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Kaiser Watch January 26, 2023: Geopolitics and Energy Transition as Junior Drivers

Posted: Jan 26, 2023JK: Kaiser Watch January 26, 2023 with Jim Goddard and John Kaiser
Published: Jan 26, 2023KRO: Kaiser Watch January 26, 2023: Geopolitics & Energy Transition as Junior Drivers
Kaiser Watch is a weekly 15-30 minute audio show produced by KaiserResearch.com with Jim Goddard and John Kaiser discussing the junior resource sector. The show has three parts: the first is a general topic, the second discusses developments involving the KRO Favorites which as of January 1, 2022 are no longer exclusive to KRO members, and the third is a peek inside the members only KRO Bottom-Fish Workshop. KRO is transitioning into a Do-It-Yourself research platform that covers all Canadian and Australian resource listings and which also features a Bottom-Fish Workshop where John Kaiser highlights juniors with solvable "missing pieces". Companies that graduate from the Workshop may become part of the Annual Favorites collection whose profiles and related commentary are unrestricted for non-members. Visit the KRO Favorites Dashboard for quick access to all the unrestricted Favorites related content. KRO is not sponsored or compensated directly or indirectly by public companies. The business model is based solely on membership fees in the form of a USD $450 Annual Individual Membership that at some point will increase substantially to reflect KRO's shift to a research platform. However, when the change happens active members will be grandfathered to renew indefinitely at the current rate provided they maintain a continuous paid membership. Kaiser Watch is available at Kaiser Research YouTube and as a Podcast downloadable from KaiserResearch.com. Each episode will be made available through the publication of a Kaiser Media Watch blog report which will provide links to specific questions and include supplementary graphics. All episodes will be archived at Kaiser Watch.

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Kaiser Watch January 26, 2023: Geopolitics & Energy Transition as Junior Drivers
Jim (0:00:00): You will be in Vancouver this weekend for the Metals Investor Forum. What will be the topic of your presentation?

The Vancouver January 2023 Metals Investor Forum will be held on Friday and Saturday (January 27-28) at the Fairmont Pacific Rim Hotel across from the convention center where the Vancouver Resource Investment Conference will take place on Sunday and Monday (January 29-30). My MIF session will be on Saturday between 11:20-12:50. The conference is free but you must register in advance. My presentation will be about the "Implications of Geopolitics and the Energy Transition for Resource Juniors".

The most pressing global themes today are 1) the push to achieve zero net emissions by 2050 in order to keep global warming to a 1.5 degree celsius gain above pre-industrial revolution levels, and, 2) the showdown between autocracy and democracy that is pitting China and Russia against the United States and Europe, with the rest of the world wondering which side to choose. These two themes conflict with each other but both have positive implications for the resource juniors and the reasons why I think the decade long bear market for resource juniors is over, at least for the next few years.

Earlier this month the International Energy Agency published its Energy Technology Perspectives 2023 report. It is a 48 MB pdf with 458 pages which I am still digesting after it emptied my laser printer's toner cartridges. The IEA is a non-profit organization created in 1974 in response to the OPEC oil shock to serve as a think tank for energy security and policy. It is an extension of the OECD (Organization for Economic Co-operation and Development) and its membership is restricted to OECD members. It is a collection of democracies from which autocracies like China, Russia and Saudi Arabia are conspicuous by their absence.

It is a fascinating report which looks at a near term 2030 target for the expansion of EV sales toward ultimately replacing ICE car sales to eliminate CO2 emissions from fossil fuel combustion in the transportation sector. It also assumes that the solar and wind power will continue to expand as costs keep dropping, and that the intermittency problem of these renewable energy sources will be solved by using their surplus energy to conduct electrolysis of water to make hydrogen that can be burned to make electricity when the sun is not shining nor the wind blowing. The IEA's vision only sees light vehicles being powered by battery charged electricity. Heavy duty vehicles used for transportation of people and goods (trucks and buses) will be powered by hydrogen fuel cell technology in 2030 and beyond.

