The Eternal Metal and the basic metal of electrification

I (James) been lucky enough to have met nearly anyone who’s anyone in the world of energy over the years.

From government ministers, CEOs and analysts to other experts, my Rolodex is full of contacts spanning the full spectrum of energy insiders all over the world.

After 15 years of working on near enough the frontlines of the industry, as a journalist, analyst and investor, I’m now on first-name terms with key players in pretty much every facet of the energy world, no matter the specific sector and regardless of the location.

But of all the people I’ve met, interviewed or just generally broken bread with, one name stands out above all else.

He is the author of a trilogy of best-selling books on energy and is regarded by many – me included – as the world’s foremost energy expert.

In fact, he was awarded the Pulitzer Prize for one of his books – Prize: the Epic Quest for Oil, Money & Power (1990) – that has now been translated into 20 languages.

He has served on the US Secretary of Energy Advisory Board under the last four presidents, no less.

Co-founder of Cambridge Energy Research Associates, he currently serves as vice chairman of S&P Global, one of the world’s largest research and information companies.

His name, for those unfamiliar with his resume, is Daniel Yergin.

I have to confess, I don’t know Daniel Yergin well, though I did meet and interview him at a conference in London around ten years ago. He was polite, engaging and authoritative – just as you might expect from someone with his background and pedigree.

More recently, I’ve swapped emails with him after I read his latest book. He kindly offered to sign some copies of the book for me to send out to some of my readers.

Why am I telling you this?

It’s certainly not to brag, but merely to point out that Yergin remains alone at the top table of energy experts around the world. He’s the energy analyst all other analysts – not just me – look up to.

In short, when he talks energy, it’s worth paying supreme attention to what he says and taking careful note.

And what he is saying right now makes for extremely interesting reading indeed for red-blooded investors like us.

You see, for the last few months, Yergin has perhaps banged one drum above all else: there is a crunch looming in the one metal that represents the linchpin of the energy transition away from fossil fuels…

… and that metal is copper.

A huge shortage is looming in copper

Nicknamed the Eternal Metal, copper is the oldest metal used by humanity, from as early as 8000BC. However, it acquired its most common modern use, as an excellent conductor of electricity, in the 19th century.

“Copper is the basic metal of electrification,” Yergin told the Financial Post in July 2022.

“And the whole thrust of the post-Paris (2015 United Nations climate) conference is around electrifying the world, and so really, copper is that fundamental mineral that’s required for the energy transition.”

However, Yergin sees a looming supply-demand gap in copper that risks “short-circuiting” the energy transition and stalling global ambitions to slash greenhouse gas emissions to net zero by 2050.

In fact, Yergin and his team of analysts at S&P Global Market Intelligence dug into the supply and demand dynamics, along with geopolitics and economic ramifications for copper in an increasingly electrified world in a 122-page report released last summer.

A key fact underlying the report is that all the technologies central to the energy transition – such as electric vehicles (EVs), charging infrastructure, solar photovoltaics, wind turbines and batteries, as well as the wires that comprise the grid itself – require much more copper than the technologies used to produce energy from fossil fuels.

For instance, a battery-powered electric car requires at least two and a half times more copper as a conventional car, while a medium-sized truck requires four times as much.

To meet this new demand, the report estimates that copper supply needs to double by 2035 – from the current 25 million metric tonnes per year to a record 50 million metric tonnes per year.

That timeframe, Yergin says, is problematic. If we are to get to net zero by 2050, we’ll need to have electric cars, wind and solar comprehensively in place by 2035, just 12 short years away.

The report lays out two scenarios.

In the first, copper output –  including what is made available from mines and recycling – continues to grow at a steady rate of around 3.2% per year. This leads to an enormous shortfall of 20% – or 9.9-million megatonnes per year – by 2035.

