[00:03:10] Lucas White: What you can do is you can look at the valuation of the companies, and oil and gas companies are extremely cheap right now. Generally speaking, commodity producers in general are very cheap right now. Historically, oil and gas companies, metal and mining companies kind of, they’ve traded at about a 20% discount in a.

[00:03:31] Lucas White: Relative to the broad equity market going back to the 1920s, just to give you a sense for how cheap these companies are right now, that discount is more like 55, 60% discount relative to the broad equity market. It’s hard to know what’s gonna ha commodity prices next year. Commodity prices are going to have a big impact on how these companies are valued or rewarded by the market.

[00:03:52] Lucas White: But the companies are very cheap and I suspect will deliver pretty reasonable, if not very exciting returns over the medium.  

[00:04:00] Rebecca Hotsko: Okay. I was gonna ask you that if you think the energy sector is still cheap because it was the best performing sector, it had massive gains over the last year, and I was wondering at current valuations with the unknowns of recessionary risks and the potential downgrade for demand if we enter a recession.

[00:04:19] Rebecca Hotsko: If that would kind of hurt the outlook or put the energy sector maybe in an overvalued territory, because I know looking relative to its own history, the multiples are a bit higher now compared to its own history. And then you were comparing it to, was that the total market then? 

[00:04:37] Lucas White: Yeah, I was comparing it to the, the broad equity market, the s and p 500.

[00:04:41] Lucas White: Just to give you a sense, once again, historically commodity producers once again, oil and gas companies, metals and mining companies have traded at about a 20% discount to the market. Right now, that’s more like 55, 60%, but if you were to go back two, three years ago, we saw that discount hit about 80%.

[00:04:58] Lucas White: 80% discount of the broad equity market is probably unprecedented. There’s probably never been a significant sector of the. It’s treated at an 80% discount to the broad market, yet we knew with more or less absolute certainty it would exist in something approximating its current shape and form 10 years into the future.

[00:05:16] Lucas White: It’s just unheard of. Right, and so that strong performance that you’re referencing over the last couple years, that strong performance from an extremely low base. Another way of thinking about it is if a stock drops 90% and then it rallies 200%, yeah, it’s gone up 200%, but it’s still down 70% from where it started.

[00:05:33] Lucas White: These stocks had. Especially relative to the broad equity mark by a dramatic amount. And yes, they’ve outperformed, but they’re nowhere near kind of the valuations that we’ve, we’ve seen historically. They’re still extraordinarily cheap along a number of dimensions. And if you thought, once again, I don’t believe that anybody can predict commodity prices, but if you thought commodity prices were gonna stay flat, not even go up from here.

[00:05:55] Lucas White: You thought oil prices, iron ore prices, copper prices, et cetera, we’re gonna stay flat from here for the next 10 years. Resource companies would deliver a very, very strong return in that kind of a world. 

[00:06:07] Rebecca Hotsko: Is that something that you really look for in your company’s ones with the lowest breakevens?

[00:06:12] Rebecca Hotsko: Because every operator obviously has different breakeven points, but many are well below the prices we’re seeing today. So even if we saw significant decreases down to 60 or 50, many would still do very well. 

[00:06:27] Lucas White: Oh, absolutely. I mean, you can find companies. We, we typically model some right now in, in the oil space, something around $70 oil, which is just, quite frankly the trailing average five year price for oil.

[00:06:38] Lucas White: What the, we don’t think we can predict oil prices, but you need an input to put into your financial model. What are you gonna use? You have to use something trailing average price around $70. So if oil’s bouncing, I mean, it’s been up to 120, but if it’s bouncing around 80, 90, a hundred, 110, $120 a barrel.

[00:06:57] Lucas White: Well, sure oil prices could drop substantively, and these companies could still deliver, I don’t know, something like 10% free cash flow yields, which in this moment in time, I think a lot of people would be excited about 10% returns if, if oil prices stay at higher levels than that. If they stay, let’s say at $90 or $95 or a hundred dollars a barrel, now you’re talking about 15 to 20.

[00:07:18] Lucas White: Free cash flow yields and generally speaking, we believe that free cash flow yields are what investors are entitled to or what are they’re gonna earn over the long term. 

[00:07:27] Rebecca Hotsko: That’s really good to hear your perspective because I know some investors might have thought they missed the boat on this. I guess thinking a bit more long-term, are you of the view then that were in this new long-term commodity bull cycle and this is just the beginning of the run in a longer energy boom.

[00:07:47] Lucas White: It’s hard for me to sit here and, and say that I can’t predict commodity prices and then give you a strong, bullish view on where commodity prices are gonna go. But I do think that the dynamics in the resources sector are [00:08:00] conducive to rising or, or at least very high commodity prices. And so there many commodities are at elevated levels right now.

[00:08:06] Lucas White: So even if they, once again, if they were just to stay flat from here, coal prices, for example, were $50 a few years ago and, and have been hovering around $400 300 to $400 in in the last year. So some of the things that it would support high commodity prices. First of all, you. Almost three, what I call relentless drivers of commodity demand.

