In this exclusive Q&A with Critical Resource, CEO and Executive Director of Anglo Pacific Julian Treger discusses the resource sector’s failure to attract capital, the idea that jurisdictional risk does not change, and the prospect for coal as the new rare earth.
Julian Treger joined Anglo Pacific as Chief Executive Officer and Executive Director in October 2013. Prior to this, Julian was one of the principals of Audley Capital Advisors LLP, an investment advisory firm which he co-founded in 2005 and which focusses primarily on the natural resources sector. Julian also holds an external non-executive directorship with Mantos Copper S.A.
The resource sector’s failure to communicate its value to investors means we have seen capital leave the sector
“The market for the resource sector in 2019 will continue to see different commodities moving at different speeds. Certain minerals are likely to become the ‘flavour of the month’ again, as cobalt and lithium have done in recent years. I think the commodities that people are most pessimistic about at a particular time (especially those that cannot be recycled) are the ones that will surprise on the upside. More generally, assuming that the current trade war fears get resolved in the first quarter of this year, we may start to see a recovery in the prices of some industrial metals in the second half of 2019.
What is most interesting about the mining sector is that there has not been a significant recovery overall from the lows that we saw three to four years ago. Part of the problem is that, because of the sector’s lack of innovation and failure to communicate its broader relevance to investors and the public, we have seen capital leave the sector rather than be attracted to it. There has been a significant reduction in the amount of private equity available, banks are not lending in a major way, and investors are looking elsewhere for high valuations, lots of liquidity and high market caps. As a result, we are seeing capital shortage in a sector that is very capital-hungry and capital-intensive. There is therefore enormous demand for royalties and streams because there is little alternative.”
The dearth of capital will lead to squeezed supply and higher prices in the 2020s
“Macro events like changes in interest rates or Donald Trump’s latest actions are difficult to predict and make forecasting very short-term market movements challenging. However, I expect that the cumulative effect of the dearth of capital in the sector will continue into 2019 and will result in some sort of pent-up extreme version of supply shortages in the medium term – and therefore much higher pricing in due course. That is not necessarily the forecast by the pundits, and it is probably not going to be this year or the next. But an era in the 2020s of much higher prices for almost all commodities is something I feel will eventuate.”
Jurisdictional risk doesn’t improve long term
“Unfortunately, I continue to believe that countries’ risks do not change significantly for mining investors because of the long-term nature of the investments, and because it is very difficult to liquidate those and move on. You really have to take a multi-decade view on a country – and while you do see some countries go through a brief flurry of reform, they unfortunately tend to lapse back into their original state. It is therefore probably safer in our sector to stick to jurisdictions which, for better or for worse, are more predictable and where at least we can rely on the rule of law.
The other approach to country risk is to say ‘we will go to more risky places – but we want to get much higher returns to compensate us for that’. And there are many investors who take that approach. My view, however, is that when things go bad, jurisdictional risk trumps everything else – and there is no return high enough which can compensate for the losses that you might suffer.”
South Africa is lapsing back into being “bad news”
“Sadly, and this is not something that I say with any pleasure, I feel that South Africa might be one such case of a country lapsing back. We have had a lot of optimism around Cyril Ramaphosa over the past 12 months, but I think the issues with rule of law and endemic corruption have not really changed. He has not brought anybody to justice, the Guptas continue to be at large, and not one penny has been recovered for the state. The civil service is enormously bloated and state-owned enterprises are very Soviet in terms of their efficiency. Meanwhile, you have only about a third of the population matriculating and the pass rate is 30% – so it is no surprise that unemployment rates in South Africa are so high. Actions speak louder than words, and the lack of action on Ramaphosa’s part makes me very concerned.”
Coal is the new rare earth
“The consistently high price of the various coals in recent years may be a result of the practical ban on funding for new coal developments, particularly thermal coal. In a way, coal is becoming more precious, a new sort of rare earth. That agenda actually suits the green movement because higher coal prices mean people will switch away from coal to alternatives. So there is a sort of paradoxical confluence of interests to have higher coal prices and profitability for existing coal assets, while making new coal assets difficult to bring onstream.
It is unrealistic to expect that the world will not continue to use coal for the foreseeable couple of decades – a large part of the world is set up for coal-powered energy, and some forms of coal are crucial to the development of steel. So it will be important to make sure that we are exposed to the cleanest coal possible – coal with less ash and fewer contaminants. My philosophy is therefore not to take very long-term risk in coal – since as a commodity it clearly isn’t going to grow – but if you have exposure in clean coal over the next decade or so, you should actually do very well.”
Millennials are taking on the ESG agenda – but the whole industry needs to up its game
“The ESG movement is a good thing, and I think it is going to be a permanent feature of the resource sector in the next years. There is a generational shift to millennials who feel much more strongly about these issues and are prepared to put real money into the ESG agenda. Miners are also now starting to see that compliance with ESG standards is good business. For example, strong health and safety means fewer injuries and fatalities, and if your community engagement is positive, you have fewer strikes and less disruption. I do not see strong ESG performance as a compromise but as an evolution to providing the market with what it needs in a profitable fashion.
Whilst I think ESG is gaining prominence, I am not sure the resource industry is embracing it as much as it should. The industry needs to be more relevant, more diverse, better at PR and at expressing its relevance to the world, and it needs to innovate much more. I want people to see this as the industry of the future, not the industry of the past – but we will need to change our behaviour to take on that role going forward. There is a long way to go.”