If you get a few glasses of scotch into a wealthy fund manager…
They’ll tell you that one of the key things they look for in an investment opportunity is something called “pure-play exposure”.
- Pure-play exposure means an investment’s performance is determined by a sole characteristic.
The financial returns associated with a pure-play investment are not diluted by other unwanted characteristics.
Take a company like General Electric.
GE derives its revenue from power, appliances, renewable energy, aviation, and even hydrocarbons. A company like GE is known as a conglomerate.
With such diverse revenue generation capability, it would be nearly impossible to find a single return determining characteristic or risk factor for GE.
On the other hand…
A specialized commodity producer’s return performance is going to be guided mainly on the revenues made from that commodity.
Assuming management meets expectations, the economic return should be guided by the commodity.
That’s an example of a pure-play investment.
That’s equivalent to nearly two full years’ worth of emissions from all energy production around the world.
Pick the right commodity and you give yourself the best-undiluted chance of making a big score.
Copper Tension and Demand
Identifying an early trend in the commodity space can unlock vast fortunes.
And this is why I love the commodity business.
- The biggest trend I see in the investment space these days is global decarbonization – with eventual Balance Sheet reporting of carbon footprint and liability of all publicly listed companies.
But there are very few pure-play ways to get exposure.
You might think you’d need to be invested into some element, with an unpronounceable name, far down the periodic table which is only located in a tiny corner of the planet.
But that’s not the case.
- Did you know that the average generator in a wind turbine needs 1,900 pounds of copper?
- Or that the average electric car requires 150 pounds copper?
Solar panels, power lines, high-efficiency laundry machines…you name it, they need copper.
And A LOT of it…
By 2030, the market is poised to grow to over 30 million tonnes of copper consumption annually, representing more than 30% growth through the decade.
Copper represents a fantastic way to get pure-play exposure to economic growth and global electrification.
Copper Prices are Booming
I’ve written many times in the past that for the copper supply to increase, prices would need to go up, substantially.
- The world needs a lot of copper…but it won’t get it for $3 per pound.
This is coming to fruition now.
Copper prices have been rapidly increasing since the pandemic began in March 2020 and are hovering just under all-time highs today.
Take a look…
I do believe copper prices – in the long term – can still rise higher.
It seems like a textbook setup of long-term demand growth, coupled with a tight supply outlook.
Copper Prices are Rising, But Stock Valuations are Not
You would expect that with prices near all-time highs, valuations would be equally rich.
This is not the case right now.
Below is a chart which shows the forward-looking estimates on a rolling basis for EV/EBITDA
That stands for: Earnings Before Interest, Taxes, Depreciation, and Amortization relative to Enterprise Value).
- When the EV/EBTIDA ratio is high, this can demonstrate a company or sector is overvalued relative to peers.
- When the EV/EBTIDA ratio is low, it can show that a company or sector is undervalued relative to peers.
You can see that in 2021, the market was pricing in a lot of growth for the sector.
That’s because share prices had climbed much higher than expected cash flows.
Today, those expectations have been revised lower and the market is projecting lower prices and less growth.
This comes at a time when it is clearer than at any time in the past decade…
…the world is going to need a lot more copper.
Copper “Peanut Gallery” Analysis
As a total side point…
I want to warn everyone interested in the commodity business about what I call the Peanut Gallery.
Those are people who have opinions (whether paid for by their masters or their own) but are unblemished with success.
- Simply put, they have zero tangible success in actually building anything of value in the commodity space.
OK, Katusa – what have you done then?
Having to stand up for myself, just google the deals I’ve been part of.
In the copper space specifically, I was one of the original four founding directors of Copper Mountain, which eventually became the 3rd largest copper mine in Canada.
I was incredibly fortunate to sit beside the legendary Jim O’Rourke for over 13 years and watch and learn how a master goes about building a mine.
Everything from design to exploration to permitting to dealing with all stakeholders to building the mine on time and budget.
- Doing is so much more of a learning experience than reading and judging from afar.
In the early years, I was the largest individual investor in the company.
And I learned first hand the difference between ‘Skin in the Game’ and “Paid Suits’.
- Million-dollar lesson: Always bet on people with skin in the game.
So, when you read some analysis or opinions—ask yourself, “what has this person actually done in the space”.
Back to my point now…
Copper’s Crux: Copper Supply
It is getting harder and harder to discover new world-class mines.
Making the situation even more challenging is that many of the world’s largest copper mines are getting older, mining lower grades, and are located in politically risky jurisdictions.
This trifecta sets the stage for a long-term boom in copper prices.
Skate Where the Puck (and MONEY) is Going…
Right now, my team is laser-focused on the decarbonization investments.
Renewable energy, electric vehicles, and carbon offsets all play major roles.
- I believe governments around the world are going to tax the high polluters and use that cash to subsidize the switch to greener economies.
Trillions of dollars are going to be invested into the decarbonization sector over the coming decades.
Re-read that sentence above 3 times.
And prepare accordingly.
Because Carbonomics is going to become a pillar of every single industry.
Now, if you want to get an independent unfiltered opinion and a piece of the action…
Consider becoming a subscriber to my premium service – Katusa’s Resource Opportunities.
The commodities and carbon bull market haven’t even started. But for many sitting on the fence…
It will be too late, very soon.
Regards,
Marin Katusa