[00:08:25] Lucas White: First of all, the population is growing. We’ve added about a billion people to the planet in the last 10 years, which is insane. I mean, think about that number. A billion people have been added to the planet in over a 10 year period. That is a lot of mouths to feed. It’s a lot of housing that you need, a lot of infrastructure, a lot of food and water.

[00:08:43] Lucas White: It’s a lot of natural resources go into supporting a billion incremental people and we’re not stopping there. So we’re at about 8 billion people right now. The un, which by the way is historically been very accurate in projecting population growth. The UN projects us to get to about 9.7 billion by [00:09:00] 2050.

[00:09:00] Lucas White: So these are wild numbers and have huge implications for commodity demand. But perhaps more important than that, you have countries like China, India, even Indonesia, parts of Latin America, Africa, who are going through the stage of economic development that is incredibly commodity intensive. You’re building out your cities, your infrastructure, your electric grids, et cetera.

[00:09:21] Lucas White: You need a lot of copper and iron ore and cement and aluminum and, and all of these things. Is a process that doesn’t take five or 10 or 20 years. It takes many decades. Even for the us, the uk, Japan, other countries that have gone through that stage of development, it takes decades. Well, none of those countries had 1.4, 1.5 billion people the way China and India do.

[00:09:43] Lucas White: So how long is it gonna take those countries to go through that stage of development? It could be a century or more. And who knows what it looks like for a country with a billion and a half people to go through that stage of development. Time will tell. This is an unprecedented experiment. Nothing like that has ever happened in the [00:10:00] history of the world.

[00:10:00] Lucas White: That’s the second relentless driver of commodity demand. And then third one is clean energy. Clean energy is brilliant. Everybody loves it. Guess what? It doesn’t mean you’re done with natural resource. You’re just using a different set of natural resources. So rather than our global economy revolving around coal, natural gas, oil, our economy, our a clean energy economy, is gonna revolve around copper, lithium, nickel, cobalt, vanadium, platinum, group metal, silver, you know, it’s just a different set of materials.

[00:10:27] Lucas White: That you need. And if we are serious about getting to a net zero world, there is going to be much more demand for those clean energy materials than anything we’ve ever seen before. And, and there are real questions, quite frankly, about whether where we’re gonna get it all, and more importantly, at what price?

[00:10:42] Lucas White: If you need that much more copper, that much more lithium, that much more nickel than the world has ever needed before, how much is it gonna cost us to extract that and transport it to where it needs to go and be used in, in its end markets? Here are these three drivers of demands that any base, reasonable base case you [00:11:00] have is that all three of those are gonna play out.

[00:11:01] Lucas White: Not one of the three, not two of the three. All three of those are going to play out. Should be your base case, unless you’re kind of out of touch on the supply side. The issue is that we’ve been under investing for years now, so commodity prices or metals prices peaked in 2011, meaning at the end of the the China driven commodity supercycle.

[00:11:21] Lucas White: Oil prices peak middle of 2014. Commodity prices fell for a number of years. What did the commodity producers do in reaction to that? Well, they slashed CapEx. They slashed it pretty substantively. Then what happens? Covid hits. What do you think the commodity producers do when Covid hits they slash CapEx?

[00:11:40] Lucas White: Again, now Covid is not in the rear view mirror. We’re learning to live with it, I guess. But now looking forward, what does the world see? We see a global recession. Do you think the commodity producers are gonna dramatically ramp up production in the face of, of a recession? It, it seems unlikely. There’ve been slight upticks in CapEx, but just to put it in perspective, CapEx [00:12:00] levels over the last year or two have been at 15 year lows.

[00:12:02] Lucas White: And by the way, not just low. Like about half the level of where we were about 15 years ago and about a third of, of where we were at the peak of, of the China driven Supercycle. You have these companies investing a fraction of what they used to invest into commodity production to make things a little bit worse.

[00:12:20] Lucas White: Than being at a 15 year low or a half, you know, of where we were 15 years ago. We use a lot more natural resources now than we used 15 years ago. So when you look at copper, iron ore, coal, well, not coal but copper, iron ore, natural gas, major commodities, coal we’ve been trying to get off of. So it hasn’t grown as much, but for a lot of these major commodities that drives the world, almost literally, you’re talking about about 40% more consumption of these major commodities than we had 15 years.

[00:12:47] Lucas White: So we’re investing half as much in commodity production despite consuming, in many cases, 20, 30, 40% more of these commodities for lithium we’re consuming much more than that relative to where we were 15 years ago. And [00:13:00] on top of all of that, if that is an a grim enough picture for you, it takes about 10 years.

[00:13:05] Lucas White: It used to take seven to 10 years for a commodity asset to come online. You’ve identified the asset, you’ve done your due d. But now you’re getting into the point where you’re gonna develop that asset and try to bring it to production from when you really get serious about it, until production actually starts flowing.

