How Capital Cycles Create 100 Baggers (Django Davidson)

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The supply is measurable, and
demand is storytelling.

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But if you focus on the supply,
something that's actually

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measurable, then you won't go
far wrong.

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And if you're investing in
something with constrained

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supply, all else equal, you
should be in a good place.

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Money miners, JDI think we've
got a treat in store because

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we're, we're joined by a really,
really interesting person,

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someone who looks at the, the
universe that we, we'd love to

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invest in or speculate in, in
many instances, but through a,

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through a framework that has a
lot of logic behind it.

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In fact, I, I, I spoke, you made
this comment to me, I want to

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say 2 days ago, JD, you said
like, you know, the style of

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investing that that resonates
with you the most is the capital

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cycle style of investing.
So we're utterly privileged

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today to be joined by someone
who lives and breathes the

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capital cycle style of
investing, aren't we?

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We are very lucky indeed.
Django Davidson, thanks for

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joining us today.
Thank you.

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Thank you for that amazing
introduction.

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I don't not sure I deserve it,
but thanks anyway.

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The, the capital cycle approach
to which Trev just touched on is

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like the the cornerstone to, to
Hosking and, and how you and,

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and the other portfolio managers
within the business think about

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investing.
So I think the the most logical

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place to jump off is to give a a
brief overview and to tie in why

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it's just so, so powerful for
mining investors to keep in

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mind.
Yeah, sure.

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So there's a, there's a really
interesting back story to the

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origin of this capital cycle and
it starts on the West Coast of

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America in the early 1980s.
And our founder, my partner,

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great friend Jeremy Hosking, had
been sent out by his asset

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management company called GT
Asset Management, had been sent

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out from London to California,
and it inherited a portfolio of

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busted PC shares.
And he'd been told to go and

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sort out this portfolio that had
fallen.

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Some of the shares had fallen
90%.

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And as a young guy, he had to
kind of make sense of really,

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how was it that this
extraordinary technology, this

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new productivity miracle, the
PC, it sat on your desk.

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You could do all these fantastic
computations.

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It was a terrific thing, but it
delivered disastrous results to

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shareholders.
And in, you know, this is, this

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is Jeremy in his early 20s and
he's trying to make sense of

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this.
And this is where the germ of

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this idea of the capital cycle
came from, that when you have

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these great booms, these great,
whether they be new technologies

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or in, in the, in, in
commodities, you know, a, a

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great desire for, for, for more
of an existing commodity, you

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can have terrific capital
misallocation.

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And this, this idea is then
fleshed out as Jeremy goes on to

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set up a company called Marathon
Asset Management, which he sets

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up in the 1980s with a couple of
other guys.

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And in, in, in the preceding
sort of 15 years, this capital

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cycle approach of avoiding areas
of capital formation where

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valuations are high, where
capital is attracted at high

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valuations on the promise of a
future.

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And then looking for areas of
capital scarcity of capital

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consolidation where new capacity
and industry is rationed, often

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driven by low valuations.
Low valuations can are, are are

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a great friend of the capital
cycle.

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They, they amplify it on the way
up.

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So if I can raise money for a
new PC factory in the early

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1980s, if I can raise 100 of
capital and have it valued at

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300 in the market the next day,
guess what?

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I'm going to raise a load of
capital.

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And on the other side, if my PC
factory, let's say seven years

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later, costs 100 to build but is
valued by the stock market at

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50, there's no incentive for me
to build any new capacity.

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In fact, I should probably be
buying back my shares and

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thinking about winding up my
fixed assets.

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So the wonderful thing is that
this capital cycle, this mean

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reverting framework of industry
returns, which any anyone with,

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you know, a basic knowledge of
economics can understand, is

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amplified by the stock market,
the debt markets, the

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participants.
It's a sort of behavioural

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framework that really amplifies
these booms and amplifies these

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busts.
And final, final sort of point

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about the capital cycle is what
it what it does, because it's

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very skeptical of these booms
and busts.

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It's very skeptical of the
valuations that the stock market

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puts on industries, particularly
if there's a great amount of

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capital formation.
What it does is it moves your

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focus away from the future, from
demand, and it pushes it towards

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supply.
How many PCs are going to be

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made?
How many PC factories are there?

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And, and, and I've got this quip
that if you are a kind of a

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practitioner, to use a slightly
pompous word of, of the capital

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cycle, you, you will have this
view that demand, so that supply

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is measurable and demand is
storytelling.

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The demand, the story tales
around demand are often what

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kind of see these huge
misallocations of capital.

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But if you focus on the supply,
something that's actually

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measurable and pretty simple to
do, then you won't go far wrong.

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And if you and if you're
investing in something with

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constrained supply, all else
equal, you should be in a good

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place.
So yeah, that's that's the sort

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of that's the sort of a very,
very simple framework on it.

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And then as we were talking
earlier, JD, the the idea was

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given real clout when a
financial journalist, financial

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historian called Edward
Chancellor collected all these

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works that are these pieces that
have been written by Jeremy and

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the team in in the 1990s and
over the tech boom.

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And he published this book
called Capital account, which if

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anyone, if anyone is listening
and wants to go deeper into

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this, I, I, I heartily recommend
it.

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It is, I think it's now 2 grand
on eBay.

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So it hasn't been published.
So it's expensive.

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But if you, if you squirrel
around, I'm sure you'll, you'll,

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you'll find bits of it on, on
the Internet.

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Not that I should say that, but
that's, that's the, that's,

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that's the place to, to really
learn more about this idea.

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And yeah, and, and, and what,
what Edward did that I think was

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very useful was take this idea.
And he, he, he's got this one

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very pithy sentence, which is
the last sort of point on this,

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which is that over the long run,
a company's share price is not

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driven by earnings or
announcements or in your world,

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you know, finding a new resource
that isn't what drives long term

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shareholder returns.
What drives long term

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shareholder returns is the
return on capital.

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And if you're in an industry
which is seeing declining

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returns on capital, you, you
might have increasing earnings,

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but declining returns.
A great example would be the the

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hyperscalers at the minute that
are going to see earnings rise,

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I'm sure, but the amount of
capital employed as they spend

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$700 billion this year on day
centres are going, are going to

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fall.
That's not a good thing.

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But if your returns are returns
on capital are rising and that

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and that can come by the way
through reducing the amount of

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capital employed in the
business, then you're going to

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have a very good outcome as a
shareholder.

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So that's why that was the sort
of whole wisdom dump on the

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capital cycle.
Happy to take take it wherever

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you guys would like it.
Now that that was fantastic,

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Django and Ed Chancellor's got a
fantastic way of, of, of putting

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words together and and writing,
which draws out the points in an

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amazing way as well.
The the thread I want to pull on

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most is like incentives.
You, you speak a lot in the in

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investment memos and through the
book.

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Incentives shine through, be it
the be it the bankers, be it the

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managers of a mining company or
any other cyclical kind of

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business.
I'm curious to to hear how much

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you dig into incentives as a
theme.

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Yeah, well, you're right to 0 in
on that.

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You know, Munger never ever
think about anything else.

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I mean, that's, that is one of
his biggest, you know what I

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think one of his he's got so
many wisdom bullets, but that

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one that that's one that's
definitely lodged in my, in my

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brain.
I mean, listen, number one, you

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know, this idea that you
particularly went in these

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capital formation periods, booms
if you will.

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If I can raise a dollar, if I'm
a promoter, if I can raise a

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dollar and have a value of $3 or
$5 or in the case of a data

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center $10, I'm going to raise a
lot of capital.

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And if with that $10, if from
that one to 10, if I have to pay

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away, you know, two or three to
the investment banks, one or two

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to some intermediaries,
etcetera, etcetera, that's fine.

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You know, but the fundamental
driver of a lot of these great

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misallocations is this in agreed
function of the stock market

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amplifying the underlying
capital, the, the underlying

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attractiveness of the returns
in, in one of these booms and

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busts.
And the incentives there can be,

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you know, are, are very, are
very powerful.

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And I don't want to sort of get
into, get into it really,

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because I, I, I don't really
have a strong view on it.

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But it is very, other than I'm a
cynic.

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But it's very clear to me that
if you look at the behaviour of

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all of the actors within the
current AI data centre boom, you

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know, there's a huge network of
reciprocity and payback and

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promotional activity and, and,
and everyone's, you know, in

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order to keep the boom going,
you've got to keep, you've got

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to keep greasing the, the palms
of the various actors.

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Did I read over the weekend that
Open AI is offering guaranteed

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returns of 17 1/2% to PE firms
in a business?

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So you know, you've got to, and
as these bubbles get bigger,

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the, and, and your point about
incentives, JD is very important

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here.
You've got to get in the, you've

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got to grease bigger palms and,
and the wheel turns, you know,

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the, the, the, the, the bigger
these features become, you know,

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the fact that the private equity
private credit is so involved in

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this AI boom is, is very
telling.

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And we all know what the
incentives are in that industry.

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It's a, it's a, it's a
ruthlessly brilliant fee

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generating industry.
So watch out.

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The, yeah, the, the, the reason
I, I really love the, the, you

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know, this framework of thinking
about investing in cyclical

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industries is because it's like
intuitively so, so sound and it,

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and secondly, it's like it, it
feels incredibly reliable as a

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behavioural edge because,
because, because humans are

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susceptible to, to animal
spirits in the good times.

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You talked about the return on
capital of the companies, you

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know, diminishing.
There's also the return on

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capital of an investor.
As prices rise, definitionally

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your return on on capital should
be lower.

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Yet as prices go up, oftentimes
people think there's even more

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money to be made.
So it just, it feels like a

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wonderful way to have an edge if
you keep this, this heuristic

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front of mind at all times.
And when you port it over to the

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commodities, landscaping in
particular, like a lot of people

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who try and make sense of, of,
of our world, they, they find

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their way to, to Rick rule.
There's got a wonderful,

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wonderful quote.
You know, if you're not a

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contrarian, you're going to be a
victim.

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And I think that that that you
know what that one phrase is, is

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really trying to emphasize the
importance of the capital cycle

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in in our industry.
I, I really like that.

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And, and that, and you've,
you've reminded me of this other

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idea that, you know, as I, I,
I've kind of, you know, I've

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spent the last best part of the
last two decades doing this.

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But I'm still, I'm still
pleasantly surprised at how

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often this very simple framework
guards against bad decisions,

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helps me, you know, make less
bad decisions.

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So one idea I came up with last
year was that the capital cycle

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is a sort of guardrails for
contrarians.

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OK, if you're a natural
contrarian, which you know, I

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am, it's important to have some
guardrails because it's no good

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being contrarian and wrong.
Like I say, you just, you just

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lose money and you're also
contrarian.

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So you're probably just quite
difficult and not not a very

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easy person to be around.
So being contrarian and wrong is

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just a recipe for like a
particularly good set of life

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outcomes.
So you've got to be contrarian

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and right and the capital cycle
just helps you avoid the kind of

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obvious pitfalls.
And let me give you an example

224
00:14:24,400 --> 00:14:25,880
on the kind of boom side and the
bus side.

225
00:14:25,880 --> 00:14:29,200
On the boom side, you are just
going to be very sceptical of

226
00:14:29,200 --> 00:14:33,640
areas that are seeing masses of
capacity addition that are

227
00:14:33,640 --> 00:14:38,160
seeing IP OS where as you say
all the incentives are, are, are

228
00:14:38,160 --> 00:14:42,280
are there and in you know, in
mining terms, that was one of

229
00:14:42,280 --> 00:14:44,800
the reasons we were very nervous
about lithium.