In the second scenario, mine production and recycling rates ramp up significantly by 2025 – to a level that has never before happened, industry-wide. However, even then a supply deficit of 2.8-million megatonnes per annum emerges by 2035. Although that is a smaller shortfall than in the first scenario, it would still represent the highest copper supply deficits in decades.

No matter which way you slice and dice the numbers, Yergin says that copper shortages are looming.

One of the main issues is that it takes 16 years from discovery to first production at a major copper mine, says Yergin, citing an International Atomic Energy Association (IAEA) study.

Although there will be new primary production, a copper mine is far from quick-ramping. In fact, no new copper discoveries are expected to be operational in the next two years.

The market is starting to take note.

In December, copper prices were up 20% from a mid-July low, despite lingering macroeconomic headwinds such as a strong dollar and global recession fears.

In November, China took in a record volume of copper concentrate, a sign of easing Covid restrictions in the country, which is another hugely bullish catalyst.

Interestingly, global copper stocks have fallen to perilously low levels, leaving the physical market increasingly tight.

Copper stocks across warehouses of the three main global exchanges – LSE, SHFE and COMEX – are running dangerously low, down to just a few days of consumption.

Such limited inventories raise the risk of a sudden spike in prices if and when there are any drawdowns or a dash among traders to secure supplies.

Sam and I think the strikingly tight physical market will continue to lift the copper price and, with it, the entire copper mining space, making now the perfect time to take a position in a copper producer.

Surveying the copper space, one name stands out that fits our remit of finding a reasonably priced London-listed producer that can capture potential upside both in the short term and in the long term as the copper shortage plays out.

Certainly, its revenues look set to soar as the fight against climate change accelerates.

The copper it produces from an asset in eastern Kazakhstan is a vital component in renewable energy technology, and it is used in vast quantities to build EVs and related infrastructure like charging points. It also sources lead and zinc from its mine in North Macedonia, which are also key materials for EV batteries.

What we particularly like about the stock is that it also pays an inflation-denting dividend of almost 8% – an extremely attractive income stream that beats anything you might get from your bank.

The stock – our next Frontier Tech Investor recommendation – is Aim-listed Central Asia Metals (LSE: CAML).

Our next recommendation: Central Asia Metals (LSE: CAML)

Though it may not be a familiar name, Central Asia Metals has quietly been building a reputation for delivering projects on time and on budget since it floated in London in 2010. Then, it raised $60 million to build an old Kazakh copper mine known as Kounrad.

Kounrad was operational from 1936 until it was decommissioned in 2005, leaving more than 625 million tonnes of waste rock left by the side of the pit, left unprocessed over decades of Soviet-era operations.

Within this huge pile were traces of copper that amounted to about 300,000 tonnes in total.

Central Asia acquired the rock from the Kazakh authorities, before analysing the waste dump and assessing the potential for copper production.

In 2012, 20 months after Central Asia floated, Kounrad was built. It has generated steady profits ever since.

You see, not only is CAML’s copper purer than many other mines due to the nature of its ore, the cost of production is also among the lowest in the industry. That’s largely because CAML isn’t actually a miner. It doesn’t actually do any digging. It simply extracts copper from the rock lying above ground.

It does this by using technology known as SX-EW that uses diluted sulphuric acid to leach copper oxide from the huge 50-metre-high waste dumps.

This process produced copper at a cost of 57 cents per pound (lb) in 2021, which is low by global standards. Currently copper sells for about $4.14/lb so Central Asia’s profit margins are generous.

What’s more, the fact that its unit costs of production are so low protects the firm from any squeeze on margins across the sector.

Copper prices have jumped around since the financial crisis but as Central Asia’s production costs are so much lower than those of rivals, it has been cushioned from much of this volatility.

And as demand for copper is expected to outweigh supply over the next decade and more, prices – and profits – should rise even further.

The firm produced a record 14,254 tonnes of copper last year from its Kounrad operation. It aims to hit between 13,000 and 14,000 tonnes in 2023.