[00:13:20] Lucas White: You’re talking about a seven to 10 year period with what people would historically guide. Well, now that’s become more like 10 plus years. Environmental hurdles, permitting issues, everything’s become more difficult. And by the way, we’re not doing the easy projects anymore. We’re doing much more difficult, much more capital intensive projects, which is another thing.

[00:13:39] Lucas White: We’re investing half as much yet it costs a lot more per unit of production than it costs 15, 20, 30 years ago. The supply side and expectation is going to be challenged. The demand side. It’s really hard to have a base case scenario where the demand doesn’t increase pretty dramatically for resources across the board.

[00:13:58] Lucas White: So I know that was a long answer, but while I [00:14:00] can’t give you kind of what do I think oil prices are gonna be, or copper prices or nickel prices, I can tell you that the long term supply demand dynamics would seem to be conducive to prices being high and perhaps rising substantively from. 

[00:14:13] Rebecca Hotsko: That was extremely helpful.

[00:14:15] Rebecca Hotsko: All of that detail is exactly what I was after, and I think it’s so interesting hearing you speak about those different elements, particularly supply and why even at these really high prices, you would expect producers to just be ramping up. But it’s not really the case. And do you have any more color to paint on that?

[00:14:35] Rebecca Hotsko: Like how much have producers really ramped up compared to usual or maybe what was expected in this high price environment? 

[00:14:43] Lucas White: They’ve barely budged off of lows, big picture. And actually inflation is high. So that’s, some of those, those increases in CapEx and guidance are kind of in nominal terms. So yeah, we’re gonna increase, but in real terms, it may turn out that they’re just trying to keep up with inflation and, and of [00:15:00] course there have been inflationary pressures on commodity production side of things.

[00:15:04] Lucas White: Yeah. What happened is that, or at least part of what happened, I’m not gonna claim this is the entire story, but part of what happened is that in the commodity supercycle, once again, these companies did ramp up CapEx pretty dramatically. Commodity prices were high. Companies wanted to capitalize on those high commodity prices and rake in profitability associated with it.

[00:15:21] Lucas White: So they ramped up. Production, they put a tremendous amount of Tap X in unprecedented levels of CapEx and the energy and metal space. And it’s very, very hard, if not impossible to get it exactly right. Right? Like what’s over investment versus under investment versus the exact right level. It’s you’re, you’re talking about threading the needle, right?

[00:15:41] Lucas White: And how are you gonna thread the needle when you have hundreds of participants around the world, a lot of whom are yahoos and, and whatever. Like you’re, you’re not gonna get that group of people to agree on doing something reasonable, even if it there was a real number that you were targeting. So there was a tremendous amount of what in retrospect, ended up being over investment and [00:16:00] what happened?

[00:16:00] Lucas White: New supplies started. Eventually it took a lag, right? Commodity prices, well, I guess they peaked in 2007 and 2011, but oil prices peaked at $150 a barrel in, I guess the middle of 2008. I believe so, but it wasn’t until 2014 because of that distance, once again in time space to how long it takes projects to come online, you had all this new supply flood.

[00:16:22] Lucas White: The markets that helped to put downward pressure on commodity prices. And how do you think the investment community reacted to that? The investment community, generally speaking, went to these companies and said, you’re a bunch of morons. You have no idea what you’re doing and just return capital to us.

[00:16:37] Lucas White: Why would you go out? You always do this. You invest at the peak of the cycle and you divest a pet trough of the cycle. You’re a bunch of buffoons. Just give us our money, give us our capital, pay us dividends, repurchase, share. Do all the things that we as equity investors want you to do. What did the company start doing?

[00:16:55] Lucas White: They started paying out dividends, and you look at, at this period of time in which they [00:17:00] slashed their CapEx, while they’re slashing CapEx from, let’s say 2014 to to 2020, they’re ramping up their dividends that they’re paying out. They’re increasing their share repurchase programs. They’re returning capital to investors just like investors.

[00:17:16] Lucas White: Now we’re expecting these companies to do what? Change stripes. All of a sudden, like they got the message loud and clear. Don’t over ingest. Don’t invest at the peak of the cycle. Try to be competent professionals and now they need to be investing, but they’re not incentivized to. They’ve gotten the message loud and clear what their investors want from them.

[00:17:33] Lucas White: We kind of deserve what we get, I guess to some extent in the financial services industry if we end up bearing the brunt of, of high commodity prices because we were roundly scolding the management teams of these companies. And by the way, I’ll just mention that, that entire idea that these companies always invest at the peak of the cycle and divest at the trough of the cycle and that they’re incompetent and these management teams don’t know what they’re doing.

[00:17:55] Lucas White: It’s totally implausible, right? It, it doesn’t, it, it is so deeply ingrained. [00:18:00] Believe me, I talked to hundreds and hundreds of investors. In the resources sector. I talk more or less constantly with people who are looking at these companies that is a very ingrained meme or belief or, or what have you, but it’s just so implausible.

