Mining stifled by capital crunch: Navigating risks, costs and energy security | Fast Forward episode 2 transcript  

Andrea Hotter [AH]: Welcome back to Fast Forward by Fastmarkets. I’m Andrea Hotter and I am very much looking forward to today’s guest. It is Sir Mick Davis, one of the most experienced figures in global mining and resources finance. You will recall, he was the CFO of Billiton and was a key architect of its merger with BHP to form BHP Billiton. 

He later went on to lead Xstrata as its CEO, building it into one of the world’s largest diversified mining companies ahead of its merger with Glencore in 2013. Today he’s the founder and CEO of Vision Blue Resources, which invests in and develops critical minerals projects globally. All this is to say he’s got decades of experience financing projects across multiple commodity cycles and capital structures, and that gives him a pretty unique perspective on how capital flows into mining and why the cost of capital has become such a defining issue for the sector today. So let’s hear what he has to say. 

Sir Mick Davis, welcome to Fast Forward. Thank you so much for joining us today.  

Sir Mick Davis [MD]: It’s great to be with you, Andrea. 

AH: Well, we’re really happy to have you here talking about finance, because I know this is something that you are a real expert in. You have financed mining through multiple cycles and through various different models, whether it’s the public markets, private equity, strategic capital. 

Looking back across those decades, and I’ve known you for a few of those, so we’re both aging ourselves here. What is different? What do you think has fundamentally changed in how capital prices risk in mining today versus, for example, your time at Xstrata?  

MD: I sort of think the risk model itself has been rewritten. Early two thousands when I was building Xstrata with the team, capital was pricing commodity risk. It was pricing, execution risk in the main. And today capital is pricing geopolitical risk. And geopolitical risk could relate to impact on commodity prices, which are not related to business cycles. 

Tariff risk given what has taken place in the United States. It’s looking at permitting risk. It’s looking at social license to operate risk. It’s looking at technology risk. So there’s just a whole bunch of new risk, coming to the mix, which capital is attempting to price.  

And the result of course is that because it’s uncertain and people lack the ability to define what the risk is and measure it, the cost of capital therefore expands to compensate. And if you just look at the numbers, I mean in terms of the quantums that you have to invest, again when we were looking at building Xstrata, a tier one copper project was maybe four to $5,000 per annual ton of investment. 

Today it must be four, five times our 20 odd thousand a ton, and that’s not just inflation. That is structural change driven by declining grades. So you have to move more earth, remote locations, infrastructure deficits, which are dramatic and regulatory complexity, which is huge today. 

So I think that’s a big issue. And then of course, the scars of the super cycle where companies rightly wanted to invest to meet demand, but when they did invest, they couldn’t actually produce the returns where their projects were delayed, there were over cost, et cetera. And the market hasn’t forgotten that. 

So I think in that sense, they have redefined the risk in relation to the industry. So we paying a high price through high discount rates. And it’s quite paradoxical because, what we have today is, the cost of capital has risen structurally. That conviction about long-term demand has actually, I don’t think ever been stronger. 

I think it’s even stronger than today, than it was during the supercycle. And, this energy transition, this concern about security of supply, which now dominates, thinking in United States secure supply chains, require more copper, more nickel, more lithium rare earths, et cetera, et cetera. 

So, I just think that we are in a really interesting state where, you know we need the stuff that, yet, on the other hand, we pricing ourselves out of the ability to actually produce it.  

AH: I wanted to get into a lot of those topics, but you just mentioned there that narrative around the sector, that real interest in critical minerals that we are seeing. Do you think that we are attracting now this more generalist, deeper, long-term kind of capital? Do you think it’s still people such as yourselves who really understand the sector that thematic, that tactical kind of capital rather than that real structural shift where everyone and anybody wants to get involved in the sector because they understand it better? 

MD: No, I don’t agree in their space. In fact, it’s interesting during this supercycle, which you refer to the early two thousands, there was a lot of money available, but not people understood the sector. In fact, there was a fundamental misunderstanding of the risks associated with mining, which is like a 20 to 30 year time horizon business where the smallest change in an assumption, impacts dramatically through the returns you can deliver. 

Where the ability to actually find a resource campaigned through its various stages of permitting and resource definition, all that sort of stuff into feed and construction. And then operating is so profoundly risky and so much stuff can go wrong that the people providing the capital didn’t actually appreciate that. 

And so when things went wrong, they were, were stunned by the capacity of the deficit that they saw in value creation. So even then, they didn’t understand it, but they were provided funds because it was a theme which everybody bought into. They could actually see it. 