CAML expects to produce copper at Kounrad until 2034, meaning it has plenty of time to cash in as the great copper shortage develops.

Not just a copper company

But the company isn’t a one-trick pony.

In 2017, it bought a North Macedonian zinc and lead mine called Sasa for $402 million, diversifying its portfolio away from copper and away from Kazakhstan.

The Sasa mine, located approximately 150 kilometers from North Macedonia’s capital Skopje, produces a zinc concentrate and a separate lead concentrate.

CAML paid for the purchase after raising $153 million from investors, with the rest funded through debt. This was the first time it had put borrowings on its balance sheet. However, the company fully paid off the debt last August.

The Sasa mine, it has to be said, has higher costs than Kounrad given that it is a more traditional underground mining operation. However, CAML is in the process of remodeling the operation by changing the mining style from the current tailings dam set-up into a safer “dry stack” storage option – a new mining method called “cut and fill”.

This is very much needed after a leak in 2020 resulted in toxic material released into a local river.

In any case, Sasa produced 21,473 tonnes of zinc-in-concentrate and 27,354 tonnes of lead-in concentrate in 2022, respectively. Output for both is set to be at similar levels this year.

Central Asia doesn’t intend to stop at two assets. A new copper mine, likely either in Kazakhstan or a European time zone, has been on the cards for years. As of September last year, the firm had four assets under review, going through due diligence.

Saying that, given that Kounrad should remain in production until 2034 using current reserve estimates and that Sasa has at least 14 years left, it has time on its side to find the next major investment.

A juicy dividend is a key reason to invest

Speaking of cash, CAML’s low-cost operation has kept dividends flowing over the years even when copper prices have been weak.

In fact, it has paid a consistent dividend since 2013, which is something of a rarity in an industry as cyclical as mining.

Even the massive downturn in commodity prices in 2014-15, which saw many of the big miners axe dividends as profits crashed and debt piled up, failed to stop CAML from returning cash to shareholders.

Right now, its forward dividend yield sits at a mighty 7.91%, compared to the sector average of 1.99%.

This year’s projected 22p per share dividend is covered around twice by expected earnings.

Even with some cash diverted to maintaining new debt for an acquisition, CAML is likely to remain a very strong dividend payer in the future.

Indeed, now that the Eternal Metal is returning to highs seen last year, cash flow and payouts should continue to surge.

Right now, copper prices are trading around $9,000/tonne (about $4.14/lb) up from around $7,200/tonne in July last year.

Looking forward through the remainder of 2023, Goldman Sachs expects copper prices to top the current record high of $10,845 per tonne ($5.02/tonne) that it hit in March 2022, before reaching $15,000/tonne in 2025.

That spells excellent news for a firm with copper – and lots of it – to sell.

To explain why, let’s take a look at the books.

A consistent profits machine

As said above, Central Asia has long been profitable, with 2021 (the last full year we have results for) its more profitable year to date.

In 2021 the firm generated three-quarters of its total EBITDA (earnings before interest, taxes, depreciation and amortisation) of $141.5 million, up from $96 million in 2020, from its Kounrad copper asset in Kazakhstan. The remainder came from its Sasa mine in North Macedonia.

It made a margin on its profit of 60%, while free cash flow was $104 million, another record. Currently, its dividend policy is 30-50% of free cash flow so that’s a key number to look out for.

In subsequent H1 2022 results released in September last year, the company reported a cash profit of $75 million (another record), on a margin of 63%. This was caused mainly by the bull run in copper in early 2022, which more than balanced out higher operating costs.

On that note, it’s worth pointing out that CAML’s costs have not been immune to inflationary pressures. High coal prices have pushed up Kazakh power prices – so the company’s energy bill is high.

But a fixed price power contract at Sasa, as well as weaker operating currencies in North Macedonia and Kazakhstan, have certainly helped soften the impact of higher inflationary pressures.