[00:18:14] Lucas White: Why would the Exxons and Chevrons and BHP Bulletins and Rio Tintos of the world get a, a monopoly on incompetent management? Right? Like they make billions and billions and billions of dollars. You don’t think they’re going out and getting super smart people, really talented, bright people who are capable and competent and know what they’re.

[00:18:33] Lucas White: Of course they are. It’s just, it’s very difficult to run a company if you don’t know if your product is gonna be $150 a barrel or $10 a barrel or somewhere in between. That is a difficult game to play. I personally put me in charge of Proctor and Gamble, right? I can figure out if a tube, a toothpaste, should be $3 and 25 cents or $3 and 15 cents.

[00:18:55] Lucas White: That seems like the kind of uncertainty that’s pretty easy to live with, but you’re an oil company. What [00:19:00] do you. You don’t know what the price of oil’s gonna be. They don’t know any better than anyone else what the price of oil’s gonna be. They’re a little bit more knowledgeable about the volatility, what can persist for a period of time, what’s profitable for them, but, but they don’t know any better than anyone else what oil prices are gonna be.

[00:19:14] Lucas White: They certainly didn’t know oil was gonna drop to $10 back in 2020, and they had no idea it was gonna rally to $120 earlier this year. It’s just a very, very difficult kind of business to. And, and if it’s a difficult kind of business to run, it’s difficult to invest in as well, which is why these companies typically trade at such substantive discounts relative to, to fair value.

[00:19:37] Rebecca Hotsko: And you said it right there. I think for the average investor who is managing their own portfolio, analyzing and coming up with intrinsic value assessments for other financial companies is a lot easier than it is for a commodity company. There are so many other things and aspects that need to go into your analysis, and that’s why I think it’s.

[00:19:58] Rebecca Hotsko: So hard to do, but it doesn’t mean [00:20:00] that we can’t invest in them. And so I guess I’m just wondering, hearing your view on this, what are some segments of the market or companies, if you would like to share any that you are particularly bullish on or think would offer the greatest long-term investment opportunity?

[00:20:16] Lucas White: Well, the truth is that the opportunities are pretty strong across the board. You mentioned earlier that the prices had bounced back a bit for energy C. But just to put things in perspective, our resources strategy, which I run, I believe the PE is like six for it. And by the way, it’s not all deep value stuff we’re doing.

[00:20:34] Lucas White: We’re investing in clean energy and clean energy materials and companies that have pretty solid long-term, if not very solid and very exciting long-term growth prospects. When you look at these companies, they are trading at very, very cheap levels relative to their current ability to generate cash flow on behalf of their investors.

[00:20:52] Lucas White: Now, if commodity prices were to drop 50%, obviously they wouldn’t be as cheap, but at their current kind of cash flow generation [00:21:00] rate, these companies are extraordinarily cheap. So what looks attractive, well, fossil fuel companies are, are kind of deep value, right? They’re trading once again at very, very restrained levels relative to their ability to generate cash flow within the, on the clean energy side of things, which we invest in as well in in our resources strategy, and maybe it’s not a commodity producer per se, but it’s in the, the commodity arena, it’s in the energy sector.

[00:21:24] Lucas White: Clean energy companies are trading at reasonable valuations, attractive valuation levels, but have much better growth. You’re not gonna find a lot of clean. You can find oil companies trading it, and I’m not exaggerating. Companies like Petrobras, whatever, that are trading at two times earnings, three times earnings, four times earnings, or so on and so forth, you’re not gonna find that in clean energy.

[00:21:44] Lucas White: But you might find a company that’s trading at 13 times earnings, 14 times earnings, 10 times earnings. That has much better growth prospects. And so ultimately it’s impossible to know X andante, which one’s going to work out to be a better investment. But they’re both positioned to generate very strong returns with very different growth [00:22:00] profile.

[00:22:01] Lucas White: On the metal side of things, you see a similar bifurcation. You see iron ore companies, for example, trading at very, very cheap levels, but then you find copper or lithium nickel, kind of the clean energy materials that I’ve referenced a couple times already. Those companies are trading at reasonable valuation levels as still attractive valuation levels, but once again, have much better growth prospects.

[00:22:21] Lucas White: These companies that produce clean energy materials are going to make a lot more money over the next 10, 20 years than they ever have before for two very simple reasons. One, we’re gonna need a lot more copper, a lot more lithium, a lot more nickel than we’ve ever needed before. It’s not gonna be by a little bit.

[00:22:37] Lucas White: It’s gonna be by a lot. So they’re just going to be selling more metric, tons of material at the same time. It is highly unlike. Well, I’ll, I’ll put it a different way. It is guaranteed that there will be periods of shortage where supply can’t keep up with rapidly growing demand for these clean energy materials.

[00:22:54] Lucas White: So while the companies might not be as superficially cheap as a company like Vale, the, which is the world’s biggest [00:23:00] iron ore producer, they have much better growth prospects. They’re still trading at reasonable valuation levels, but have much better growth prospects and ag and water. We see opportunities, but not quite as exciting as what we see on the energy and metal side of things.