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00:14:45,440 --> 00:14:49,600
We saw it as a great, you know,
I don't have any view on the

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00:14:49,600 --> 00:14:53,360
future of, of, of lithium
battery technology other than

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00:14:53,640 --> 00:14:56,080
what I can read.
I'm just, you know, not not a,

233
00:14:56,600 --> 00:15:00,760
an expert on battery chemistry,
but the supply picture was

234
00:15:00,760 --> 00:15:06,520
pretty obvious.
Likewise on the kind of more

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00:15:06,520 --> 00:15:12,120
value side, the capital cycle
will, you know, as a natural

236
00:15:12,120 --> 00:15:15,720
contrarian, you're going to be
attracted to stocks on half book

237
00:15:16,760 --> 00:15:19,800
companies on single figure PES.
You know who, who isn't?

238
00:15:19,800 --> 00:15:23,360
That is the natural contrarian
chemistry of, of, of someone

239
00:15:23,360 --> 00:15:25,760
that likes buying a dollar for
$0.50.

240
00:15:25,760 --> 00:15:27,240
We all love doing that, don't
we?

241
00:15:28,400 --> 00:15:33,440
But if that industry has very
unattractive capital cycle

242
00:15:33,440 --> 00:15:37,080
characteristics, for example,
lots of excess capacity, for

243
00:15:37,080 --> 00:15:41,640
example, I'll disciplined
players, you know, we could, we

244
00:15:41,640 --> 00:15:44,960
could point probably to any
manner of industries where China

245
00:15:44,960 --> 00:15:50,200
is, is, is a major player, then
they're likely going to be value

246
00:15:50,200 --> 00:15:53,160
traps.
So what the capital cycle does

247
00:15:53,160 --> 00:15:55,920
is it just takes that contrarian
brain chemistry that's so

248
00:15:55,920 --> 00:16:00,320
important, as you point out, to
making money and, and and doing

249
00:16:00,320 --> 00:16:03,560
well in investing, but, and it
just put some guardrails on it,

250
00:16:03,560 --> 00:16:06,600
which is important because, you
know, this point again, I'm just

251
00:16:06,600 --> 00:16:07,840
making it.
There's no fault in being

252
00:16:07,840 --> 00:16:10,760
contrarian or wrong.
It's just that ain't good.

253
00:16:10,920 --> 00:16:12,360
You've got to be contrarian and
right.

254
00:16:12,440 --> 00:16:15,680
And so this just this, this
framework just helps increase

255
00:16:15,680 --> 00:16:18,000
your odds of, of being right.
And of course you're going to be

256
00:16:18,000 --> 00:16:19,360
wrong.
And, and the way that you're

257
00:16:19,360 --> 00:16:23,320
often wrong because no one's
ever 100% right, you know, even,

258
00:16:23,400 --> 00:16:25,040
you know, 51% right, you're
doing well.

259
00:16:25,560 --> 00:16:29,760
The way that we're often wrong
is by being early on these

260
00:16:29,760 --> 00:16:32,960
cycles.
And that's why, you know, we

261
00:16:32,960 --> 00:16:36,880
like which we can get into
another time, but but what we

262
00:16:36,880 --> 00:16:43,960
like to do is just very slowly
average into these cycles

263
00:16:43,960 --> 00:16:48,560
because it's very easy to be
wrong, which is to be too early

264
00:16:48,560 --> 00:16:52,720
on these cycles.
So we like to to, to, to slowly

265
00:16:52,720 --> 00:16:55,520
accumulate positions.
We have a tolerance of a large

266
00:16:55,520 --> 00:17:00,600
number of shares in our our fund
much, much higher than than many

267
00:17:00,600 --> 00:17:04,240
of our competitors who are very
focused on highly concentrated

268
00:17:05,760 --> 00:17:09,079
portfolios.
And by having this ability to

269
00:17:09,359 --> 00:17:14,359
have a larger number of shares
take smaller bets average into

270
00:17:14,359 --> 00:17:18,119
these positions, we feel we're
kind of being true to that

271
00:17:18,119 --> 00:17:23,200
capital cycle framework of, of,
you know, of, of being

272
00:17:23,200 --> 00:17:26,200
contrarian, but, but but within
a, within guardrails.

273
00:17:26,760 --> 00:17:29,600
So if we pull in a a real world
example, PGMS is 1 You've

274
00:17:29,600 --> 00:17:32,960
written and spoken about Where
did the where did the journey

275
00:17:32,960 --> 00:17:38,920
begin for PGMS with you?
PGMS are an absolutely

276
00:17:38,920 --> 00:17:45,160
fascinating kind of distillation
of, of, of the capital cycle and

277
00:17:45,160 --> 00:17:50,200
of mining in general.
OK, so the the supply of PGM is

278
00:17:50,200 --> 00:17:55,440
just simple geology.
Platinum is 120th as prevalent

279
00:17:55,440 --> 00:17:58,240
in the earth's crust as gold and
gold is a precious metal.

280
00:17:58,600 --> 00:18:02,280
So when I, when I read that
start, I was just mind blown,

281
00:18:02,280 --> 00:18:05,200
you know, as, as someone who's
really keen on things that have

282
00:18:05,200 --> 00:18:10,320
got supply constraints to think,
and I'm ashamed to say I didn't

283
00:18:10,320 --> 00:18:14,720
know that about platinum.
And I did a, a geography degree

284
00:18:14,720 --> 00:18:16,800
and did a bit of geology.
So it was sort of thing I should

285
00:18:16,800 --> 00:18:18,120
have known.
I just didn't know that.

286
00:18:19,800 --> 00:18:22,120
And so I was suddenly just like,
wow, this is a really

287
00:18:22,120 --> 00:18:25,600
constrained resource, much more
so than gold.

288
00:18:26,320 --> 00:18:29,480
And we've all, all, all heard
those stats about how much gold

289
00:18:29,480 --> 00:18:31,840
there is, you know, 2 tennis
courts that you guys would know

290
00:18:31,840 --> 00:18:35,480
much better than I would.
But so, you know, to, to find

291
00:18:35,480 --> 00:18:38,680
something that was that rare in
supply was I was kind of super

292
00:18:39,440 --> 00:18:42,520
turned on by that step.
And then when you look into the

293
00:18:42,520 --> 00:18:46,680
geography of the supply, it's
super concentrated again.

294
00:18:46,680 --> 00:18:50,480
So like between 70 and 80% of
the world's platinum comes from

295
00:18:50,480 --> 00:18:53,800
South Africa.
And the other two major sources

296
00:18:53,800 --> 00:18:59,080
are Zimbabwe and Russia.
And I mean, let's be brutally

297
00:18:59,080 --> 00:19:02,160
honest, there's not going to be
many multi billion dollar

298
00:19:02,160 --> 00:19:06,280
projects in South Africa and
Zimbabwe and Russia.

299
00:19:06,600 --> 00:19:09,360
Good luck, right?
These are not places that are

300
00:19:09,360 --> 00:19:14,000
going to see billions of new
capital come in to generate new

301
00:19:14,000 --> 00:19:17,280
supply.
So you've got this fantastic

302
00:19:17,280 --> 00:19:22,360
geological and political gait on
capital coming into the space.

303
00:19:22,720 --> 00:19:29,000
So like as a starting point, as
a supply disciplined investment,

304
00:19:31,480 --> 00:19:35,960
it's in a good place.
The second thing that was super

305
00:19:35,960 --> 00:19:40,560
attractive and remains really
attractive is this idea talked

306
00:19:40,560 --> 00:19:44,560
about it earlier that supply is
measurable, but demand is

307
00:19:44,560 --> 00:19:46,880
storytelling.
So on the supply side, we had

308
00:19:46,880 --> 00:19:52,280
this very constrained supply,
unlikely to see new investment

309
00:19:52,280 --> 00:19:56,600
of any scale.
But on the demand side, we had

310
00:19:56,600 --> 00:20:01,600
this story that the world was
going to move rapidly towards

311
00:20:02,240 --> 00:20:06,200
electronic vehicles.
And let's be fair, it was more

312
00:20:06,200 --> 00:20:08,160
than a story.
The good old UK government

313
00:20:08,160 --> 00:20:14,960
enshrined in law that's the sale
of internal combustion engines

314
00:20:15,760 --> 00:20:19,280
will be banned by 20-30, which
is like, you know, in about 5

315
00:20:19,280 --> 00:20:21,880
minutes they've rolled back on
that.

316
00:20:22,280 --> 00:20:24,280
So it wasn't just a story.
There were sort of governments

317
00:20:24,280 --> 00:20:30,680
like the UK that were legally
outlawing the sale of, of petrol

318
00:20:31,000 --> 00:20:37,760
and diesel vehicles.
And so the kind of demand story,

319
00:20:37,760 --> 00:20:41,160
the demand picture, the, the
legality of demand, you could

320
00:20:41,160 --> 00:20:43,920
say, because so a very
significant proportion of PGMS

321
00:20:43,920 --> 00:20:47,560
are used in, in, in ameliorating
the air quality in, in internal

322
00:20:47,560 --> 00:20:49,840
combustion, any cars was, was
very negative.

323
00:20:50,600 --> 00:20:54,160
But what was clear, I think, you
know, with global investors, we,

324
00:20:54,160 --> 00:20:55,920
we do a lot of flying around the
globe.

325
00:20:55,920 --> 00:21:00,040
We spend a lot of time in, in
Asia, in Africa was that these

326
00:21:00,040 --> 00:21:04,120
countries were, were in no way
going to adopt full scale EV on

327
00:21:04,120 --> 00:21:08,800
any time scale that was relevant
to, you know, an investment in,

328
00:21:08,800 --> 00:21:13,080
in, in, in PGMS and that kind of
got the interest going.

329
00:21:13,080 --> 00:21:18,040
And then of course, over the
past five years, and I, I think

330
00:21:18,160 --> 00:21:20,360
also this happened.
This was not just a Trump thing.

331
00:21:20,360 --> 00:21:23,320
I think this this was happening
in Europe before Trump was

332
00:21:23,320 --> 00:21:26,080
elected.
There was just a coming to terms

333
00:21:26,080 --> 00:21:31,840
with the scale of the cost of
moving from internal combustion

334
00:21:31,840 --> 00:21:36,160
engines to EVs aligned with the
consumer.

335
00:21:36,160 --> 00:21:40,360
And this is sort of, I'm a sort
of, you know, quite quite like

336
00:21:40,360 --> 00:21:42,560
decisions being made at the
consumer level rather than at

337
00:21:42,560 --> 00:21:45,040
the government level.
The consumer was just deciding

338
00:21:45,040 --> 00:21:48,560
that they didn't want these EVs,
they were too expensive.

339
00:21:48,560 --> 00:21:50,120
There was a lot of friction
involved with them.

340
00:21:51,160 --> 00:21:56,280
And the final piece of the
jigsaw that really got me over

341
00:21:56,280 --> 00:21:57,760
the line.
And I decided, right, I'm really

342
00:21:57,760 --> 00:22:01,720
going to, I'm really going to do
a lot of work here and, you

343
00:22:01,800 --> 00:22:03,880
know, go down to South Africa
and see these companies and so

344
00:22:03,880 --> 00:22:07,720
on.
Was a stat that in America, I

345
00:22:07,720 --> 00:22:10,720
think this is 2023 data, 2023
America.

