To The Moon

How long oil prices stay high depends on the energy transition.

The moment it takes 30 years to switch to fossil fuels, there is still an excellent return for investors in oil shares. The moment we switch completely to alternative energy in ten years' time, that becomes a lot more difficult. The share of alternative energy is still negligible at the moment. Moreover, 100 million barrels of oil are still being burned every day, so the transition is not really visible in the statistics yet either.$Light Crude Oil - main 2205(CLmain)$

The transition to alternative energy is largely dependent on the availability of metals.

An important raw material for batteries is Lithium, the demand for which will triple by 2025. There is a lot of investment in new Lithium mines, but more than a 50 percent increase in current supply is not in the cards for the time being. Demand for cobalt and nickel will be twenty to twenty-five times higher by 2040 than it is today, just to meet the Paris climate agreement.

A key element in the energy transition is platinum, especially at a time when hydrogen is coming into the picture as an alternative energy carrier. Perhaps not as an alternative for the electric car, but possibly for trucks or industrial applications. An electric car consumes up to four times as much copper as a fossil-fueled car.

Furthermore, electric cars place a much heavier burden on the electricity network. This capacity must be doubled and this requires a lot of copper. Aluminium is used in solar panels, and electric vehicles also contain 30 percent more aluminium than fossil-fueled vehicles. Finally, the infrastructure required for the energy transition cannot be built without steel. In the production of steel, a lot of CO2 is released. By taxing CO2 more heavily or regulating it in some other way, many Chinese blast furnaces will no longer be able to compete on the world market. But cleaner steel production requires a bizarre amount of alternative energy, and its production in turn requires many metals. One particular metal that has rapidly become popular is uranium; even the Greens in Germany are cautiously dropping their objections to nuclear power.

Despite this good outlook, mining companies are historically cheap.

The downside of this industry for investors is the capital intensity. Combined with the fact that there are many years between investment decisions and eventual production, there was a pretty mean pig cycle in mining for a long time. Very common to make losses year in and year out, which were then made up for in a good year. It is precisely in that good year that mines make spectacular profits, which at that time makes for an optically low valuation.

Still, it was better to buy at a high valuation (because of the lack of profits) than at an optically low valuation (based on peak profits). But the world of mining has changed. There are fewer providers competing with each other. Thanks to large conglomerates like BHP$BHP Billiton(BHP)$, Rio Tinto$Rio Tinto PLC(RIO)$, Glencore$Glencore Plc(GLCNF)$ and Anglo American$Anglo American plc(AAUKF)$, there is more of an oligopoly and that suddenly makes this market much more interesting. This is because then there is often a capital discipline.

Mining companies, along with oil and gas companies and food producers, are seen as good protection against higher inflation.

However, it is important to note that with commodity prices already high, many mines are generating high cash flows and metal prices do not need to rise further for this to happen.

It is also noteworthy that despite the rise in metal prices, few speculative positions are held. They do exist, but rather on the short side, as shown by the recent development of the nickel price. Because of the environmental impact of mining companies, like oil companies, they are usually avoided by sustainable investors, which means that on balance investors are not heavily overweight mining companies.

A somewhat separate category is gold mines.

In the first place, there are more of them, so it is much less of an oligopoly. Moreover, mining gold is a somewhat nonsensical activity. With great difficulty we extract gold from the ground, only to put it back in a vault deep underground. Still, the sanctions against Russia may cause the demand for gold to increase. Bear in mind, however, that central bankers can have an unpredictable influence on the gold market. As the cost of gold mining has increased in recent decades, many gold mines are trying to achieve a better price by selling gold over time. At such a time, a gold mine no longer benefits directly from the higher gold price. Furthermore, gold mines are surrounded by a group of fanatical 'gold bugs', which distorts the view of the fundamentals.

Mining companies as a group are an interesting way to benefit from the energy transition, which is likely to accelerate due to the Russian invasion. In addition, the Russian boycott is creating supply and therefore higher prices. Furthermore, it is much less easy than before to start a mine because of high environmental requirements. This means that there is a barrier against new entrants. In such a market, attractive profit margins can quickly be seen. Profits that are adjusted upwards due to rising metal prices, as can also be seen in the positive profit adjustment of, for example, Australian stocks. New, but also successful, are companies that extract metals through recycling. This industry will continue to grow in the future and also benefits from higher metal prices.