[00:23:14] Lucas White: That’s really 

[00:23:15] Rebecca Hotsko: interesting to hear cuz I wanted to get into the clean energy side of things with you later, but I’ll just ask this now since you touched on lithium and copper. I’ve been looking into that a lot recently. And just lithium in particular with the applications in the semiconductor space. And so you mentioned that.

[00:23:33] Rebecca Hotsko: Supply could be constrained. And I was wondering where do you see, I guess, those metals going? Because on one hand, if the supply can meet demand, then the price might not go up as much as expected. But do you, I guess, is your view then that you think there will be real shortages in some of these key metals that are needed for clean energy and all these other applications?

[00:23:56] Lucas White: Unless something happens that isn’t happening [00:24:00] now, there will be shortages that is, and when I say, you know, the world is an unpredictable place, could China invade Taiwan and could we end up in World War III and or nuclear war or whatever might happen right there? There are scenarios that you could come up with.

[00:24:16] Lucas White: Which commodity prices fall where we don’t end up. Who cares about if you’re in the midst of a nuclear war, stop worrying about climate change, right? It’s just not a great use of your time. Right? Hunker down in, in your bunker or whatever. You can come up with scenarios, but if your base case view of the world is that the world is going to operate in any semblance of what we’ve gotten used to over the last 60, 70 years and we’re going to need to address climate change because it’s an existential threat for life as we know it or, or as we’ve become accustomed to it, then there’re gonna be shortages.

[00:24:49] Lucas White: They’re just, we know what projects are there. One of the nice things about the commodity arena is that once again, because of the long lead times for commodity producing projects, you have a pretty [00:25:00] good sense for what supply is gonna be for the next 10 years, and you have a pretty good sense for what demand is going to be in a base case kind of view of the world.

[00:25:09] Lucas White: And if you think that China’s gonna continue growing a bit, that the world is gonna, G D P global GDP is gonna continue growing a bit that India and Indonesia and some of these other emerging countries are going to start or continue, I shouldn’t say start, but they’re gonna continue to develop their economies and that we’re gonna have to address climate change and that the population is gonna continue growing on the planet.

[00:25:29] Lucas White: If you believe these pretty, I don’t know, easy to believe things are going to. There is not enough supply currently in the pipeline for these various commodities to meet that growing demand. 

[00:25:42] Rebecca Hotsko: And then I guess the other thing on energy producers, A lot of them have initiated good or some climate change plans in their strategic planning and net zero targets.

[00:25:56] Rebecca Hotsko: But I guess what makes a good or a long-term growth clean [00:26:00] tech company for you? Because a lots of these companies have introduced that, but does that not necessarily cut it for you? 

[00:26:08] Lucas White: It depends on what strategy I’m thinking. Big picture. The way I think about the group that I run is that we’re, we’re focused on doing research into the energy, metals, agriculture and water sectors.

[00:26:20] Lucas White: And then we have different portfolio implementations based on that research. And so we might do research into a company or an industry that ends up being expressed across a broader range of our strategies. Or it might be specific to just resources or just climate change, if that makes. When I think about, I, I think you’re referencing kind of Royal Dutch Shell and companies like that, that are oil and gas companies that, but that have been putting a lot of money into to clean energy efforts.

[00:26:46] Lucas White: Well, I shouldn’t say a lot of money. They’ve been putting some money, which is a lot in absolute terms, or it sounds like a lot to people like me and you, but relative to the amount of CapEx that they’re putting into continued oil and gas operations, it’s still falls far. [00:27:00] So are those oil and gas companies or are those clean energy companies using Shell as an example?

[00:27:05] Lucas White: Shell’s an oil and gas company, right? They might be doing a bunch of clean energy stuff, but it isn’t what is going to drive the profitability of their business for the foreseeable future. It’s good that they’re doing that. I guess we do worry about whether that’s their management’s area of expertise.

[00:27:21] Lucas White: It’s reasonable to question that entire kind of divestment approach or belief, or that every single company needs to transition to net zero. As an economy, we need to get to net zero. As an economy, we need to address climate change. Does every single company need to do it or do you need to do it in aggregate?

[00:27:40] Lucas White: And do you really want your oil and gas company, which is, that’s their area of expertise, spending all of their time thinking about, or not all of their time, but being distracted by doing solar and wind and, and electric vehicle charging and things which aren’t their core competency. And by the way in many cases are lower expected return [00:28:00] projects for them.

[00:28:00] Lucas White: It’s not implausible to think that these companies are actually destroying a little bit of value with their clean energy efforts. And it’s also not implausible to think that it’s not really impacting the world in any substantive way because if they don’t do these projects, someone else will do the projects.

[00:28:16] Lucas White: And maybe that is their core competency and what they’re good at and, and what they know and where their expertise. I guess, I think it’s safe to say we’re skeptical of fossil fuel companies transitioning to become clean energy companies. You also have the happiest problem that if your shelf, for example, they put a bit of money now for a number of years into their clean energy efforts.