346
00:22:11,320 --> 00:22:16,160
The single most important
determinant for whether AUS

347
00:22:16,160 --> 00:22:22,720
household has or does not have a
electronic vehicle is whether

348
00:22:22,720 --> 00:22:27,160
the household has seven or more
cars.

349
00:22:27,400 --> 00:22:30,480
So if you have 7 or more cars, I
think you've got like a 60

350
00:22:30,480 --> 00:22:32,560
percent, 70% likelihood of
having an EV.

351
00:22:33,600 --> 00:22:37,080
So that that really was the kind
of piano over the head moment.

352
00:22:37,080 --> 00:22:42,760
I was like, right, OK, so if
you're in the top 1% of US

353
00:22:42,960 --> 00:22:46,560
household income, yeah, you're
going to have an EV and you're

354
00:22:46,560 --> 00:22:50,520
probably going to use it, you
know, once a month.

355
00:22:51,680 --> 00:22:54,960
But for people for whom this is
an economic choice, these, this

356
00:22:54,960 --> 00:22:58,080
is not, it's not economically
rational to, to, to buy them.

357
00:22:58,640 --> 00:23:02,880
So sorry, that's a very long
winded kind of background,

358
00:23:03,200 --> 00:23:05,640
background to, to, to the, to
the investment.

359
00:23:05,760 --> 00:23:08,200
And then we went down to South
Africa, took my colleague Gwen

360
00:23:08,200 --> 00:23:11,920
Meyerberg.
We went nearly two KS deep down

361
00:23:11,920 --> 00:23:14,480
the Americana shaft.
And it just, that was in

362
00:23:14,480 --> 00:23:16,520
Rustenburg.
And it just made me realize,

363
00:23:16,520 --> 00:23:21,440
gosh, these mines require huge
amounts of upfront capital,

364
00:23:21,440 --> 00:23:24,360
ongoing capital.
And that started all of the

365
00:23:24,360 --> 00:23:29,720
capital cycle analysis.
Very simply, in the decade 2005

366
00:23:29,720 --> 00:23:34,920
to 2015, the industry spent just
over $400.00 an ounce on CapEx.

367
00:23:35,880 --> 00:23:42,960
From 2015 to to 2025 S, another
sort of 10 years, the industry

368
00:23:42,960 --> 00:23:46,760
spent about $250.
So there's been this dramatic

369
00:23:46,760 --> 00:23:52,400
fall off of investment into the,
into both sustaining and, and

370
00:23:52,400 --> 00:23:55,200
Greenfield CapEx.
And that's led to these supply

371
00:23:55,200 --> 00:23:59,920
curves, which I'm sure you guys
have seen, which basically fall,

372
00:24:00,080 --> 00:24:02,400
You know, and I had friends,
Bitcoiners, sort of friends of

373
00:24:02,400 --> 00:24:04,520
mine saying, Oh yeah, Bitcoin is
great because the supply is

374
00:24:04,520 --> 00:24:05,640
limited.
And I was like, yeah, but it's

375
00:24:05,640 --> 00:24:08,440
still growing.
It's not growing in PGMS.

376
00:24:08,440 --> 00:24:14,240
We're seeing supply decline.
So I just this had all the

377
00:24:14,240 --> 00:24:20,640
setups of a kind of classic
capital cycle and, and, and then

378
00:24:20,640 --> 00:24:22,640
you get to the valuations of the
companies.

379
00:24:22,640 --> 00:24:24,880
I'm so just giving you an idea
of how the process works.

380
00:24:24,880 --> 00:24:28,680
And then when you get to the end
of the of the analysis of, of of

381
00:24:28,680 --> 00:24:32,760
the industry, what was
fascinating is very compelling

382
00:24:32,760 --> 00:24:36,040
for capital cycle investors and
it's what it's up as framework.

383
00:24:36,040 --> 00:24:38,840
I love you look at the
replacement cost versus the

384
00:24:38,840 --> 00:24:42,600
enterprise value.
If, if I could, if I, you know,

385
00:24:42,600 --> 00:24:47,360
was some mad crypto billionaire
that wants to recycle my crypto

386
00:24:47,360 --> 00:24:51,920
billions into the PGM industry,
how much would it cost for me to

387
00:24:52,120 --> 00:24:56,800
replace the number 123 players?
And what was extraordinary about

388
00:24:56,800 --> 00:25:02,120
that and still remains is that
these companies are valued below

389
00:25:02,120 --> 00:25:05,640
the replacement cost of building
out their asset base.

390
00:25:05,960 --> 00:25:11,080
And an important caveat here is
the PGM industry does a lot of

391
00:25:11,080 --> 00:25:13,840
its own smelting and processing
in South Africa.

392
00:25:14,040 --> 00:25:20,400
So there's massive, huge dirty
power intensive refining

393
00:25:20,400 --> 00:25:25,000
complexes, which I mean you
could not build them again

394
00:25:25,000 --> 00:25:27,560
today.
I think that these are multi

395
00:25:27,560 --> 00:25:32,400
billion projects that require
you to take a view on power in

396
00:25:32,400 --> 00:25:38,200
South Africa.
And if you add in, if you add in

397
00:25:38,200 --> 00:25:41,560
the valuation of all of all of
that kit and the valuation of

398
00:25:41,560 --> 00:25:45,040
the resource, you know you're
below what what, what it would,

399
00:25:45,160 --> 00:25:46,840
you know you're below
replacement cost.

400
00:25:47,120 --> 00:25:49,600
So even despite this rally,
these companies still trade

401
00:25:49,600 --> 00:25:51,520
below what it would cost to
restart them.

402
00:25:51,520 --> 00:25:54,440
So that's that's normally a good
place to to start an investment.

403
00:25:54,800 --> 00:25:57,280
And the fact that they're
they're in spicy jurisdictions

404
00:25:57,280 --> 00:25:59,400
is the opportunity as well.
Like you're, you're already,

405
00:26:00,000 --> 00:26:02,120
you're already rolling out a
huge class of investors that

406
00:26:02,120 --> 00:26:04,560
won't go there when you've got
the mandate and you're able to

407
00:26:04,560 --> 00:26:07,880
invest in South Africa,
Zimbabwe, like do it.

408
00:26:08,160 --> 00:26:09,280
I think that's really important,
yes.

409
00:26:09,280 --> 00:26:15,800
So here's here's here is a
really here's another like piano

410
00:26:15,800 --> 00:26:20,040
over the head moment that that I
came across on this PGM journey.

411
00:26:20,040 --> 00:26:25,920
But it applies very much to
anyone with the ability with

412
00:26:25,920 --> 00:26:30,280
the, with the canvas, if you
will, to invest globally and in

413
00:26:30,280 --> 00:26:40,120
small, small market caps.
In 1998, if you had invested in

414
00:26:40,120 --> 00:26:44,280
Impala Platinum, which back then
was the world's second largest

415
00:26:44,400 --> 00:26:47,720
platinum producer.
So it had a small market cap,

416
00:26:48,040 --> 00:26:53,640
but it was not a small company.
OK, So anyone who's in investing

417
00:26:54,520 --> 00:26:57,200
knows that you want small, small
market cap.

418
00:26:57,200 --> 00:26:59,000
Big company equals good thing,
right?

419
00:26:59,640 --> 00:27:02,520
You want a smaller market cap as
possible for a bigger company.

420
00:27:03,560 --> 00:27:08,720
Small cap doesn't mean bad.
So if you had if you had the

421
00:27:08,720 --> 00:27:13,800
ability in 1998 to invest in the
small cap miner that was the

422
00:27:13,800 --> 00:27:17,480
world's second largest producer
of of platinum and you know,

423
00:27:17,480 --> 00:27:19,640
been around in various guises
for 100 years.

424
00:27:19,640 --> 00:27:23,920
This was not a sort of flash in
the pan startup over the

425
00:27:23,920 --> 00:27:29,080
following ten years to 2008,
your total return including

426
00:27:29,080 --> 00:27:36,800
dividends was one hundredfold in
Rand and 75 fold in U.S.

427
00:27:36,800 --> 00:27:41,400
dollars.
And I think that that that is an

428
00:27:41,440 --> 00:27:48,600
absolute, you know, kind of
historical proof point for how,

429
00:27:48,600 --> 00:27:55,120
when these cycles, remember in
1998, it was, you know, it's a

430
00:27:55,120 --> 00:27:59,320
massive technology boom, all of
the world's capital, financial

431
00:27:59,320 --> 00:28:01,640
and intellectual, very important
point.

432
00:28:02,880 --> 00:28:05,640
All of the, you know, all of
the, all of the, all of the

433
00:28:05,640 --> 00:28:08,640
focus was on these US tech
companies.

434
00:28:08,640 --> 00:28:14,520
And it wasn't on small cap
jurisdictionally kind of

435
00:28:14,520 --> 00:28:19,600
questionable heavy asset
intensive commodity industries.

436
00:28:19,960 --> 00:28:22,160
And that was the opportunity.
And you made, you know, you made

437
00:28:22,160 --> 00:28:25,160
100 times your money or 75 times
your money in U.S. dollars.

438
00:28:26,240 --> 00:28:30,760
You know, that's like investing
in Uber in like the Series C or

439
00:28:30,760 --> 00:28:32,040
something.
Of course, I'm making that up.

440
00:28:32,040 --> 00:28:34,880
But that sort of that sort of
return.

441
00:28:34,880 --> 00:28:37,720
And you did that through a
classic capital cycle analysis.

442
00:28:37,720 --> 00:28:40,480
In the run up to 1998, there
have been very little investment

443
00:28:40,480 --> 00:28:43,120
in you PGM supply.
If you remember, that's sort of

444
00:28:43,120 --> 00:28:46,000
when the transition from
apartheid to democracy happened.

445
00:28:46,280 --> 00:28:48,760
Obviously there's a lot of
nervousness around putting

446
00:28:48,960 --> 00:28:52,200
about, you know, how the ANC
government would deal with all

447
00:28:52,200 --> 00:28:54,520
of these, these mining companies
and so on.

448
00:28:54,720 --> 00:28:56,560
So it was a it was a similar
situation.

449
00:28:56,560 --> 00:29:00,080
You'd had this constraint of
capital, the supply was not

450
00:29:00,080 --> 00:29:02,040
going to grow.
And then you had, you know,

451
00:29:02,040 --> 00:29:06,520
decent economic outcome.
You also had, you know, people

452
00:29:06,520 --> 00:29:09,720
like good old Volkswagen
cheating on their emission

453
00:29:09,720 --> 00:29:11,280
standards.
So they actually did have to

454
00:29:11,680 --> 00:29:15,440
kind of come back and, and use
more of the product.

455
00:29:15,440 --> 00:29:20,960
But I think that, you know, to
make 100 times your money in the

456
00:29:20,960 --> 00:29:25,560
second largest producer 100 year
old company over a 10 year

457
00:29:25,560 --> 00:29:29,080
period just shows how powerful
these capital, how powerful

458
00:29:29,080 --> 00:29:33,240
capital cycle analysis is, how
you want to be looking for small

459
00:29:33,240 --> 00:29:37,000
companies, you know, small
market caps, but big companies

460
00:29:38,880 --> 00:29:43,200
and you want this ability to
look anywhere, right, to go

461
00:29:43,200 --> 00:29:47,200
anywhere.
That's very powerful and the the

462
00:29:47,200 --> 00:29:48,640
investment industry doesn't like
that.