The company has also flagged a likely increase in taxes in Kazakhstan that would knock a few million off the bottom line each year going forward – so that’s something to bear in mind.

Last year, CAML also told investors that the budget for Sasa cut and fill project – which also includes building a larger underground mine entrance so that it can use larger electric mine vehicles – would be $10 million higher than expected, an additional cost that will fall this year.

But Central Asia’s balance sheet is very strong and could certainly survive the rise in costs and/or any fall in metals price.

The total capital expenditure (capex) budget for 2022 is between $28 million and $30 million, with up to $13 million going into sustaining capex and the rest on the cut and fill project at Sasa – which, once finished, will also mean more consistent production at Sasa.

This is important given CAML missed 2021 production guidance at Sasa due to “challenging ground conditions” that hit the zinc and lead content of the ore being extracted.

Last year should spell the high point for spending, not least on debt. The company fully paid off its Sasa-linked loan in August last year, putting an end to the $3 million monthly repayments.

The balance sheet is certainly strong enough for continued higher payouts to shareholders or new ventures. There’s certainly scope to add another asset if and when the firm finds one attractive enough.

The firm ended 2022 with cash in the bank totalling $60.6 million, so there are no concerns there either.

Be aware of some key risks

Of course, any investment comes with risk and CAML is no exception.

Firstly, investing in any mining share can be risky business. Demand for the product can be highly cyclical – so profits can drop when economic conditions worsen.

Just last week, the World Bank said the global economy is “perilously close to falling into recession”.

It now expects the world economy to grow by just 1.7% this year, a sharp fall from an estimated 2.9% in 2022. The Washington-based organisation said this in a report that blamed a number of factors stemming from Russia’s invasion of Ukraine and the impact of the Covid pandemic.

Be clear: given the correlation between the copper price and global industrial output, prices of the Eternal Metal could reverse recent upwards direction and cause a dent in CAML’s bottom line and share price.

However, I think the copper price is more likely to go up than down in the short-to-medium term. China recently ended its Covid Zero restrictions and the country’s leaders have pledged to spur growth in the world’s second-largest economy this year.

The Asian powerhouse is the world’s primary commodity market and absorbs around half of all copper shipments alone, so Beijing’s easing of Covid restrictions should continue to spur demand in the world’s biggest consumer of the metal.

Certainly, the currently tight copper means that there is scope for the price to trade even higher than current levels. And, over the longer term, the likely huge demand for copper going forward as the renewable energy revolution steps up a gear should be a huge boon for CAML.

Secondly, it’s worth bearing in mind that CAML’s main asset is in Kazakhstan. Last year, CAML chief executive Nigel Robinson noted that the country’s leader, Kassym-Jomart Tokayev, was in a difficult position given his country’s membership of a post-Soviet group led by Russia, the Collective Security Treaty Organization (CSTO).

So far Tokayev had held off from fully aligning his country with Vladimir Putin, reportedly refusing to contribute troops to Russia’s invading force in Ukraine and not joining a new axis headed by Putin.

But any change in Kazakhstan’s position relating to Russia could spell problems for CAML and its share price, no doubt.

Thirdly, a key risk for all copper companies such as CAML pertains to technology, over the longer term especially.

There’s also the possibility for innovation. Daniel Yergin himself calls this the “wildcard,” which could materially change the calculation for copper.

As the report headed by Yergin noted, if copper prices rise too much, we could see a substitution of cheaper metals such as aluminum. Aluminum is only about 60% as conductive as copper, but just one-third the price and weight, meaning that it is ready and waiting to take market share if the fundamentals move in its favour.

That, too, could cause demand projections for the copper sold by CAML to suffer.

It’s time to buy

If you’re comfortable with the risks, then we think you should make your move soon.

Certainly, I think the troubled macroeconomic landscape is reflected in CAML’s valuation. Right now, the stock trades on a forward price-to-earnings (P/E) ratio of just 8.61 times.