[00:28:37] Lucas White: So now what you have is a low multiple business with a high multiple business trapped. So if you wanted to maximize the value of Shell, what should you do? Obviously you should spin off their clean energy unit because it is higher growth and more popular and more politically palatable and all those other things.

[00:28:57] Lucas White: It will trade at a higher multiple than their fossil fuel [00:29:00] business, and you’ll get a, a, a multiple expansion on that part of the business. That is what would maximize Shell’s shareholder value. But what would the investment community do? They would start harassing shell and say, Hey, shell, you have to add some clean energy stuff to your business again, because we want you to be net zero aligned.

[00:29:19] Lucas White: Like some of the core premises of a lot of these things don’t make sense. I would argue without hopefully offending too many people that divestment from fossil fuels doesn’t make sense. You, you, the worst thing you, you think that climate change is bad. You know what’s worse than climate change? It would be shutting off the taps on fossil fuels.

[00:29:37] Lucas White: Right now. You wanna see chaos in blood. Turn the tops off on fossil fuels. There will be blood in the streets within minutes or days, right? Like it would be mass chaos. We need fossil fuels right now. Globally, there’s no solution I wish, called fusion, which, and, and all these other things that get talked about.

[00:29:56] Lucas White: We’re ready for prime time and we’re here right now, but for the [00:30:00] foreseeable future, for the next few decades, we’re gonna need fossil fuels. So why are you demonizing in industry, which is producing exactly what the world needs in order to. And if you were gonna punish anyone, shouldn’t you be divesting from the massive consumers of fossil fuels?

[00:30:16] Lucas White: Why are you demonizing the producers? People aren’t out there producing oil and gas and coal for no reason. They’re producing it because it’s being demanded by other people. So why not divest from the companies that are demanding the fossil fuels as opposed to the companies that are producing it? To me, the divestment effort lacks intellectual.

[00:30:35] Lucas White: But it does, I guess, have some background in, in kind of one of the problems is that we end up subsidizing and supporting these industries. And so we, if you’re supporting the fossil fuel industry at the expense of, of moving to clean energy, then certainly that’s something that, that we wouldn’t want to happen.

[00:30:52] Lucas White: So I’m not totally against divestment, I just don’t think it’s a, a logical thing. It’s more of a political. 

[00:30:58] Rebecca Hotsko: You said so many [00:31:00] great things there, and it just makes me think about all these energy companies, whether they’re an infrastructure company trying to get more hydrogen pipelines, or they’re a producer with now carbon capture systems or whatever they’re doing to become more clean and how it could actually be detracting shareholder value because like you mentioned, it’s not, there are expertise and so when, as soon as they’re starting to move out into these different avenue, As share, which is demanded by them, by the public, by governments, by shareholders, it’s likely not in their benefit.

[00:31:31] Rebecca Hotsko: So I think that is so interesting, and you made such a good point with when you turn off the tabs, you realize how much it’s needed. We see that with the energy crisis going on in Europe. And so I actually did wanna ask you about that because I think there’s been some comparisons perhaps. This energy crisis compared to 1970s, and so I was wondering if you could touch on how you think these two periods are maybe different.

[00:31:55] Rebecca Hotsko: Is today maybe worse 

[00:31:57] Lucas White: even? I’m not sure that today is [00:32:00] worse. You know, it is. The impacts of the European energy crisis, unfortunately, for our European friends are largely within Europe, right? Like we are eating higher oil prices in the United States. Everyone globally is, but it’s Europe that’s really born the brunt.

[00:32:16] Lucas White: Of Russia’s invasion of Ukraine and the sanctions fall out from there and shutting down the pipelines and turning them back on and shutting ’em down again and, and all that kind of chaos. So it’s impacted us in the United States and it’s impacted other parts of the world, but it is really hitting the European community much harder than it’s hitting other parts of the world.

[00:32:34] Lucas White: But it is a great proof point. I mean, I don’t think I’ve said anything yet on this podcast. That isn’t something that I believed prior to 2022, but it’s great kind of intellectually and I don’t feel good about anything that’s happening in terms of Russian invading Ukraine or whatever. But it’s great to get that kind of.

[00:32:51] Lucas White: I guess what I, what offends me a little bit is the pie in the sky stuff, where you come up with solutions for the world that sound good, but they don’t get us [00:33:00] anywhere. Because if it’s not realistic, if it’s not cheap, quite frankly, because in the United States we can afford more expensive things, but there are other areas of the world and, and of course parts of our own country where people can’t afford extensive solutions.

[00:33:13] Lucas White: So we need cheap solutions, viable solutions, pragmatic, realistic, so, Not, we should go to a hundred percent clean energy by 2035 and, and get rid of oil and gas and coal completely. Like the, these are just not things that are gonna happen. I think Elizabeth Warren was talking about that a couple years ago, or a few years ago.