463
00:29:48,640 --> 00:29:51,040
By the way, what the investment
industry wants, because it likes

464
00:29:51,040 --> 00:29:56,160
to compartmentalize is it wants
to have a small cap emerging

465
00:29:56,160 --> 00:30:01,840
market manager, AUS large cap
growth manager a, you know, they

466
00:30:01,840 --> 00:30:04,480
want to parcel you off into
various buckets.

467
00:30:05,880 --> 00:30:09,680
And I understand that, that that
that is helpful in constructing

468
00:30:09,680 --> 00:30:14,440
these very large portfolios, but
often times you you kind of miss

469
00:30:14,720 --> 00:30:17,760
when you're put into a silo, you
miss the kind of wood for the

470
00:30:17,760 --> 00:30:20,760
trees.
And we're very lucky here at

471
00:30:20,760 --> 00:30:23,520
Husky Parlors, being able to
look everywhere for these

472
00:30:23,520 --> 00:30:27,040
contrasts 1.
Of one of the, one of the pieces

473
00:30:27,040 --> 00:30:32,400
that I, I suppose is just like
get would get you really excited

474
00:30:32,400 --> 00:30:36,320
is when, when the, the, the
supply response, there's some

475
00:30:36,320 --> 00:30:39,160
like very, very lengthy period
of time, long lead time.

476
00:30:39,160 --> 00:30:42,760
And actually to bring any new
supply on to, to address the,

477
00:30:43,200 --> 00:30:45,920
the, the constrained nature of
the, the capital cycle.

478
00:30:46,240 --> 00:30:50,320
Like, how do you, yeah, how do
you, like, have you, have you

479
00:30:50,320 --> 00:30:53,160
seen opportunities where like
everything, everything looks

480
00:30:53,160 --> 00:30:55,120
great, but you can just tell
that supply will be too

481
00:30:55,120 --> 00:30:56,760
responsive for this to be
interesting.

482
00:30:56,880 --> 00:31:00,280
And I raised this because
because like I've, I've had this

483
00:31:00,280 --> 00:31:02,600
from time to time, like thinking
that there's going to be a, a

484
00:31:02,880 --> 00:31:05,880
remarkable response to some
supply shock.

485
00:31:05,880 --> 00:31:09,120
And it's just the reality is
supply can be super responsive

486
00:31:09,120 --> 00:31:11,320
to to any anyone shock
sometimes.

487
00:31:11,880 --> 00:31:13,320
Yeah.
I mean, well the cure for high

488
00:31:13,320 --> 00:31:17,400
prices, high prices and I think,
you know each year that goes on

489
00:31:17,400 --> 00:31:22,040
and we add more and more metal
to the above ground stock that

490
00:31:22,040 --> 00:31:24,760
becomes.
And this is in all, well, in all

491
00:31:24,760 --> 00:31:32,160
commodities, you know, that
ability for ingenious human

492
00:31:33,680 --> 00:31:39,680
activity to profit from this
higher metal, you know, is, is

493
00:31:39,680 --> 00:31:44,760
kind of unbounded, really.
So, yeah, high prices are not

494
00:31:44,760 --> 00:31:55,160
good.
I, you know, the, the starting

495
00:31:55,160 --> 00:31:58,920
point for any commodity
investment has to be low prices.

496
00:32:00,680 --> 00:32:02,520
That just is.
So for for me anyway.

497
00:32:02,520 --> 00:32:05,200
I mean, I'm not saying I'm some
legendary commodity investor,

498
00:32:05,200 --> 00:32:07,360
but if I'm going to get
interested in investing in it,

499
00:32:09,800 --> 00:32:13,120
in any kind of mining area, I
want the prices to be low.

500
00:32:13,120 --> 00:32:15,160
I want, I want people to feel
depressed.

501
00:32:15,160 --> 00:32:17,480
I don't.
I want, I want mines to be

502
00:32:18,160 --> 00:32:21,840
coming to the end of their life.
You know, as soon as these new

503
00:32:21,840 --> 00:32:26,760
mines get off the ground, the
lead time for them is so long

504
00:32:26,760 --> 00:32:30,160
that you can have depressed
prices for such a long time.

505
00:32:34,120 --> 00:32:36,800
One idea I'm I'm kind of working
on at the minute is, you know,

506
00:32:36,800 --> 00:32:39,880
often investors say to us, OK,
so that's great.

507
00:32:39,880 --> 00:32:43,200
Django, you know, PGM has done
very well recently and so on.

508
00:32:43,200 --> 00:32:45,840
But how long are these cycles
going to be?

509
00:32:47,600 --> 00:32:54,680
And you know, the truthful
answer is I don't know, but I

510
00:32:55,120 --> 00:32:57,640
haven't just given you that
example of the ten year up cycle

511
00:32:57,640 --> 00:33:03,880
in PGMS from 98 to 2008 where
you made 100X on on Impala.

512
00:33:05,160 --> 00:33:09,240
I think I was reminded when I
did that kind of historic case

513
00:33:09,240 --> 00:33:15,320
study of just how difficult and
how long it takes to bring on

514
00:33:15,800 --> 00:33:19,360
supply in supply constrained
geographies.

515
00:33:20,560 --> 00:33:23,520
But when it does come on, wow,
it has a long life.

516
00:33:25,720 --> 00:33:30,320
So one of the things I'm looking
at as a just a simple guide,

517
00:33:30,320 --> 00:33:33,240
it's not a kind of treasure map.
It doesn't lead you to the exact

518
00:33:33,240 --> 00:33:36,520
kind of point that is right.
This is the length of the cycle.

519
00:33:36,880 --> 00:33:41,000
But it gets you in the right
kind of area is, you know, what

520
00:33:41,000 --> 00:33:45,240
is the average time taken to get
this mine up and running?

521
00:33:45,240 --> 00:33:47,600
And then how long is the mine
life thereafter?

522
00:33:51,280 --> 00:33:54,440
And you know, with copper, we
all know the story there.

523
00:33:54,440 --> 00:33:56,360
I'm not going to bore your
listeners with that.

524
00:33:57,800 --> 00:34:03,280
PG Ms. is kind of similar as you
move towards more, you know,

525
00:34:04,040 --> 00:34:06,680
closer to, to things like oil
and gas, that that lead time

526
00:34:06,680 --> 00:34:14,239
becomes a lot shorter.
And I think one, one thing for

527
00:34:14,239 --> 00:34:17,320
to bear in mind when looking at
the length of these cycles is,

528
00:34:17,719 --> 00:34:20,560
you know, how long does it take
for, for meaning, but meaningful

529
00:34:20,560 --> 00:34:22,840
amounts to come online?
And then how long does that

530
00:34:22,840 --> 00:34:26,920
supply last?
And that's why in any of these

531
00:34:26,920 --> 00:34:30,239
cycles, you know, we are feels
like we're kind of mid cycle.

532
00:34:30,239 --> 00:34:32,239
Now.
I'd be comfortable saying that

533
00:34:32,239 --> 00:34:37,719
in, in mining in general, when
these big mines get built, that

534
00:34:37,719 --> 00:34:43,639
is a really powerful negative
story for, for, for the

535
00:34:43,639 --> 00:34:47,159
industry, because as you say,
it's amazing how when the prices

536
00:34:47,159 --> 00:34:51,080
go high, all of this supply,
whether it's above ground,

537
00:34:51,080 --> 00:34:53,159
recycling, whatever, it all
starts to come in.

538
00:34:53,600 --> 00:34:58,240
And so, you know, building new
minds is not is not a great

539
00:34:58,240 --> 00:35:00,600
thing.
I've got one kind of idea I get

540
00:35:00,600 --> 00:35:03,240
this is actually an idea from
from that I got from Jeremy.

541
00:35:04,080 --> 00:35:07,120
He he, he once said to me, just
a throwaway line and I've been

542
00:35:07,120 --> 00:35:11,320
thinking about it pretty much
ever since.

543
00:35:11,600 --> 00:35:14,160
He said, ultimately demand for
these commodities is price

544
00:35:14,160 --> 00:35:16,280
inelastic.
The guys have just got to keep

545
00:35:16,280 --> 00:35:19,920
it in the ground.
And I just kind of thinking

546
00:35:19,920 --> 00:35:26,040
about that in relation to this,
you know, Iran war, like if I

547
00:35:26,040 --> 00:35:30,880
need to drive to the hospital
to, to, to pick up my old man

548
00:35:32,040 --> 00:35:36,360
and it's either going to cost me
£5 in petrol or £500 in petrol.

549
00:35:38,000 --> 00:35:39,360
I mean, I've got to pay the
£500.

550
00:35:39,560 --> 00:35:41,840
I'm complete, it's completely
price inelastic.

551
00:35:41,840 --> 00:35:45,120
My demand for oil for certain
things, of course not for

552
00:35:45,120 --> 00:35:49,240
everything.
But, you know, I think one of

553
00:35:49,240 --> 00:35:53,160
the, the, the, the frustrating
things about being a commodity,

554
00:35:53,160 --> 00:35:57,200
you know, having investments in
commodity industries is just how

555
00:35:57,200 --> 00:36:00,720
the entire superstructure is.
Your point about incentives, the

556
00:36:00,720 --> 00:36:05,600
entire superstructure is just
designed around bringing on new

557
00:36:05,600 --> 00:36:09,040
supply and it's not about
managing demand.

558
00:36:11,720 --> 00:36:14,720
So yeah, I'll, I'll, I'll leave
that sort of idea with you, I

559
00:36:14,720 --> 00:36:16,200
think.
That's market structure, tried

560
00:36:16,200 --> 00:36:17,640
that for a while.
Yeah, I think it's market

561
00:36:17,680 --> 00:36:22,200
structure where if, if if anyone
player has sufficient

562
00:36:22,280 --> 00:36:25,200
sufficient, you know, sufficient
dominance in the market, then

563
00:36:25,200 --> 00:36:28,240
they absolutely control supply
even in in mind.

564
00:36:28,240 --> 00:36:31,560
Look at the niobium market for
instance, tremendous, tremendous

565
00:36:31,560 --> 00:36:34,960
market, tremendous to to be
Yeah, one of the one of the, one

566
00:36:34,960 --> 00:36:38,560
of the shareholders of CBM.
I'm sure the yeah.

567
00:36:38,560 --> 00:36:41,640
I think the, the reality is
though, because there's, you

568
00:36:41,640 --> 00:36:44,240
know, the only the, the, the
geological abundance of a lot of

569
00:36:44,240 --> 00:36:45,920
mines, you just get fragmented
markets.

570
00:36:45,920 --> 00:36:50,240
And and then, yeah, the I do, I
do really resonate with your

571
00:36:50,240 --> 00:36:53,800
view though, that there is this
like tremendous like value of

572
00:36:53,800 --> 00:36:56,760
just holding on to holding on to
like a mediocre deposit for a

573
00:36:56,760 --> 00:36:59,720
very long period of time and
doing nothing on having minimal

574
00:36:59,720 --> 00:37:02,640
spend on it as possible, but it
being ready for the right

575
00:37:03,000 --> 00:37:05,240
moment.
And I think the only way you

576
00:37:05,240 --> 00:37:08,000
can, you can really achieve that
is a lot more in the in the

577
00:37:08,000 --> 00:37:10,880
private markets, public markets,
there's just pressure to have a

578
00:37:10,880 --> 00:37:13,480
catalyst news flow.
The personal incentives are so

579
00:37:13,480 --> 00:37:14,800
fundamentally different.
Yeah.

