talking about critical materials, things like uranium and copper and silver.

Um, but one of the things that makes metal unique is that it will also provide exposure to, you know, other metals that aren't necessarily critical materials, but they're very important to, you know, growing infrastructure, things like steel and the platinum group metals.

Um, can you talk a little bit about what makes those metals so important? >> Steel is part of our world.

It's essential for, you know, what we do.

And if we talk about energy, steel's not the first thing that springs to mind, but it's an infrastructure enabler is the tag line that I've ended up on.

And you know, we need steel.

It's going to be there for not just, you know, all the buildings, but all the wind power, all the hydro, all the nuclear, any sort of energy, electric vehicle that you come up with.

We're going to be big consumers of steel.

Right now, steel accounts for almost 10% of our fossil fuel emissions.

That's more than all the cars and planes in the world combined. looking for some way to think about your impact on steel is very important.

And there's a niche sector internally in the steel industry that's still off the radar for many which is growing very quickly and that's green steel.

And that's the corner that we're excited about.

We think it's revolutionizing the industry.

Instead of using old blast furnaces which have to be fed with uh coal and traditional products are very energy intensive.

The newer electric arc furnaces are fed from recycled products and direct reduced iron or DRRi feed.

And the green steel sector is more energy efficient.

It's cheaper and faster to build.

It has lower operating costs, way lower emissions, lower regulatory hurdles.

So that's the corner of the steel market that we're particularly excited about.

And you know, the fact that you can marry the economic benefits with much lower emissions really makes it a nice win-win. the platinum group metal side of things.

There's six platinum group metals altogether, but the main ones are platinum, palladium, roodium, and aridium.

Uh, you know, these things go into catalytic converters, they go into fuel cell electric vehicles, they go into hydrogen production.

And across the world, increasingly, major economies are realizing that they're critical. the US, the UK, the EU and China all have these down as important to their domestic growth and economies.

Uh, one of my co-PMs, Shri Kakukar, was on an interview last month and he pointed out that platinum's been in a structural deficit for coming on to three years now.

You put that together with stock piles going down and you've got a recipe for the price action to respond.

I think platinum's up 50% this year and that demand's only going to keep rising as countries enact stricter and stricter emission standards.

The hydrogen economy keeps going.

There's not many substitutes available for these things.

And on the mining side, we've had chronic underinvestment in new supply.

There haven't been new discoveries coming on.

So you've got a really strong setup that we think could lead to continued price appreciation. >> Yeah, that uh underinvestment and you know supply difficulties is something that we've seen prevalent throughout a lot of the metals that we talk about on this channel.

Um I think one thing that is really interesting about the mining sector is that this is an area where active management can really add a lot of potential value.

Um when you start looking at dispersion of returns for example amongst the miners if you look at the average over the last 5 years top performing miners have um underperfor or outperformed uh the bottom performing miners by about 612% per year.

What are some of the reasons that we see such drastic differences in performance amongst the mining sector? >> There's a few uh you know as a starting point.

We talked before about the broader metals and mining complex and the different constituents each of which has its own orbit and its own price cycle that it goes through.

Obviously, if you've got some sectors that are weak and some are strong, you've got to set up for a wide dispersion of results.

You complicate that when you realize that different metals influence each other, you know, with substitution or related markets.

Uh, some of these things get mined as byproducts. you've talked before on this show that I've heard about, you know, a lot of the big copper miners actually make a surprising amount of silver.

Um, the venadium markets impacts impacted by what happens in the steel market because it's a big additive into that.

We've seen rapid changes in battery chemistry when thrifting comes in and that affects things like cobalt, nickel, manganese.

So leaving aside that as a driver for a wide dispersion of results like you touched on, you do tend to have a small number of companies that deliver outsiz results and that happens in lots of naturally occurring phenomenon.

We see it in cities, we see it in uh wildfires, earthquakes and you see it in all bodies.

There's going to be a few monster bodies that'll deliver a lot of the value and then a lot of average ones at the other end.

And we see it in share price performance as well over appropriate time periods.

And that, like you touched on, is arguably one of the strengths of well-run active management where you've got a team who's able to adapt to that changing environment that I talked about, who can be a breast of technological breakthroughs, you know, react to changes in government legislation.

And if you're able to be nimble there, there's opportunities for outperformance and that can impact performance. >> Yeah, I think this really feeds into kind of what we do at SPAT.

When we do decide to bring new strategies to market, we tend to take a very thoughtful process uh particularly as it relates to our ETFs, which we've really been expanding here over the last several years.

Um we'll look at um you know what are the long-term opportunities within the mining sector and uh where we think that's favorable.

We also look at uh gaps in investor options and look at where our strategies can kind of align with our core values and our expertise in the metals and mining.

Um all that being said as we've recently rolled out metal um why in your view is this a good time for metal to become available to investors?

I couldn't be more excited about metal launching now.

Uh I think if you're able to see through some of the shortterm perturbations going on in the economy, you know, look through the tariffs and the changing trade policy and some of the uncertainty there today. the longterm drivers for commodities.

It's all about, you know, the global growth and the humanities that, you know, I think we're seeing a a Malcolm Gladwell like tipping point where the public consciousness or the trend for what we're going to need for the medals to deliver for us to, you know, sustain the population growth that's coming in the next 25 years.

We're going to have pushing up against 10 billion people here.

That means massive investments in infrastructure.

They're all going to want homes, schools, hospitals, and especially power.

You know, a lot of those people will be in developing economies with young populations and rising incomes, and they're going to want to bring their lifestyle up.

And that means bigger living areas, air conditioning, and that means power generation in uranium.

It means power transmission in copper.

Those two themes means more urbanization.

Cities use way more materials than rural areas.

More steel, more copper.

You look at what's happening in the developed world with technology and the rise and rise of AI.

You know, the consumption of data centers has gone up 60% in three years and it's projected to double in the next five.

That's crazy.

You know, we're going to our infrastructure is just not set up for that.

We're going to need more energy and more metals.

And then you layer in things like uh supply chain security, friend shoring, strategic stockpiling, uh the decarbonization trend where we've spent $2 billion last year on cleaner non-traditional energy sources.

I couldn't be more excited about the timing for this product and the impact I think we'll be able to have. >> Yeah, and thanks for that, Justin.

We're just about out of time here, so thanks for your insights today. >> My pleasure.

And that's going to do it for another episode of Metals in Motion.

Uh be sure to hit our season 2 playlist in the description section below.

There you can watch all of our archive shows where we discuss things like silver, uranium, copper, and uh the metals market in more detail.

Uh also be sure to jump over to spatet.com.

You can learn more about metal as well as our suite of ETFs and also provide access to our uh research and our insights uh for all things metals and mining.

Thank you for watching and we'll see you next time.