[00:33:33] Lucas White: She was talking about banning fossil fuel extraction completely, or, I don’t know, I can’t remember the details. It was a few years ago. You know, we need real solutions that are gonna help people in the short term, the medium term, but also have an eye towards the long term where of course, climate’s becoming a bigger and bigger problem for the world.

[00:33:50] Rebecca Hotsko: And so I guess as governments are making this push towards net zero, you kind of already touched on this, but how the demand for other resources will increase. And [00:34:00] so just touching on that again, can you talk a bit about which resources will benefit the most from the energy transition? 

[00:34:09] Lucas White: Probably the most guaranteed is Copper .

[00:34:12] Lucas White: So copper is really at the heart of most things in clean energy. When you look at wind and solar projects, they use four to 12 times as much copper as a comparably sized coaler natural gas power plant because they’re distributed generation. So there’s a lot more copper wiring and bringing everything together than when you have kind of a really centralized coaler natural gas plant.

[00:34:33] Lucas White: When you look at electric vehicle, They use three to four times as much copper as an internal combustion engine vehicle. Every electric bus that we produce has something uses something like 800 pounds of copper, which if you realize how scarce of a resource copper is, is a truly mind boggling number.

[00:34:50] Lucas White: We need to overhaul our electric grids to allow us to incorporate a higher percentage of renewable. And because we are electrifying our vehicle fleet, so the, you [00:35:00] know, historically used oil and diesel and things like that to run your cars, right? You see your transportation was run by fossil fuels, and then your electricity generation with some fossil fuels, but also some nuclear and hydro and wind and solar and whatnot.

[00:35:14] Lucas White: Well, now we’re electrifying our vehicle fleet. When you do that, what do you have? You have a much greater burden on your electric. Trillions of dollars need to flow into our electric grids, both to allow us to have a higher percentage of renewables in our generation mix, but also to service all of the electric vehicles and buses and everything else that, that are gonna be flooding the streets, a lot of copper and overhauling the grid energy efficient electrical components, appliances, et cetera, revolve around a lot of copper usage.

[00:35:43] Lucas White: Coppers, obviously the, the electric material of choice or whatever you, you want to call. Copper’s just kind of the oil of a clean energy economy, and we’ve, once again, we, we’ve never needed as much as we’re going to need. And unfortunately, you don’t find a lot of it, right? Like [00:36:00] companies when commodity prices, copper prices were high, at the end of the, the China driven commodity, Supercycle companies went out.

[00:36:08] Lucas White: They were looking for copper, right? They ramped up their exploration and discovery budgets by 5, 6, 7 times or more relative to what they had been. They didn’t find hardly anything. They found very, very little. Copper is kind of integral to everything in clean energy. So it’s not just betting on one technology, one solution for climate change.

[00:36:30] Lucas White: It’s kind of across the board. Clean energy solutions revolve around copper, and on the supply side it’s really constrained. Other things are kind of some of the kind of well known things. Lithium, nickel, cobalt, manganese, go into lithium ion batteries for electric vehicles. Vanadium is potentially gonna be a big long-term winner on the utility scale energy storage side of things.

[00:36:55] Lucas White: So people talk a lot about energy storage, but the embedded kind of [00:37:00] incumbent right now is just batching together a bunch of, well, I guess the, the real kind of solution when it comes to, to energy storage, at least at kind of utility scale is pumped tidera, where you pump water up a mountain into a reservoir.

[00:37:12] Lucas White: And let it flow back down and generate hydropower, which is great if you’re next to a mountain with a reservoir, right? . But it doesn’t do you much good in many areas of the world. Then when you’re talking about kind of energy storage that could be used anywhere. Now you’re talking about people batched together huge amounts of lithium ion batteries, but the longer term solutions are likely to be potentially at least a venatium redox flow storage systems.

[00:37:35] Lucas White: And venatium, obviously, as the name implies, would be a major input into those storage systems, which have different characteristics than what what you would get with lithium ion battery. It’s all pretty complicated and I don’t wanna go on and on and on about it, but there are a number of different materials.

[00:37:52] Lucas White: Platinum group metals, for example, would be used heavily in, in kind of hybrid vehicles. There are a lot of different materials that are used in different [00:38:00] applications on the clean energy side of things, but if you made me pick one once again, I would go a copper, just because copper’s used across such a wide range of clean energy.

[00:38:09] Lucas White: So, That’s so 

[00:38:11] Rebecca Hotsko: interesting to hear you talk about that, and it’s hard to ignore the, I guess, the opportunity in that space. And so for investors wondering, what do you think is the best way to invest in, say, the precious metals used to that are needed to meet this increasing energy, clean energy demand? If someone wants to invest in copper, these other materials you just talked about, what would you say is the best opportunity or way to do so?

[00:38:37] Lucas White: Well, I wouldn’t invest in the materials themselves or the futures surrounding them. I would invest in the equities that are producing those, those commodities or companies that service those commodity producers. Do you want a bet on copper? Don’t go out and buy. Not that many investors can do this other than institutional investors, but even for institutional investors, don’t go out and buy a copper future.[00:39:00] 

[00:39:00] Lucas White: If you wanna bet on copper, invest in a company that is making money, developing copper assets and producing copper. The problem with betting on futures or directly investing in commodities, any commodity, it doesn’t have to be copper, but any commodity is that the only way you win is if the commodity price goes up.