The IEA is also realistic about natural gas as an energy source. Natural gas is a problem for home heating because there is no way to capture the CO2 emissions from every home's furnace and so the IEA sees electricity powered heat pumps as the future source of heat for residences. It sees nuclear energy as only supplying 5% of the future's electricity needs, and instead sees reforming natural gas to make hydrogen while capturing the carbon at giant conversion facilities and piping it as carbon dioxide to storage facilities. They call this "carbon, capture, utilisation and storage" or CCUS. Although lithium ion batteries are seen as suitable to power light vehicles, the technology is deemed inadequate for the needs of long distance transport involving heavy duty vehicles. The problem with fossil fuel combustion is that it is impossible to capture tailpipe CO2 emissions, but hydrogen fuel cells simply emit water.

The hydrogen scenario as a source of grid electricity or direct fuel for heavy duty transportation is still a decade down the road, but this technology has interesting implications for future platinum group metal demand, especially for elements like iridium which most people have never heard of except as the clue that helped explain what wiped out the dinosaurs 65 million years ago. Figure 1.6 shows the growth of six clean energy technologies from a 2021 base to 2030 and 2050. It is clear that solar-wind energy installations and electric cars are the key growth areas from now until 2030.

The IEA report is very helpful for helping one understand how the experts think the energy transition will achieve net zero emissions by 2050, but its real relevance to the resource juniors is what it sees as the 2030 target which is a major shift from ICE to EV car sales. What impressed me about the IEA report was that it has put its finger directly on a very serious problem, namely that the critical metal supply needed to make the EV goals for 2030 a reality are not yet in place, and given the abysmal history of mine development timelines, the report is brimming with urgency to ramp up mining investment over the next few years. The elephant in the room it ignores is the reason it takes so long to produce new metal supply, namely the horrendous permitting system particularly in OECD member countries where no autocrat can declare "make it so". Figure 1.11 is important because it shows two things: 1) how much average yearly CapEx must expand to for 2023-2030, which it splits between upstream mining and downstream processing and clean technology manufacturing. It also shows the time window available to make final investment decisions, and while it stretches to 2027-28 for processing and manufacturing decisions, the window for mining decisions is 2023-2025. In other words, a massive amount of capital needs to be committed over the next few years to mine development involving the 5 key critical minerals.

The metals the IEA highlights are copper, nickel, lithium, cobalt and the magnet rare earths. Of these copper and the rare earths are related to the motors and wiring of EVs while nickel, lithium and cobalt are related to the batteries. Cobalt is the least important because R&D is working to eliminate it mainly because its 65% supply from Congo is seen as an unmitigable risk factor. I've selected a few graphics from the IEA report which illustrate why this report is so important and in effect a blueprint for the resource juniors.

Figure 3.3 presents the 5 critical metal groups in terms of expected NZE related usage for the 2030 and 2050 goals using 2021 as a baseline. Eyeballing those bar charts it looks like copper needs a 50% supply expansion to meet 2030 NZE needs, nickel needs a 100% expansion with a slightly higher gain for cobalt, magnet rare earths (the IEA uses neodymium as the placeholder for the Nd-Pr-Dy-Tb group) also need a doubling of supply, but the stunner is lithium which needs a 600% gain from 100,000 tonnes of metal in 2021 to 700,000 tonnes in 2030. The 2050 NZE goal requires lithium supply to increase 1,200% from the 2021 level, though by 2040, as Figure 3.5 shows, lithium battery recycling will start to become a major part of annual supply. Figure 3.8 is important because the left part shows what regions will receive $180-$220 billion in mining investment that has already been earmarked, while the right part shows how much each of 4 critical minerals (nickel, copper, cobalt, lithium) needs from the required $360-$450 billion investment, and what portion is not yet committed. In the case of nickel and lithium only half their required investment has been earmarked, whereas for copper which requires 62% of the total, only a third of that need is identified.