China was industrializing. It was a shortage of commodities. It was gonna drive the price up for a long period of time, full stop, that was gonna happen. And today, I think an industry which has been out of the sector for a long time, it has been captivated by technology, stocks and things like that, which does not love cyclicals, their time horizons the way that their funds are measured in terms of performance. 

They’re looking at this and they say, no, we recognize. That there’s something happening, but we don’t get it. And I don’t think that they are, running out, unlimited forms of capital. So the capital is still coming from a very narrow base, which is, I guess, starting to change given the dynamics that are taking place with the United States in particular, the government, entering the space, which governments have not been in the past. 

AH: So is still small scale in terms of what it could be, and it’s cyclical to a certain extent as well. Could we see the cost of capital come down and how much do you think No, we’re in a new era where now it will not come down for the other reasons you’ve mentioned. 

MD: Yeah. Cost of capital planning come down. If you can start addressing the risk, which drive it up. If you look at the risks that people face in producing. A project I think there’s three things you have to take into account. 

If you’re gonna try and think about, well, how does that structural premium you’ve got now sort of come down? The one is permitting certainty. The ability to get certainty in permitting is actually quite difficult and quite complex. And so many people go down this row for a long period of time and end up with nothing. 

And companies which invested huge amounts of money, billions in projects, bring them into production, suddenly find their permits are removed from them, in circumstances, which they could never have predicted and would never have predicted. So, permit certainty is an issue.  

A proven execution track record is fundamental, because these projects are complex and they’re difficult to do and to prove that the industry has the capacity to do that is important. 

And in a world where, in the last 10 years, we’ve lost so much capacity and so much expertise, the only people who’ve developed it who have it in spades is China and perhaps India emerging into it where they have shown the capacity to execute quickly and have lower cost and anything that can be produced in the west. 

But we’ve lost expertise. We’ve lost people. And that has to be addressed. And then I think the question of de-risking we government need to play a role de-risking through off takes, maybe de-risking through some form of guarantees. Markets alone can’t do this. 

And I think it takes a partnership now between governments which are very focused in on supply chain security and critical minerals and industry. And ultimately, if you can get that partnership going and reach a balance of how you can achieve a de-risking of those areas, you can then start attracting the capital at a price, which is lower than it is the moment.  

AH: Another thing that I think has been really interesting in my discussions with a lot of mining executives, they say all the time, you raised it there. We can be talking about 10, 20 year plays here. 

Mining’s very long dated in nature, but capital markets are increasingly short term in their orientation. They operate quarterly. I think we’ve discussed this previously as well.  

MD: Yeah, absolutely.  

AH: Yeah. Has the time horizon of capital shortened in a way that financing long dated mining projects is just harder now because the markets aren’t set up for it? 

MD: Well, absolutely. To be frank with you, Andrea, the mismatch is the killer. It is absolutely is the killer. When I started out with first of all, Billiton and then Xstrata, we had a whole universe of people who prepare to support mining ventures and mining propositions, which we do not have today. 

They’re not in the market. And so the idea of going to the public markets now to raise a significant amount of capital to support anything other than a gold project is just not in the universe of the possible. The capital markets have fallen away in, in that sense, private equity, which once exits in let’s say a five to 10 year timeframe, doesn’t match those time horizons. 

And so they have to hope that the cyclical moves, allow them to exit at a time of the cyclical high as it were, because they can’t actually invest over the course of the economic life of the project and earn their return that way. And so you have the structural tension that makes long dated mining projects hard and harder to finance. 

And certainly it’s the hardest point in my career that I see. And I guess that the source of capital really should be people with patient capital, which is the Sovereign wealth funds. But sovereign wealth funds generally, in my view are quite nervous, quite conservative, and therefore bring them into an industry which has a history of risk and uncertainty Is complicated. And the other form of patient capital is the long-term pension funds, especially the North American ones, which today have patient capital because they’re still in the ascendancy of funds coming in. They’re not in the door down phase, and they’ll probably be like that just given the age profile of their populations for quite a few years to come. 

But they faced the question of the moral hazard of investing in the mining industry. So the potential sources of capital to fund this industry, have their impediments as to will they actually do it?  

AH: As you say, even if capital were patient, there are all these other complications. 

You mentioned just then two very large companies that you were previously integral to, Xstrata and Billiton, you had a deep history there. We’re talking about big scale companies. It sounds though that wasn’t necessarily a dominant advantage or wouldn’t be now, do you think that it previously was, but maybe other issues, other aspects, jurisdiction, political alignment, all the risks you mentioned have taken over and made it harder? 