580
00:37:15,480 --> 00:37:20,760
I, I, I think, I think that's
right, albeit there are public

581
00:37:20,760 --> 00:37:27,880
market operators who if, if they
had this discipline, most of

582
00:37:27,880 --> 00:37:30,360
them don't, although it's been
good for the past five years, if

583
00:37:30,360 --> 00:37:33,920
they had this discipline, they
could have truly exceptional

584
00:37:33,920 --> 00:37:36,680
financial returns.
And I always go back to this

585
00:37:36,680 --> 00:37:41,800
analysis by a fantastic analyst
and investor called Paul Gate,

586
00:37:41,800 --> 00:37:44,520
who's been a terrific guiding
light for me on my kind of

587
00:37:44,520 --> 00:37:47,200
journey into commodities.
He's now, he now runs some

588
00:37:48,400 --> 00:37:51,360
corporate development, corporate
development at Anglo American,

589
00:37:52,320 --> 00:37:54,320
but he was an analyst at
Bernstein.

590
00:37:54,320 --> 00:37:56,400
Then he went to work as an
investor As for law, and he's a

591
00:37:56,400 --> 00:37:58,080
good friend and has really
helped me on this.

592
00:37:59,000 --> 00:38:09,640
He did an analysis of BHP and
Rio's iron ore assets and he

593
00:38:09,640 --> 00:38:12,600
compared the returns on those
assets, returns on capital for

594
00:38:12,600 --> 00:38:16,800
those assets versus Microsoft
over the past 30 years.

595
00:38:17,480 --> 00:38:21,080
And they're better, they're
better businesses than Microsoft

596
00:38:21,080 --> 00:38:23,080
or they were whenever he ran the
analysis.

597
00:38:23,640 --> 00:38:27,680
And that, that is a profound
kind of that.

598
00:38:27,680 --> 00:38:31,040
I thought that was a fantastic
analysis, a brilliant comparison

599
00:38:31,040 --> 00:38:36,560
that is very rarely articulated
and a reminder that if you are

600
00:38:36,560 --> 00:38:39,240
disciplined, what if these, if
this isn't, if it's an amazing

601
00:38:39,240 --> 00:38:42,120
geological resource with
terrific long life and you're

602
00:38:42,120 --> 00:38:45,840
disciplined, These are
incredible businesses.

603
00:38:45,840 --> 00:38:49,680
They are up there with the best
businesses on the planet.

604
00:38:51,520 --> 00:38:57,000
But that is not a view widely
held by stock market

605
00:38:57,000 --> 00:39:01,320
participants, particularly in
the US where the S&P 500 has a

606
00:39:01,320 --> 00:39:06,760
paltry 1.6% allocation to metals
and mining shares, right.

607
00:39:06,760 --> 00:39:12,200
So that, that Paul gate analysis
is very powerful and it's, it's,

608
00:39:12,240 --> 00:39:16,440
you can make some, if you anchor
on that analysis, you, you make

609
00:39:16,440 --> 00:39:18,400
better decisions when you invest
in mines.

610
00:39:18,400 --> 00:39:23,000
So the the mines that should
come on line are those mines not

611
00:39:23,000 --> 00:39:28,120
the peripheral stuff, OK would
be one thought from that.

612
00:39:28,320 --> 00:39:32,520
The second is that if you are
lucky enough to have an

613
00:39:32,520 --> 00:39:37,560
ownership stake in one of those
mines, you may have A506070 year

614
00:39:37,560 --> 00:39:41,200
cash flow stream.
That's pretty bulletproof.

615
00:39:42,160 --> 00:39:44,200
It won't be as cyclical as
people think.

616
00:39:44,720 --> 00:39:48,760
And one of the reasons we have
another person we've learned a

617
00:39:48,760 --> 00:39:53,680
lot from my colleague Luke led
the investment, but I've I've

618
00:39:53,680 --> 00:39:55,800
been learning a lot from it and
it's a terrific company.

619
00:39:55,800 --> 00:39:58,760
Is Altis Minerals.
Yeah, yeah.

620
00:39:58,800 --> 00:40:04,240
Which tremendous and and and
Brian has a similar, you know

621
00:40:04,240 --> 00:40:08,720
Brian would sympathise with that
analysis and so that it is

622
00:40:08,720 --> 00:40:14,960
possible within the mining world
to to be more disciplined.

623
00:40:16,320 --> 00:40:20,480
Get exposure to these assets.
What what happens is your point

624
00:40:20,480 --> 00:40:23,600
about incentives is that as soon
as the boom starts to take off,

625
00:40:23,600 --> 00:40:25,640
the discipline is lost.
The incentives of poor, the

626
00:40:25,640 --> 00:40:29,360
middle men start coming, the
promoters take over.

627
00:40:30,960 --> 00:40:33,520
And so you just got to be on
guard for that in all of these,

628
00:40:33,600 --> 00:40:36,000
in all of these industries.
And I'm obviously watching with

629
00:40:36,000 --> 00:40:40,080
PGMS, I'm watching like a hawk
these potential new projects.

630
00:40:41,640 --> 00:40:45,200
Same with copper, you know,
that's, that's what we've got to

631
00:40:45,200 --> 00:40:49,080
be hyper vigilant for When?
We talk about some of the best

632
00:40:49,800 --> 00:40:52,880
almost monopolies or or cartel
is in the mining world.

633
00:40:53,280 --> 00:40:56,840
De Beers is the name that that
kind of comes to mind for for

634
00:40:56,840 --> 00:40:59,400
over 100 years.
And you mentioned to us Jenga

635
00:40:59,400 --> 00:41:03,120
before we started recording that
you'd been starting to do a bit

636
00:41:03,120 --> 00:41:06,000
of work on on the diamond space.
What has it turned up so far?

637
00:41:06,400 --> 00:41:07,840
Well, it's pretty depressing,
right?

638
00:41:09,240 --> 00:41:16,560
You know, here was an industry,
but both kind of born and

639
00:41:16,560 --> 00:41:20,840
stewarded by one company with
incredible discipline and

640
00:41:21,040 --> 00:41:24,480
commercial brilliance for best
part of 100 years.

641
00:41:24,480 --> 00:41:26,520
I've just finished reading a
biography of of Harry

642
00:41:26,520 --> 00:41:33,240
Oppenheimer, which was just an
amazing insight into a what an

643
00:41:33,240 --> 00:41:39,520
what an incredible man he was.
How how you know, just what an

644
00:41:39,720 --> 00:41:43,600
extraordinary kind of steward of
that of that company and the

645
00:41:43,600 --> 00:41:46,800
difference between being private
and public and the benefits

646
00:41:47,240 --> 00:41:50,440
thereof.
I think at peak, yeah, Anglo

647
00:41:50,440 --> 00:41:52,760
American was like a third of the
South African economy.

648
00:41:52,760 --> 00:41:55,920
Now I appreciate that was in a
time that the you know, that

649
00:41:56,040 --> 00:42:00,400
under apartheid and I'm not in
any way, you know, excusing, you

650
00:42:00,400 --> 00:42:04,240
know, the a lopsided economy,
but it was an amazing business

651
00:42:04,360 --> 00:42:09,400
and mining kind of stewardship.
And the Debeers, you know, the

652
00:42:09,520 --> 00:42:15,280
the the Oppenheimer's helped
bring to life versus the Debeers

653
00:42:15,280 --> 00:42:19,320
of today is, you know, not the
same thing.

654
00:42:21,360 --> 00:42:24,960
You know, they've they've lost
their role of their role as

655
00:42:24,960 --> 00:42:31,240
steward of the industry.
Perhaps the single biggest black

656
00:42:31,240 --> 00:42:37,840
mark on that would be that I
think it's fair to say embrace

657
00:42:37,840 --> 00:42:41,440
of lab grown diamonds.
I mean rather than immediately

658
00:42:42,360 --> 00:42:46,200
drawing attention to the
difference between lab grown and

659
00:42:46,200 --> 00:42:50,560
natural, you know, I'm pretty
sure De Beers, you know, have

660
00:42:50,560 --> 00:42:53,040
had a a lab grown production
facility.

661
00:42:53,080 --> 00:42:54,360
I.
Tried to sell it recently,

662
00:42:54,360 --> 00:42:56,560
Lightroom, I think it's called a
light box.

663
00:42:56,720 --> 00:42:58,240
Yeah.
But yeah, yeah, you're right.

664
00:42:58,960 --> 00:43:01,480
I mean, I just cannot having
read that Harry Oppenheimer

665
00:43:01,480 --> 00:43:04,760
biography and you know, guy was
pretty blunt, pretty to the

666
00:43:04,760 --> 00:43:09,640
point, don't think he would have
done that might be wrong.

667
00:43:10,600 --> 00:43:16,520
So you know that they, the, the
industry is not what it was.

668
00:43:16,880 --> 00:43:21,320
Let's put it like that.
And you know it Debeers

669
00:43:21,320 --> 00:43:23,760
valuation, you know, they've
marked it down from over $11

670
00:43:23,760 --> 00:43:27,160
billion to just over $2 billion.
That's pretty brutal.

671
00:43:28,720 --> 00:43:31,760
So, so listen, the outlook for
the diamond in just let's, let's

672
00:43:31,760 --> 00:43:34,160
do a capital capital cycle
analysis on the diamond

673
00:43:34,160 --> 00:43:37,960
industry.
First off, the supply of

674
00:43:37,960 --> 00:43:46,480
diamonds in total is growing,
but less fast than at a slower

675
00:43:46,480 --> 00:43:49,240
pace than it was.
Natural diamonds or or.

676
00:43:49,520 --> 00:43:51,560
Yeah.
So within, within that, within

677
00:43:51,560 --> 00:43:56,640
that natural diamonds are
falling very rapidly.

678
00:43:56,960 --> 00:44:00,720
So we've gone from about 120
million, a 125 million I think

679
00:44:00,720 --> 00:44:03,440
at peak to I think we're going
to be well below 100 this year.

680
00:44:05,040 --> 00:44:07,480
But lab grown is, is, is is
rising.

681
00:44:09,960 --> 00:44:15,160
So there is a capital cycle case
to be made for natural stones

682
00:44:15,160 --> 00:44:22,360
and that's based on quite rapid,
quite rapid supply falls and

683
00:44:22,360 --> 00:44:25,800
very, very low levels of new
investment in new mines.

684
00:44:25,800 --> 00:44:27,560
I mean take Petra Diamonds for
example.

685
00:44:27,560 --> 00:44:30,360
They've closed down two of their
four mines.