Lithium supply requires only 4% of this total required investment by 2030, which would be $14-$18 billion of which only half has been identified, which makes lithium seem not so important. But Figure 3.6 makes it very clear what a huge change in annual global demand lithium faces by 2030 when recycling will not yet be a meaningful source of secondary supply. In 2021 the global copper supply was worth nearly $200 billion at the average price of $4.22/lb. An EV uses 6 times as much copper as an ICE car. All this talk about the world needing more copper supply is valid but it is building on an already huge base. In the case of nickel the IEA sees a 100% demand growth, which is also a big deal because in 2021 the nickel supply at $8.38/lb was worth $50 billion. However, it is unclear in light of the growing interest in lithium iron phosphate batteries for cheaper cars in China and India to what extent nickel-manganese-cobalt batteries will be part of the EV rollout.

In the case of lithium there is no substitution for the batteries used by the EV fleets the carmakers are developing and marketing. The IEA expects lithium demand to grow 600% by 2030, and over 1,200% by 2050 though by then a large part of the supply will come from recycled batteries. The lithium supply by 2030 is the most pressing problem in the energy transition, which is why Lithium Mania 2.0 has reached a tipping point. The need to identify and mobilize new lithium, nickel and copper supply over the next decade will be very good for the resource juniors, especially in the case of lithium where the major producers have little experience. If the 2021 price of $15/lb lithium carbonate becomes the new long term reality, the annual lithium market will be worth $100 billion by 2030, and $200 billion by 2050. If there is one point to take home from the IEA report, it is this incredible lithium supply expansion over such a short period, with its future source to be identified in the ground over the next three years, required to make the primary 2030 net zero emission goal a reality.

The IEA Membership List

ETP 2023 Figure 1.6 - Clean Energy Paths to Net Zero Emissions

ETP 2023 Figure 1.11 - CapEx needed and Decision Windows

ETP 2023 - Lithium, Copper, Nickel, Cobalt, Rare Earth required demand growth

ETP 2023 Figure 3.5 - Critical; Mineral Recycling Supply Growth Timelines

ETP 2023 Figure 3.8 - 2030 NZE Goal required mining investment and gap

ETP 2023 Figure 3.6 - NZE 2030 projected demand growth for Critical Minerals

The Value of Copper Supply in 2021

The Value of Nickel Supply in 2021

The Value of Lithium Supply in 2021
Jim (0:11:15): What are the implications of geopolitics for resource juniors?

Geopolitics has positive implications for resource juniors in two different ways, both related to the showdown between autocracy and democracy which has three general outcomes. The first outcome is that the alliance between China and Russia hardens, as a result of which the United States and Europe representing a rules based democracy order square off against authoritarian nations, with emerging market countries deciding which side to take. This will result in global economy splitting into two distinct trading zones. Given that rare earths come mainly from China, and both China and Russia are a major source other metals, and China is a major processing center for converting concentrates into end-use feedstocks like lithium carbonate or hydroxide, this will cause a scramble by the democracy group to find new supply in secure jurisdictions that also have the greatest permitting obstacles. Inadequate supply of key critical minerals would hurt the EV goals for 2030. But it would make discovery oriented exploration by resource juniors very important. And if it results in higher real metal prices, it would allow pounds in the ground to be developed in a manner similar to what happened during the 2000-2010 China super cycle.

This splitting of the world into autocratic and democratic zones is also very positive for resource juniors because half the world will cease using the US dollar to settle its trade in goods and services. At the moment nobody really wants to settle in rubles or RMB, but central banks everywhere are working on their own digital currency platforms so that they can escape geopolitical sanctions imposed by the United States. Gold is a fungible asset class consisting of 6.4 billion ounces in above ground stock worth about $12 trillion today. Central banks from autocracies stepped up gold buying in 2022 rather than buy US treasury notes. This trend will continue and gradually push up the price of gold in real terms, not just to reflect inflation.