MD: In my view, there’s no doubt even today having a significant balance sheet, being diversified across geography and across commodity is an advantage. There’s absolutely no doubt about it. But you’re right to say that when I was building Xstrata and was part of the building of Billiton, that was the ultimate thing that we sold to the market. 

That was the thing that the market buying into, the fact that we had this spread of risk, this diversification of resource, this capacity to deploy people, the ability to use funds generated in one area for the building of funds in another area. And all of that made sense and that’s why diversified mining companies enjoyed multiples much higher than single resource companies. 

To some extent that still applies, but there’s no doubt that the issues today, which dominate the thinking is the whole question of this geopolitical risk, you’re talking about the geographic risk associated with, with investing in particular jurisdiction. 

So the whole question of scale versus jurisdiction, which is the question that you basically are asking is a very interesting one. And I would say today that notwithstanding what I’ve said, that, that scale and diversification remain advantageous, that today jurisdictional and political alignment have sort of overtaken scale as a primary consideration. 

Today I’d probably like to finance a small asset in the right jurisdiction than a large world class asset in the wrong jurisdiction. And the risk payment for political uncertainty, of course has become quite prohibitive. So I think that feeds into the whole thing. 

That’s the way that I look at it. Yeah.  

AH: No, very interesting. How that evolution of mining has evolved brings us to your current platform. You negotiated and completed a transaction that created one of the great mining companies the merger of BHP and Billiton into BHP Billiton, now BHP. You were at the heart, at the helm of the deal to create another huge, great mining company, the combination of Xtrata and Glencore are now operating Vision Blue Resources.  

So after building scale at the top of the industry, you’ve stepped into a very different model. Can you explain for our listeners a little bit what Vision Blue Resources is and how it differs from that traditional mining company or private equity fund model that you previously may have been operating in? 

MD: Okay. Yeah, look, Vision Blue, as you say, is neither a traditional mining company nor is it a traditional private equity fund as well, although it looks like a private equity fund. I’d like to think we sort of a platform which is designed to enable a responsible supply of clean energy, metals and minerals and secure critical minerals. 

And so we certainly bring capital but more importantly I think we bring expertise networks and a long-term partnership approach. The problem we are solving I think is this, that the market systematically under invests in midstream processing and earlier stage development because the risks are hard to price and the returns are pretty uncertain. We try to bridge the gap by being hands on, by adding value through technical inputs by helping management teams de-risk their projects, et cetera. And take more of a hands-on approach than simply trying to be financial engineers. 

We take board seats, we sit in the tech committees, we engage deeply with the management teams on their strategy and execution, but we are not the operators. So we, the partners and our skill, I guess, is knowing when to intervene and when to let good people do their jobs. And that’s essentially how we built Vision Blue Resources. 

So sitting somewhere in between the private equity fund and the traditional mining company.  

AH: Right. And you’ve also tested that model alongside government capital because you’ve recently worked with the US government to secure financing for a project. I’d love to hear more about that process. 

I’m very curious to know what does work in Western critical minerals financing and what maybe still doesn’t work. What was that like? 

MD: We have a number of in interactions with governments around the world. We brought in the National Wealth Fund in the UK into our tin operation in Cornish Metals. 

But I think the one you’re talking about, which is the most significant, is the rare earths project that we are an investor in Serra Verde in Brazil, where loan agreement has been negotiated and concluded with the Dividend Finance Corporation in the United States to lend money to the project to allow its complete debut equity and bringing into full scale production. 

And that was critical to realize the optionality of the value proposition of Verde. So Serra Verde is a rare earth mine, It is the only operating only clay deposits outside China. It has a high proportion of heavy rare earth metals. 

And so it is highly desirable and strategically very significant. I have been interacting with various arms of the US government going on for three years. And the approach with Serra Verde and DFC took place almost 18 months plus ago, and it has taken obviously a while to transact this through. 

And I think what we found in the discussion with both the Biden administration now, the Trump administration a slightly different emphasis on why the administrations were interested in what was happening. And for the Biden administration, it was very much from a clean energy transition perspective. 

Whereas the Trump administration is very much focused in on security of supply, supply chain adherence and dependency issues and things like that. And when we set up Vision Blue Resources, we actually had both strategic issues in mind in terms of what we wanted to address. So having a conversation with both administrations was not difficult. 

If the US government had decided that it was gonna not become engaged in the real business of facilitating projects to get off the ground. 