[00:39:18] Lucas White: If the commodity price doesn’t go up, you’re flat or you’re losing. If you’re investing in a copper miner who at $3 and 50 cent copper is gonna generate a real return of eight or nine or 10% a year, well, you’re gonna get eight, nine, or 10% a year out of that copper miner. Even if copper prices stay flat.

[00:39:36] Lucas White: Now, if copper prices go up, you’re gonna make a lot more than that. Investing in publicly traded companies that are producing these clean energy materials and investing in a basket of those companies and a basket of those underlying commodities via those companies would be my recommendation. 

[00:39:54] Rebecca Hotsko: That’s really helpful to know.

[00:39:56] Rebecca Hotsko: And I was actually just looking into a couple ETFs. I was [00:40:00] looking into a silver one and then an oil one. It was uso, but then you also have to worry about whether the curve is in backwardation or tangle, because that can impact the returns. Can you talk a little bit about that? 

[00:40:14] Lucas White: Yes. Let’s leave the futures out of it for a.

[00:40:17] Lucas White: Oil prices in real terms are flat-ish since 1925, which is when our data set goes back to, we can get oil prices before then, but our public equity data set goes back to 1925. Oil price has been flattish up, maybe 40 basis points per since 1925. Oil and gas companies are up over 8% per annum, real over the same period of.

[00:40:40] Lucas White: Look at metals, metals, prices, flattish in real terms over the last hundred years, same as oil prices. Look at the mining companies. They’re up closer to 9% annualized per year, after the last hundred years. So once again, that’s that. I didn’t call it an equity risk premium, but you would not invest in a company if you didn’t think you were gonna [00:41:00] get a return from investing in that, that company.

[00:41:02] Lucas White: And so companies are priced, equities are priced at a level such that they will generate a return, an expectation for you. Commodities are priced based on supply and demand at that moment in time. Totally different things, right? One is kind of a fallout. The other one is kind of an explicit intentionality from the investment community.

[00:41:21] Lucas White: We are intentionally pricing these companies at a level such that we think they’ll generate a return for us. I don’t know about you, but eight to 9% edge for the equities relative to the commodities themselves for a hundred years is a pretty big edge, right? Like that is you compound out 9% a year for a hundred years and compound out zero a year for a hundred years, and you’re at wildly, wildly, wildly different endpoints.

[00:41:45] Lucas White: Forget about the commodities themselves. The futures are basically investing in the commodities themselves. But to your point, you have other problems as well, which is that in the last 15 years or so, the futures curves have generally been upward sloping, [00:42:00] which means every time you go to roll your future, your expiring future into a a future that’s further out on the curve, you are selling low and buying.

[00:42:09] Lucas White: So if your oil, let’s say oil prices are at $90 and your contract is out to expire, you sell oil at $90, and then you go out and you buy the contract a year into the future, let’s say, and maybe that’s $97. That isn’t a good trade. Right. And generally speaking, that has burned the investors in commodity futures year after year, after year for quite a while now.

[00:42:32] Lucas White: The equities are much, much better than the commodities themselves. The commodities themselves much, much better than the futures on the same commodities. I’m sure there’s a counterpoint to that, but I can’t imagine what it was. And if someone’s trying to argue, I, I would be very skeptical. 

[00:42:49] Rebecca Hotsko: Yeah, you explained that so well. Thank you for that. I think sometimes that seems like the easiest way maybe to get exposure to commodities without having to do the other due diligence. You’re just kind of making a speculative bed. Or maybe it’s not speculative. Maybe it’s an informed bet, but you don’t wanna have to worry about all the other things that go into valuing producers or something, and so, I guess just off the top of my head, that’s maybe one reason, but I think that was just, yeah, that was super helpful. And for our listeners who want to learn more about GMO and yourself and the funds that you guys have, where can they go to find you? 

[00:43:26] Lucas White: gmo.com is the website for our company and, there’s more information about our strategies and certainly material that is similar in tone to, to a lot of what I’ve said today.

[00:43:37] Rebecca Hotsko: Well, thank you so much for coming on today, Lucas. 

[00:43:41] Lucas White: Thank you for having me once again. This was a pleasure. 

[00:43:44] Rebecca Hotsko: All right. I hope you enjoyed today’s episode. Make sure to follow the show on your favorite podcast app so that you never miss a new episode. And if you’ve been enjoying the podcast, I would really appreciate it if you left a rating or review.

[00:43:59] Rebecca Hotsko: This really helps support us and is the best way to help new people discover the show. And if you haven’t already, make sure to sign up for our free newsletter. We study markets which goes out daily and will help you understand what’s going on in the markets in just a few minutes. So with that all said, I will see you again next time.

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