686
00:44:30,360 --> 00:44:34,000
They've only got 2 mines.
That mine is being run in a much

687
00:44:34,000 --> 00:44:38,080
more disciplined fashion and the
supply there is going to focus

688
00:44:38,080 --> 00:44:44,320
on large stoves.
So, so, so the natural industry

689
00:44:44,320 --> 00:44:48,640
appears to be conforming to a
very classic capital cycle and

690
00:44:48,640 --> 00:44:54,040
the valuations of the natural
players, Petra, Gem Diamonds,

691
00:44:54,320 --> 00:44:58,280
Lucara, probably the, the, the
three that you might look at,

692
00:44:59,080 --> 00:45:01,400
you know, they've got a combined
market cap of less than 500

693
00:45:01,400 --> 00:45:03,200
million.
I mean, it's just a nothing

694
00:45:03,200 --> 00:45:08,240
burger in terms of the, the,
the, you know, the, the mining

695
00:45:08,240 --> 00:45:12,040
industry.
But on the lab grown side, you

696
00:45:12,040 --> 00:45:16,840
know, supply continues.
There are there are there's a

697
00:45:16,840 --> 00:45:23,160
case to be made for but for lab
for lab grown prices perhaps

698
00:45:23,160 --> 00:45:26,320
bottoming they're now these
these companies have gone the

699
00:45:26,320 --> 00:45:28,640
lab growing companies have gone
from making supernormal profits

700
00:45:28,640 --> 00:45:32,240
to making pretty low margins.
But you've got to be very

701
00:45:32,240 --> 00:45:33,560
careful.
And I think you know, the way

702
00:45:33,560 --> 00:45:36,880
I'm looking at it is there
probably is a case to be made

703
00:45:36,880 --> 00:45:43,720
for very large natural stones,
you know, kind of 10 carat, you

704
00:45:43,720 --> 00:45:51,280
know, really beautiful one off
bits of of diamond.

705
00:45:51,880 --> 00:45:57,000
If it does look as if those
prices have bottomed and the

706
00:45:57,000 --> 00:45:59,960
question is, do they just, are
they just anchored at this low

707
00:45:59,960 --> 00:46:03,520
level or could they rise, you
know, in relation to the gold or

708
00:46:03,520 --> 00:46:06,320
any of these other similar
anchors?

709
00:46:06,320 --> 00:46:08,400
They're the the cheapest they've
ever been.

710
00:46:09,400 --> 00:46:10,840
So there's a chance they could
go up.

711
00:46:12,280 --> 00:46:16,280
And if they and if the prices do
go up, the industry's much more

712
00:46:16,280 --> 00:46:18,360
consolidated.
The supply is constrained.

713
00:46:18,360 --> 00:46:22,000
It's been ravaged by five years
of a kind of depression.

714
00:46:22,000 --> 00:46:26,520
You've had all this destruction
in the midstream.

715
00:46:26,840 --> 00:46:29,360
So, so, so you know, the, the,
the outlook looks pretty good

716
00:46:29,360 --> 00:46:31,800
and they're trading way below
replacement cost and they're,

717
00:46:31,880 --> 00:46:34,280
they're basically nothing
burgers in terms of market cap.

718
00:46:34,280 --> 00:46:41,640
So perhaps there is a case to be
made for the natural players for

719
00:46:41,640 --> 00:46:46,120
but, but for for a company like
De Beers, which is as far as I

720
00:46:46,120 --> 00:46:48,320
can work out, it's still
struggling to find buyers

721
00:46:48,320 --> 00:46:52,920
despite being being marked down
from 11 billion to just over 2

722
00:46:52,920 --> 00:46:55,560
billion.
You know, that's not great.

723
00:46:55,560 --> 00:46:59,800
You know, that's for the diamond
thesis to really work out for

724
00:46:59,800 --> 00:47:04,320
you to have a 10 year runway of,
of returns, like perhaps the

725
00:47:04,320 --> 00:47:07,600
PGMS might be in full, you'd
need some you'd need that

726
00:47:07,600 --> 00:47:09,560
stewardship role to be
reclaimed.

727
00:47:09,560 --> 00:47:13,200
You'd, you'd hope for some deep
pocketed sovereign wealth fund

728
00:47:13,200 --> 00:47:16,480
to come by to beers, make lots
of investment in in this kind of

729
00:47:16,480 --> 00:47:20,720
natural stone marketing.
And we're not, we're not there

730
00:47:20,720 --> 00:47:23,840
yet.
So, you know, I think it's

731
00:47:23,840 --> 00:47:27,160
interesting if you've got a, if
you're like us and you've got

732
00:47:27,160 --> 00:47:29,760
the ability to have a
diversified portfolio and

733
00:47:29,760 --> 00:47:34,680
perhaps have a small exposure to
a couple of those ideas, then

734
00:47:34,960 --> 00:47:38,200
then maybe it's interesting.
But if you're running a 15 stock

735
00:47:38,200 --> 00:47:41,760
mining fund, could be, you know,
it's going to be tricky to have

736
00:47:41,760 --> 00:47:44,000
a big position in a, in a
diamond miner.

737
00:47:44,000 --> 00:47:48,840
So, you know, I think this is a
it's one of those kind of

738
00:47:48,840 --> 00:47:53,000
interesting places that you want
to keep an open mind.

739
00:47:53,000 --> 00:47:57,400
So I'm want to be want to be
very hesitant on a podcast, you

740
00:47:57,400 --> 00:48:00,520
know, chanting out that diapents
are a great investment.

741
00:48:00,520 --> 00:48:03,680
I think keep keeping keeping an
open mind on this one's probably

742
00:48:03,680 --> 00:48:04,400
the right thing.
I.

743
00:48:04,400 --> 00:48:08,000
Can think of 1 sovereign wealth
fund that that took issue last

744
00:48:08,000 --> 00:48:12,320
time we insinuated they might be
interested in to beers so we're

745
00:48:12,320 --> 00:48:15,520
put to bed that thesis.
I, I think like to make a

746
00:48:15,520 --> 00:48:19,400
broader commodities analogy like
there are these, there are these

747
00:48:19,560 --> 00:48:23,520
moments in, in history where
some new form of technology

748
00:48:23,520 --> 00:48:28,120
comes into play, which, which
helps to uncover the, you know,

749
00:48:28,120 --> 00:48:31,160
a commodity at a much cheaper
price per unit than was

750
00:48:31,160 --> 00:48:33,760
otherwise done and disrupts, you
know, some, some competitive

751
00:48:33,760 --> 00:48:36,080
market dynamics that existed
before.

752
00:48:36,080 --> 00:48:41,880
And even, you know, the, the,
the propulsion of SSEW plants

753
00:48:41,880 --> 00:48:44,040
and copper kept copper at $0.60
for a decade.

754
00:48:44,040 --> 00:48:47,160
The, the, the, the shale boom in
oil.

755
00:48:47,160 --> 00:48:49,400
There's, there's so many of
these instances where technology

756
00:48:49,720 --> 00:48:53,360
helps to, to produce like
completely disrupt ISR in

757
00:48:53,360 --> 00:48:54,960
uranium.
Like there's, there's, there's

758
00:48:54,960 --> 00:48:58,760
so many instances where some new
method of extraction comes into

759
00:48:58,760 --> 00:48:59,840
play.
That is a technological

760
00:48:59,840 --> 00:49:03,160
advancement.
And and it completely it

761
00:49:03,160 --> 00:49:06,920
completely keeps a lid on on on
the upside of that commodity for

762
00:49:07,040 --> 00:49:09,840
for longer than anyone kind of
thinks is is reasonable.

763
00:49:11,400 --> 00:49:13,080
Yeah, I think that's right.
And I think that has to be the

764
00:49:13,080 --> 00:49:14,920
base case on diamonds.
You know, these lab grown

765
00:49:14,920 --> 00:49:18,600
diamonds are to the naked eye
you, you you wouldn't know.

766
00:49:20,400 --> 00:49:22,960
So that has to be the base
proposition.

767
00:49:23,200 --> 00:49:26,800
What what's health and and I
think that's you would invest in

768
00:49:26,800 --> 00:49:30,480
diamonds thinking that that was
you're more likely or not to

769
00:49:30,480 --> 00:49:33,280
have your business eaten by lab
grown.

770
00:49:34,360 --> 00:49:37,520
But if you thought that there
was a 30% chance, let's say

771
00:49:37,960 --> 00:49:40,000
using sort of probabilistic
analysis, and you thought

772
00:49:40,000 --> 00:49:45,240
there's a 30% chance that in
large stones their value would

773
00:49:45,240 --> 00:49:48,760
persist for let's say the next
20 years, which would be like

774
00:49:48,760 --> 00:49:54,840
the aging boomer demographic as
the primary consumer of these

775
00:49:55,320 --> 00:49:56,680
stones.
You know, we're talking

776
00:49:56,680 --> 00:50:00,640
$1,000,000 plus stones here.
You know, those are people

777
00:50:00,640 --> 00:50:02,680
who've anchored on this diamond
is forever thing.

778
00:50:02,680 --> 00:50:04,880
They've got loads of money.
Boomers have got all the money.

779
00:50:04,880 --> 00:50:07,200
If you have sort of a good
investment case, just find one

780
00:50:07,200 --> 00:50:10,760
that's driven by boomers.
That's that's something I'm

781
00:50:10,760 --> 00:50:13,480
quite keen on.
You know, they're probably going

782
00:50:13,480 --> 00:50:15,520
to buy diamonds for another 10
to 15 years.

783
00:50:15,520 --> 00:50:19,000
And if that's true, there's a
hell of a lot of value in these

784
00:50:19,320 --> 00:50:25,800
diamond companies with, you
know, 20 year mine lives and,

785
00:50:26,680 --> 00:50:32,480
you know, valuations that may be
less than one times

786
00:50:33,600 --> 00:50:36,800
forward-looking earnings.
I'm a great fan of this idea of

787
00:50:38,200 --> 00:50:42,040
I just put out this piece, which
is about looking for 10 baggers.

788
00:50:42,040 --> 00:50:45,560
How do you find 10 baggers?
And actually, it's a really

789
00:50:45,560 --> 00:50:48,280
simple, but not easy framework
as you look for companies that

790
00:50:48,280 --> 00:50:51,520
are on PS of that one times,
it's obviously not going to be

791
00:50:51,520 --> 00:50:54,480
next year's earnings.
We've got to do some analysis on

792
00:50:54,480 --> 00:51:00,200
the company and often times when
a company's in distress or

793
00:51:00,200 --> 00:51:02,480
there's a huge amount of
depression around the industry,

794
00:51:02,800 --> 00:51:05,160
you can look out two or three
years and unreasonable

795
00:51:05,160 --> 00:51:07,920
assumptions, you know, get a
company to be on a very low PE.

796
00:51:07,920 --> 00:51:11,080
And if you're, and if you're
lucky like us and you've got a

797
00:51:11,760 --> 00:51:15,480
capital that will look out
longer, say 5 to 10 years,

798
00:51:15,480 --> 00:51:18,600
buying something on APE One's
normally a good entry point.

799
00:51:19,360 --> 00:51:21,840
And I think a lot of these
diamond companies are on PES of

800
00:51:21,840 --> 00:51:28,960
1 or maybe less than one.
And if you get this, this point

801
00:51:28,960 --> 00:51:34,160
about the 30%, you know, if
there's just a 30% chance that

802
00:51:34,240 --> 00:51:38,120
there is a 10 to 15 year runway
in these large high value

803
00:51:38,120 --> 00:51:40,960
stones, then you can make a lot
of money in these diamond

804
00:51:40,960 --> 00:51:44,920
companies.
But equally you have to be open.