In other words, the provision of finance thinking about offtake agreements and other ways in which they could reduce risk, some of these projects would not have happened. And, a few years ago, the concept of funding as Serra Verde would’ve been very difficult. So I think that our interactions with the US government and other governments is very important and critical. 

And their constructed response is fundamental to ensuring that the key commodities which economies require are produced.  

AH: That’s really interesting. Different nuances, maybe not necessarily that you’d get the same result at the end though, so that’s interesting to hear. I’m curious, when you decide to back a project or try to get it financed, what are the risks that you are most focused on getting rid of or reducing as much as you possibly can before that first capital injection goes in? 

Is it about the actual metallurgy of the mining, the permitting, the offtake. Is it about geopolitics something else? What is it? 

MD: It is all sort of about everything, but I think the key things that I look at initially is the question of can I get tenure? 

Can I get those permits? And can I actually understand the metallurgical aspects of what we are doing to make sure that this is gonna be worthwhile and can be done in the universe of the possible. And it’s not a risk-based thing, which we can’t manage. And the third issue, which is fundamental to me still comes back to a term I think we coined many years ago as a social license to operate that so many projects are inhibited in terms of realizing the optional value in the timeframes that need to be done. 

You have to have a constructive relationship with the countries that you’re in, with the communities that you’re in and with the NGOs that you’re facing. And. It is a difficult business. 

If we can get those things right and we can get comfortable on those things, well then I feel I can then step back and worry about, well, what are the geopolitical issues and other things that I need to be thinking about in the context of it and what are the jurisdictional issues? 

But if I can’t get those initial things right, then it closes down the option.  

AH: Yeah, those are the things that you need to be convinced of. What about investors? What’s the biggest kind of ask from them and what do you think that they don’t necessarily always understand perfectly well? What’s their disconnect with how they’re modeling the risk and then actually how it’s going to materialize on the ground in the actual project? 

 MD: Not wanting to be too controversial, but the world has been taken over by these three letters, ESG, which I think is a bad, three letters. I’d rather call it sustainability because that to my mind is much more encompassing and much more reflective of what we try to do, create sustainable propositions, not only in terms of delivery of the commodities, but the communities to be in et cetera. 

But the focus on ESG compliance in the investment phase, while, important, should not dominate your understanding of the investment proposition. Your investment proposition actually comes from what the resource is in the ground. Because the one thing that you need is good rocks in the ground.  

If you don’t have good rocks, you’re gonna have a shitty project no matter how good your management is, no matter how good everything else is. So that is the most important thing for people to focus in on initially, are the rocks in the ground good enough? And if they’re not good enough back away. 

Then they should be focusing on, is this the team that can execute a project of this scale and this complexity? And that is the second critical dimension of the whole thing. And third, they need to understand if you can execute the project and deliver product to the market, what is the nature of the market you actually are delivering into? 

If you can understand those three things, you can make a decent investment decision.  

There’s so much concentration on having to satisfy the ESG complexities, that they don’t spend enough time on those three aspects, and that’s where I think they miscalculate and potentially come to conclusions and investment decisions, which may be are not right. Sometimes they don’t invest and sometimes they do investment when they shouldn’t.  

AH: That’s fascinating because you hear the ESG acronym so much less than you used to, and I was curious as to whether people still genuinely care about it when it comes to financing or whether it’s become more of a filtering mechanism or maybe even investors are hiding behind ESG to justify risk aversion? I don’t know.  

MD: I come back to the term I used a little while ago. The whole question of the moral hazard of investing in mining ventures is a significant factor in the minds of a lot of investors. And therefore, ESG dominates their thinking in any evaluation that takes place. 

Now, it is certainly true that on a government influence platform, ESG no longer has a prominence that it did have. There’s no question about that. I think that the mood music out of Washington, et cetera, has changed that narrative and maybe brought some more balance into that perspective. 

The focus, I suspect of most governments today should be, can we get access to that on a sustainable basis at a price which is reasonable? And that’s what they’re probably concentrating in on. But there is no doubt in my mind that people who are writing out checks from the private sector, this is still a very big factor. 

AH: Let’s look at that jurisdictional aspect from a capital markets perspective. Because you are active globally with your company now. How differently does capital price, the exact same project, well obviously they’re not the same, but the same project in North America or corporate project in North America, Europe, Latin America, Africa, Australia, around the world. 

Where is a great jurisdiction, where has got more work to do? Not to slate any of these areas, but you know, there are certain parts of the world where it’s probably harder from a capital markets perspective. 