The gold market is very deep. In 2021 the market bought 96.5 million ounces of new mine supply worth about $174 billion. No new mine will ever be big enough to affect the price of gold negatively. Whatever the juniors discover and get developed as a mine can be sold at the prevailing gold price. In 1992 Francis Fukuyama wrote a book called the end of history to celebrate democracy's victory over autocracy. The great western hope was that China and Russia as they became part of a globalized economy would evolve into democracies as prosperity flourished. But Russia never had a chance thanks to the looting of the country's resources by the oligarchs whom Putin was able to get under his thumb. And in 2014 Xi Jinping decided to make sure the Chinese Communist Party remained in charge of everything. Putin's invasion of Ukraine made the embrace of autocracy by China and Russia official. History is back and gold demand will grow as history weaves an uncertain future.

The second potential outcome for the autocracy-democracy showdown is that the United States itself mutates into an autocracy that squares off against every other country except those it can bully into being an ally such as Canada. Donald Trump personifies this desire to turn the United States into a thug nation where a small group jams its belief system down everybody's throat such as we have seen in places like Afghanistan. This outcome is very bad for the energy transition goals but very good for gold demand because if this happens in the United States, the nation will become vulnerable to a breakup into smaller states such as California and Texas whose economies individually are bigger than that of Canada. This fracturing will not be good for the US dollar. But even if the United States can enforce domestic thug rule to prevent a breakup into the DisUnited States of America, the rest of the world will start to shun the US dollar whether they are competing autocracies or still democracies. Whether resource juniors can flourish in such an environment is a different question I am not going to bother with because I think this outcome is so very undesirable and hopefully unlikely.

The third outcome is that China and Russia undergo domestic revolutions that ousts their strongman leaders and allows these resource rich and powerful nations to embrace democracy as a political structure which enables globalized trade to be restored and the energy transition goals be pursued collectively. This is the most desirable outcome for the good of the world but it is not positive for gold demand. Nor would it be helpful for resource juniors when the richest and lowest costs deposits once again dominate global metal supply. However, I think we are in no danger of this outcome becoming reality, and even if it starts to trend in this direction, it will take years to become realit

Percentage of Global Metal Supply China and Russia Reporesent

What share of the Global GDP Pie will the Autocracy and Democracies Alliances Represent?

USD Dollar "safe haven" rally peaked in H2 of 2022

The Value of the Gold Supply in 2021

Gold Price Reversal not reflected by GLD holdings growth

Western gold bugs not visibly driving gold uptrend
Jim (0:23:35): What are the implications for the five companies in your Metals Investor Forum session?

I have five excellent companies in my session: Eagle Plains Resources, Vanstar Mining Resources, FPX Nickel, Solitario Zinc and Amarc Resources. None of them are involved in lithium. Two are involved in gold, one in nickel, one in copper, and one is a prospect-generator with an exciting zinc-lead-silver exploration play. More detail on them in next week's KW episode.

Amarc Resources Ltd (AHR-V)

Fair Spec Value
Joy Canada - British Columbia 3-Discovery Delineation Cu Au
Eagle Plains Resources Ltd (EPL-V)

Fair Spec Value
Vulcan Canada - British Columbia 2-Target Drilling Zn Pb Ag
FPX Nickel Corp (FPX-V)

Good Spec Value
Decar Canada - British Columbia 6-Prefeasibility Ni
Solitario Zinc Corp (SLR-T)

Fair Spec Value
Golden Crest United States - South Dakota 2-Target Drilling Au
Vanstar Mining Resources Inc (VSR-V)

Bottom-Fish Spec Value
Nelligan Canada - Quebec 4-Infill & Metallurgy Au
Disclosure: JK owns FPX Nickel and Eagle Plains; Amarc Resources, Eagle Plains, Solitario Zinc are Fair Spec Value rated 2023 Favorites, FPX Nickel is a Good Spec Value 2023 Favorite; Vanstar is Bottom-Fish Spec Value rated

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