805
00:51:44,920 --> 00:51:48,400
And it's like, I think it was
Ralph Waldo Emerson who said,

806
00:51:49,000 --> 00:51:52,200
and this is very pretentious,
but I just love this, this

807
00:51:52,200 --> 00:51:53,760
quote.
So I've lodged it in the brain.

808
00:51:54,840 --> 00:51:59,280
The test of a first class mind
is to be able to hold 2 opposing

809
00:51:59,600 --> 00:52:03,760
thoughts and and not go mad or
they go butchered.

810
00:52:03,760 --> 00:52:05,040
The quote, I've even got that
wrong.

811
00:52:05,040 --> 00:52:06,800
But so I'm not a first class
mind.

812
00:52:06,800 --> 00:52:11,320
I can't I can't hold it.
But basically, you know, you the

813
00:52:11,320 --> 00:52:13,720
idea of investing in something
like Dimes, which is why it's

814
00:52:13,720 --> 00:52:17,000
such a tiny slither of our
portfolio, is that there's

815
00:52:17,000 --> 00:52:20,440
probably a higher probability of
you not making any money in this

816
00:52:20,440 --> 00:52:21,840
than there is a making money.
OK.

817
00:52:21,840 --> 00:52:24,480
So it's probably a bad
investment, but there's a

818
00:52:24,480 --> 00:52:29,040
probability, let's call it 30%
that they might go on to do

819
00:52:29,560 --> 00:52:33,840
5X10X.
So you're entering an investment

820
00:52:33,840 --> 00:52:37,520
in which your most likely
outcome is losing money, but the

821
00:52:37,520 --> 00:52:42,960
probability adjusted return is
very high because if you just

822
00:52:42,960 --> 00:52:46,120
have that 30% chance that the
large stone market does continue

823
00:52:46,120 --> 00:52:48,320
and so on and so forth, you're
going to make very good money

824
00:52:48,320 --> 00:52:53,040
on, you know, so that's that's
one of the joys of having a very

825
00:52:53,040 --> 00:52:57,960
diversified portfolio, the
ability to take small bets that

826
00:53:00,000 --> 00:53:02,080
that we have here.
And I just wrote this just if

827
00:53:02,080 --> 00:53:04,600
anyone's interested in exploring
this idea of how do you look for

828
00:53:04,600 --> 00:53:08,880
10 baggers, what the frameworks?
I've just written this piece on

829
00:53:08,880 --> 00:53:15,000
Saga, which is Auk cruise and
holiday and insurance company

830
00:53:15,000 --> 00:53:17,040
for old people.
Go back to this idea of boomers,

831
00:53:17,040 --> 00:53:20,000
the people with the money I love
this is just a great investment

832
00:53:20,000 --> 00:53:22,400
idea.
Look for industries that serve

833
00:53:22,400 --> 00:53:24,040
boomers because they've got all
the dough.

834
00:53:24,560 --> 00:53:28,480
And we managed to buy Saga on AP
of of basically less than one.

835
00:53:28,480 --> 00:53:31,880
It was on 1/2 time's PE and it's
done very well.

836
00:53:31,880 --> 00:53:34,960
And but that's that framework of
looking for things that could go

837
00:53:34,960 --> 00:53:39,040
up a lot, I think is a really
good way to test your investment

838
00:53:39,040 --> 00:53:40,760
thesis.
It forces you to step back to

839
00:53:40,760 --> 00:53:45,080
look at the long term and also
just very, you know, you're not

840
00:53:45,080 --> 00:53:48,720
competing with as many people
when you're looking out that

841
00:53:48,720 --> 00:53:50,800
long.
You know, there's loads of

842
00:53:50,800 --> 00:53:53,360
people in pod shops looking for
next.

843
00:53:53,760 --> 00:53:57,200
Apparently in a pod shop, a long
term thesis is looking through

844
00:53:57,200 --> 00:53:59,360
1/4's earnings.
You know, you're not doing any

845
00:53:59,360 --> 00:54:02,240
of that stuff.
You're looking out 10 years so

846
00:54:02,720 --> 00:54:05,880
got less competition.
The contrast between you guys

847
00:54:05,880 --> 00:54:09,840
and a pod shop are pretty stark.
There's one more commodity I'm

848
00:54:09,840 --> 00:54:13,800
curious to get your thoughts on.
And I think if we were to kind

849
00:54:13,800 --> 00:54:18,720
of poll our listeners and remind
them what the capital cycle sort

850
00:54:18,720 --> 00:54:22,840
of framework is and try and wrap
that around a commodity, uranium

851
00:54:22,840 --> 00:54:24,600
would be one of the first ones
that would come to mind.

852
00:54:24,640 --> 00:54:29,480
And it's a bit more, you know,
further played out than you M

853
00:54:29,480 --> 00:54:32,520
than the, the PGM example you
might give.

854
00:54:32,840 --> 00:54:35,880
But I'm curious if you've got a
history with the the uranium

855
00:54:35,880 --> 00:54:38,200
narrative or you've just got
thoughts in general to share on

856
00:54:38,200 --> 00:54:43,400
it.
I think you're, you're right.

857
00:54:43,400 --> 00:54:47,280
It conforms to classic capital
cycle analysis and we have owned

858
00:54:47,320 --> 00:54:53,840
uranium and uranium related
stocks for a while.

859
00:54:54,560 --> 00:54:59,960
I, I think we're kind of.
So here's what I'd say on

860
00:54:59,960 --> 00:55:07,760
uranium, this idea that the
industry finds it very difficult

861
00:55:07,760 --> 00:55:13,280
to internalize, this idea that
the demand for this product is

862
00:55:13,280 --> 00:55:17,720
ultimately price inelastic,
that's that high prices always

863
00:55:17,720 --> 00:55:25,320
bring in these intermediaries
who are keen to produce, keen to

864
00:55:25,320 --> 00:55:29,160
kind of mediate new supply.
I think is relevant in uranium.

865
00:55:29,400 --> 00:55:34,520
You know, if I look at uranium
compared to say I don't know

866
00:55:34,520 --> 00:55:39,760
PGMS or even I don't know
something like compared to PGMS,

867
00:55:40,360 --> 00:55:46,560
there are far few middle men,
promoters, brokers, funds

868
00:55:47,520 --> 00:55:50,960
mediating the PGM space than
there are in uranium.

869
00:55:51,400 --> 00:55:56,680
Uranium may well have strong
enough supply demand dynamics

870
00:55:56,680 --> 00:56:02,040
due to the, you know, build out
of, of nuclear and so on that

871
00:56:02,040 --> 00:56:05,440
that doesn't matter that that
may be the case.

872
00:56:05,440 --> 00:56:08,880
And I, I, I, I don't have a
strong view on that.

873
00:56:08,880 --> 00:56:12,400
I can quite see that the long
term build out and and under

874
00:56:12,400 --> 00:56:14,800
investment in nuclear is just
going to be a terrific demand

875
00:56:14,800 --> 00:56:21,080
tailwind with with kind of a
slightly more readable demand

876
00:56:21,080 --> 00:56:23,640
story than something more
cyclical like for example,

877
00:56:23,640 --> 00:56:27,240
copper.
So, so I buy all of that, but

878
00:56:27,240 --> 00:56:32,000
you are buying a demand story
with uranium at these prices and

879
00:56:32,000 --> 00:56:36,600
where we are in this cycle.
And I would just be, you know,

880
00:56:36,600 --> 00:56:42,720
for me, I'm would be more, I'd
be cautious about that doesn't

881
00:56:42,720 --> 00:56:46,440
mean it might, it won't work,
But just if you were to do a

882
00:56:46,440 --> 00:56:53,440
super simple, like what are the
characteristics of a mid to late

883
00:56:53,440 --> 00:56:57,480
cycle commodity, I think uranium
would take a few of those.

884
00:56:57,480 --> 00:56:59,680
That doesn't mean it can't
extend, but that that would be

885
00:56:59,680 --> 00:57:03,760
my sort of thought on it.
I'm really curious about

886
00:57:03,760 --> 00:57:09,120
refiners like there's yeah,
they're, they're incredibly like

887
00:57:09,120 --> 00:57:12,120
critical there's, there's often
latent capacity.

888
00:57:12,120 --> 00:57:14,520
They seem to be getting a, a
government bid these days of

889
00:57:14,520 --> 00:57:17,960
strategic assets.
And whenever you, you, you look

890
00:57:17,960 --> 00:57:21,520
at the valuation of some of some
of these data smelter, A refiner

891
00:57:21,520 --> 00:57:24,520
like, like companies want to
sell them for a dollar and like,

892
00:57:24,640 --> 00:57:26,720
you know, they're stuck with a
big liability and they can't

893
00:57:27,800 --> 00:57:29,640
like just how do you, how do you
think about the evolving

894
00:57:29,640 --> 00:57:32,040
landscape of these?
Because I know you'd look at the

895
00:57:32,040 --> 00:57:34,800
replacement cost and my God, the
replacement cost of some of this

896
00:57:34,800 --> 00:57:37,440
infrastructure is enormous, But
how, how valuable is it?

897
00:57:37,440 --> 00:57:42,320
How useful is it like?
I mean, it's absolutely, you

898
00:57:42,320 --> 00:57:45,320
know, it's we're, we're
committing economic suicide in

899
00:57:45,320 --> 00:57:50,600
the West with this removal of
all forms of energy dense

900
00:57:50,600 --> 00:57:52,840
material processing.
It's so sad.

901
00:57:54,480 --> 00:57:57,400
I've one of my best man at my
wedding, one of my great mates,

902
00:57:57,400 --> 00:57:59,680
guy called Ed Conway.
He wrote a book called the

903
00:57:59,680 --> 00:58:07,840
material World and great book
and very sweetly, he put me in

904
00:58:07,840 --> 00:58:10,520
the notes, which I'm, which I'm
forever grateful for.

905
00:58:10,520 --> 00:58:13,360
And he's he's godfather to one
of my sons and my son's a real

906
00:58:13,360 --> 00:58:17,040
geek.
And, and he follows him on on,

907
00:58:17,040 --> 00:58:20,840
on on YouTube because that's all
he watches religiously.

908
00:58:20,840 --> 00:58:26,560
And Ed just did a terrific piece
on the removal of the UK's

909
00:58:26,560 --> 00:58:29,120
chemical in all like the
collapse of the UK's chemical

910
00:58:29,120 --> 00:58:32,280
industry, not over the past 20
years, but in the past five

911
00:58:32,280 --> 00:58:34,800
years.
OK, the speed and I think this

912
00:58:34,800 --> 00:58:38,560
is one thing that people are not
familiar with is they kind of

913
00:58:38,560 --> 00:58:41,400
put their hands to go, oh, we've
been deindustrializing for 30

914
00:58:41,400 --> 00:58:44,680
years.
Yes, we have the speed at which

915
00:58:44,680 --> 00:58:46,960
we have deindustrialized in the
past five years, particularly in

916
00:58:46,960 --> 00:58:49,280
the UKI don't know why this is
relevant, particularly not in

917
00:58:49,280 --> 00:58:52,000
odds.
You guys never had large

918
00:58:52,000 --> 00:58:58,800
industry is is rapid and you
know so much so that in this Ed

919
00:58:58,920 --> 00:59:04,960
Conway piece that he did he
talks about there being a

920
00:59:04,960 --> 00:59:09,000
credible scenario within the
next five years that the UK

921
00:59:09,000 --> 00:59:13,320
might have to import salt.
Now we've never imported salt in

922
00:59:13,320 --> 00:59:16,720
the history of this island
nation.