Just as Pulitzer Price-winning energy analyst Daniel Yergin expects, demand for copper should soar as the transition towards green technologies accelerates. All being well, this will likely lead to a sharp share price for Central Asia Metals.

We recommend that you buy this high-dividend stock.

Action to take: BUY Central Asia Metals
Ticker: LSE: CAML
ISIN: GB00B67KBV28
Current price (as of 19.01.23): 276p
Market cap: £503.1 million
52-week high/low: 289.03p/187.47p
Buy up to: 310p

What is ChatGPT and why is it going to change everything?

Ladies and gentlemen, I (Sam) would like to introduce you to ChatGPT.

What is ChatGPT you might ask? Well, let’s ask ChatGPT…

ChatGPT, how would you explain yourself and what you do to a five-year-old?

To explain myself and what I do to a five-year-old, I would say that I am a computer program that helps people find answers to their questions and solve problems. I can do this because I have been programmed to understand and communicate in human language, and I have access to a vast amount of information. My job is to use this information and my abilities to assist and support people, and to help make their lives easier and more convenient.

Now, to a 60-year-old?

To explain myself and what I do to a 60-year-old, I would say that I am an advanced artificial intelligence (AI) program that is designed to assist and support people by providing information and answering questions. I have been trained on a large dataset of human language, and I use this knowledge to understand and communicate with people in a way that is similar to how a human would. I can provide information and assistance on a wide range of topics, and my goal is to help make people’s lives easier and more convenient by providing them with the information and support they need.

You see, ChatGPT is artificial intelligence. However, this isn’t your typical run-of-the-mill AI. This is good AI, natural AI, and very advanced AI. It is not sentient. But it is now more capable than ever at producing information on request in a very natural way.

Just how natural though you might ask? Well, there are two examples above. They are basic examples but, nonetheless, examples. But I don’t believe that the two examples truly capture the real essence of what ChatGPT is capable of.

So, unbeknown to everyone – and I mean everyone, including my publisher and our entire team at Southbank Investment Research – I put ChatGPT to the ultimate test. I published an article from my inputs into ChatGPT for the purpose of this very update.

Now this might get me into trouble with a few people, but I wanted to see if anyone even noticed what was me, and what was the AI writing. I wanted to see how advanced AI had really become.

On 6 January in our free e-letter, Exponential Investor, I published this article, “Halfords isn’t going to fix your EV”.

Now the opening section is me, authentically and truthfully. But the rest of the article is all ChatGPT – all artificial intelligence.

When I look at the piece, there’s certainly a much more informational tone to the writing. And it certainly lacks a little bit of personality, but I put that down to my inputs rather than ChatGPT’s capability.

And my inputs were very specific, requesting conversational tone, a structured piece on battery technology and other alternatives. I was very specific and followed up the original request with more inputs and questions.

What it produced is wonderful. It’s not brilliant. It’s also clearly not the kind of style I like. And when you really think about it, you can tell what is my writing, and what’s not. But after thoroughly checking the output, I found that it’s accurate and it’s structured: you’d be pretty hard pressed, unless I told you, to  ever see that AI had a major hand in that article.

This is what real, hands-on AI now feels like. And the great thing is, anyone can test it. In fact, it’s getting so popular that it’s currently not letting people log in as it’s “at capacity”. Indeed, it’s rumoured that Microsoft is looking to buy a stake in ChatGPT’s parent company OpenAI for a reported $10 billion – giving the company a $29 billion valuation.

This is technoiogy that you’ll be hearing a lot more about this year. Some are even calling it the “Google Search Killer”. That’s some way off yet as it’s not currently able to search the internet for data and its access to information only goes to the year 2021. But the potential is certainly real.

It’s exciting to see the conversation around AI and its potential coming back to the surface. It’s an area we’re keenly interested in and also an area we’re going to be looking even more closely at for investment opportunities.