923
00:59:16,720 --> 00:59:19,240
Never, we've always had enough
salt domestically.

924
00:59:19,840 --> 00:59:23,320
And when you start kind of, you
know, get peeling back the

925
00:59:23,320 --> 00:59:26,200
hierarchy of needs towards it's
important, like salt's pretty

926
00:59:26,200 --> 00:59:32,680
critical.
So it is not just that we are

927
00:59:32,680 --> 00:59:36,120
closing refining capacity, but
we're not really aware of the

928
00:59:36,120 --> 00:59:40,360
importance of refining capacity.
It's that the destruction of the

929
00:59:40,880 --> 00:59:44,720
basic building blocks of an
industrial society in, in places

930
00:59:44,720 --> 00:59:49,640
like the UK has, has been so
rapid in the last five years

931
00:59:49,640 --> 00:59:51,240
that we may have to import salt.
Now.

932
00:59:52,280 --> 00:59:54,040
There's all sorts of reasons for
this, of course.

933
00:59:54,040 --> 00:59:56,640
It's the very, very high energy
costs in the UK.

934
00:59:56,640 --> 01:00:01,120
It's the planning regulations.
There are all sorts of specific

935
01:00:01,120 --> 01:00:05,520
proximate causes, but to my mind
there's one overarching one.

936
01:00:05,560 --> 01:00:10,080
And this is 1 something I, you
know, shouldn't be well be be

937
01:00:10,080 --> 01:00:13,680
careful being too bombastic.
And it's not really a political

938
01:00:13,680 --> 01:00:16,680
point.
It's that the leadership class,

939
01:00:16,680 --> 01:00:22,760
certainly in the UK, basically
does PPE degrees, politics,

940
01:00:22,760 --> 01:00:25,200
philosophy and economics and
they learn how to be.

941
01:00:26,760 --> 01:00:30,320
Rhetoricians, they learn how to
come up with narratives.

942
01:00:30,560 --> 01:00:33,600
They all become sort of public
relations people after they

943
01:00:33,600 --> 01:00:35,120
graduate.
And then they get jobs in

944
01:00:35,440 --> 01:00:38,120
politics.
You know, our energy secretary,

945
01:00:38,640 --> 01:00:43,840
OK, pretty important job right
now is a PPE graduate.

946
01:00:44,400 --> 01:00:46,720
And this is very, very
dangerous.

947
01:00:46,720 --> 01:00:48,880
And it's happening all over the
the West.

948
01:00:50,200 --> 01:00:54,240
And these people don't
understand the basic building

949
01:00:54,240 --> 01:00:58,720
blocks of how an economy works
and when they are and what

950
01:00:58,720 --> 01:01:01,760
they've, what they've done by
bring by, by kind of taking in a

951
01:01:01,760 --> 01:01:05,560
lot of these narratives that are
basically kind of doom

952
01:01:05,560 --> 01:01:08,960
narratives, whether it's
environmental or, or what have

953
01:01:08,960 --> 01:01:14,240
you, they've rapidly taken out a
lot of this capacity.

954
01:01:14,240 --> 01:01:16,640
And it's, it is very dangerous.
So dangerous, in fact, that we

955
01:01:16,640 --> 01:01:19,080
may have to import salt.
That's why I'm giving you this

956
01:01:19,080 --> 01:01:22,800
salt thing because it's a, it's
a way of focusing people as to

957
01:01:22,800 --> 01:01:25,040
how rapidly we've
deindustrialized.

958
01:01:25,240 --> 01:01:27,840
And how could we do that?
Well, because the people at the

959
01:01:27,840 --> 01:01:31,040
top who make a lot of decisions
don't really understand this

960
01:01:31,040 --> 01:01:32,840
world.
And, and that's why books like

961
01:01:32,840 --> 01:01:35,320
the material world and stuff
that Ed is doing is so important

962
01:01:35,320 --> 01:01:38,560
because it's putting, pushing
these ideas back up the agenda

963
01:01:38,560 --> 01:01:42,160
and confronting these decision
makers with the, the hard

964
01:01:42,160 --> 01:01:47,280
realities of, of, of us needing
this infrastructure, basically.

965
01:01:48,840 --> 01:01:52,120
Is there is there a commodity
that maybe we haven't talked

966
01:01:52,120 --> 01:01:57,000
about like that, that you're
pretty like, yeah, you, you, you

967
01:01:57,000 --> 01:01:59,000
think he's in a sweet part of
the cycle right now?

968
01:01:59,240 --> 01:02:00,920
It's it's, it's super
overlooked.

969
01:02:01,000 --> 01:02:02,480
Maybe it's niche, maybe it's
not.

970
01:02:03,840 --> 01:02:07,800
Well, I would say a couple of
things, OK, using the capital

971
01:02:07,800 --> 01:02:13,760
cycle framework and using the
S&P 500 as probably the best

972
01:02:13,800 --> 01:02:16,440
arbiter of where global capital
is, right?

973
01:02:16,760 --> 01:02:23,520
Whatever it is, nearly 70% of
the global index, around 50% of

974
01:02:23,520 --> 01:02:29,000
the S&P 5 hundreds is MAG 7 chip
names, software names.

975
01:02:29,760 --> 01:02:33,520
So just under $0.50 in every
dollar invested in the S&P is

976
01:02:33,520 --> 01:02:39,480
that in metals and mining it's
about 1.6% and in energy, I

977
01:02:39,480 --> 01:02:46,560
think it's just over 4 1/2%.
So your listeners, you guys, you

978
01:02:46,560 --> 01:02:49,200
spend a lot of time on mining
and you're, you're really

979
01:02:49,200 --> 01:02:53,560
delving into the, the weeds of
mining, but just standing back

980
01:02:53,560 --> 01:02:56,240
and that's, you know, the, the
massive privilege we have as

981
01:02:56,240 --> 01:02:58,640
like global investors and be
able to look everywhere.

982
01:02:59,840 --> 01:03:06,400
The opportunity here is
extraordinary in it's metals and

983
01:03:06,400 --> 01:03:09,800
mining, it's energy, It's also
just fixed asset heavy, fixed

984
01:03:09,800 --> 01:03:11,840
asset intensive industry in
general.

985
01:03:12,320 --> 01:03:15,160
It has been under invested in.
Not just my point earlier about

986
01:03:15,160 --> 01:03:18,240
the the Ed Conway piece about
UK, It's not just been like a

987
01:03:18,240 --> 01:03:25,440
three decade disinvestment, it
has rapidly the destruction of a

988
01:03:25,440 --> 01:03:26,920
lot of this fixed asset
investment.

989
01:03:27,160 --> 01:03:30,880
The lack of in keeping that you
know of a sustaining CapEx even

990
01:03:30,880 --> 01:03:33,960
in the last five years has been
very significant because all of

991
01:03:33,960 --> 01:03:36,720
the world's capital attention
and intellectual capital, right?

992
01:03:36,720 --> 01:03:39,000
This is not just a, it's not
just a money cycle, it's an

993
01:03:39,000 --> 01:03:42,200
intellectual capital cycle.
How many people graduate from

994
01:03:42,840 --> 01:03:45,440
universities in the US and want
to be minors?

995
01:03:45,440 --> 01:03:49,160
It's 300.
I, I, I can't get the numbers on

996
01:03:49,160 --> 01:03:51,440
how many people graduate as
software engineers, but it's

997
01:03:51,440 --> 01:03:53,680
just like many, many multiples
of that.

998
01:03:54,360 --> 01:03:57,680
So all of the world's
intellectual financial capital

999
01:03:57,680 --> 01:04:01,920
is on that $0.50 and none of it
is on that, let's call it, you

1000
01:04:01,920 --> 01:04:08,400
know, 5-6 cents.
So yes, we have started a bit of

1001
01:04:08,400 --> 01:04:12,440
a commodity bull run broadly
speaking, but it's very nascent

1002
01:04:12,440 --> 01:04:18,200
and it will take a long time.
And so I think you know, I'm,

1003
01:04:18,240 --> 01:04:22,120
I'm not answering your question,
but I'm trying to put it in

1004
01:04:22,120 --> 01:04:25,320
perspective, which is that we
are just very early in this

1005
01:04:25,320 --> 01:04:31,560
cycle as a whole and don't my
not advice, not allowed to give

1006
01:04:31,560 --> 01:04:35,520
investment advice.
My thought would be look at the

1007
01:04:35,520 --> 01:04:40,240
long term stand back, remember
how long these cycles could be

1008
01:04:40,640 --> 01:04:45,080
an anchor on that example I gave
you of Impala which from 1998,

1009
01:04:45,200 --> 01:04:49,760
well second largest PGM miner,
not some small little company

1010
01:04:49,760 --> 01:04:54,720
that had just found a new
deposit in you know some dodgy

1011
01:04:54,720 --> 01:04:57,440
geography.
The world's second largest PGM

1012
01:04:57,440 --> 01:05:01,160
miner went up 1 hundredfold in
round 75 times in U.S. dollars

1013
01:05:01,160 --> 01:05:05,320
over a 10 year period.
It was an incredibly volatile

1014
01:05:05,320 --> 01:05:07,760
ride.
There were like 5 draw downs of

1015
01:05:07,760 --> 01:05:11,600
over 50%.
You had to be really disciplined

1016
01:05:11,640 --> 01:05:15,640
and have a kind of iron will.
But if you kept that view of the

1017
01:05:15,640 --> 01:05:21,160
cycle, you did extremely well.
And so I would focus on the big,

1018
01:05:21,280 --> 01:05:26,920
I would focus on on the long run
structural capital cycles in

1019
01:05:26,920 --> 01:05:29,960
that, in that bucket of under
invested materials and and

1020
01:05:29,960 --> 01:05:32,240
energy names.
And I think you have a great

1021
01:05:32,240 --> 01:05:35,440
decade.
Tango, I think that's the

1022
01:05:35,440 --> 01:05:37,360
perfect spot to leave the
conversation.

1023
01:05:37,360 --> 01:05:39,440
I appreciate you being generous
with your your time.

1024
01:05:39,440 --> 01:05:43,320
And I have little doubt you've
given all our listeners and, and

1025
01:05:43,320 --> 01:05:45,080
us as well a lot to think about.
So thank you.

1026
01:05:46,440 --> 01:05:48,960
Really enjoyed it guys.
Hope to see you when I'm coming

1027
01:05:48,960 --> 01:05:51,840
down to Oz in October.
Hope to catch up with you in

1028
01:05:51,840 --> 01:05:54,800
person then.
Absolutely big thank you to our

1029
01:05:54,800 --> 01:05:58,000
fantastic partners, Sandvik
Ground support, Interlinks,

1030
01:05:58,000 --> 01:06:01,120
Focus, the platform by market
tech and Nat Gen.

1031
01:06:01,280 --> 01:06:06,240
Check him out Uduru, Uduru.
Remember, I'm an idiot.

1032
01:06:06,480 --> 01:06:08,960
JD is an idiot.
If you thought any of this was

1033
01:06:08,960 --> 01:06:11,480
anything other than
entertainment, you're an idiot

1034
01:06:11,840 --> 01:06:13,000
and you need to read out
disclaimer.