MD: First of all, let me just say to you that capital markets will offer a lower cost capital where people are buying something which exists with the intention of growing it as opposed to people who are building something afresh simply because of the different nature of the risk. 

But secondly, they would price risk differently in countries which have a stable permitting infrastructure where it is understandable, it is consistent, and where you have recourse to courts, to enforce. And they would price risk differently for countries which basically don’t exhibit resource nationalism and issues like that. 

So essentially, predictability and the level playing field are a critical thing. Now, more often than not, that is found in what we’ll call the first world rather than the third world, but not entirely so.  

My great story about this is in 2009, 2010, when the then labor government of Australia decided that they were going to tax in a disproportionate way the rent of mining companies in Australia. And so they were changing the tax system where essentially they would allow you to earn what they consider to be a normal return, which in fact was set at some cost of borrowing by government, which clearly was at lower cost of capital to mining companies. 

So it wasn’t exactly a fair return. And then anything above that would be disproportionately taxed. So essentially that was like putting the hands in my pockets after I’d taken all the investment risk and invested the money, and then they’ll enjoy the returns without bearing the risks. 

And so I and other mining companies responded quite badly to it, and I in fact, shut down a project in Queensland was about a $600 million project at the time because I said, I’m not gonna invest further. You can make whatever decisions you make about future investments, you can’t make that about existing investments. 

And I remember the then Prime Minister getting quite upset with me and saying that the mining industry would not dictate to the Australian government, what they would do and all that sort of stuff. But that actually fundamentally changed my view about investing in Australia. 

It so happened, that, the Prime minister was changed out and they canceled that whole thing and then the labor government changed. And so we rode back, but there was a first world country with a first world mining resource sector, which was fundamentally important to their economy, who decided irresponsibly that they would actually change the nature of doing business and completely upsetting the whole concept of predictability that we depend on in a 20 to 30 year investment horizon.  

And so it can happen in first world countries as well as third world countries. So we are looking for countries with where they demonstrate that is not the space that they in and there are many countries in Africa, in South America, which I’m very happy to invest in because I can actually understand the risk that I’m dealing with. 

And I understand their motivation of how they actually want to attract business in and how consistent they’ll be on that basis. So capital markets provide risk premiums appropriate to the jurisdictions, and depending on how the jurisdictions behave and what signals they send about future behavior. 

AH: That’s what I was gonna ask. Are they right, our investors, right, when they think that political risk and emerging markets is a much higher risk than regulatory risk in developed markets. You’ve just said not necessarily. Not, definitely not.  

MD: It’s not necessarily so, no.  

AH: Yeah, exactly. Just to just change slightly. When you look at the critical mineral sector across the value chain, are there any mismatches between capital and strategic importance? Not talking about companies here or projects, but parts of the value chain or mineral categories even.  

MD: Look, I can think of some commodities which deserve some attention, which they’re not getting now. Certainly, commodities, although the markets are small that, that feed into the defense sector because just given the nature of geopolitical risk that is taking place and which are pretty important tungsten as an example. Iif you think of something like neodymium, which is critical for not only the hardening of steel, but which is critical for grid scale storage of electricity again that certainly deserves more attention than it’s getting at the moment. 

So I think you can find commodities which at a point in time are not getting the attention they deserve. But generally speaking, over time that sorts itself out. I think the big issue where everything has been missed is that in the early two thousands, when commodity prices went up significantly in relatives for the first time in 25 years, it required a huge amount of infrastructure investment. And so we had this demand for iron ore for the steel, for coal, for power for copper, et cetera, et. 

That China basically saw two things. First of all, the amount that it was having to pay for all these commodities going up through the roof, but secondly, had no security of supply. And so it’s set about saying, well, we are gonna sort that out. But they didn’t think about security supply simply at the top end of the situation of finding resource. 

Because, it doesn’t have an abundance of many of the commodities that it needs. It has a lot of coal, but it didn’t have any oil, it doesn’t have a lot of copper. So it didn’t just look at securing access, ownership to the upstream. It said actually we need to control the value chain right through to the end product.  

And that’s what it has done. So it controls that whole value chain, which gives them enormous power to influence markers today. So if you look at graphite, it produces something like 90% of the world’s graphite for anode. And that is a key component of many of the battery systems we have. 

So if that’s the case, because it has access mines or has access to by 60 plus percent of the world’s graphite, it processes all of the world’s graphite. It has the capacity to recognize where it can actually earn its rent in that value chain. And so when competitors who wanted to produce graphite in other places in the world want to build a graphite mine, they can do everything they can to allow the graphite price to be suppressed because they are creating their value somewhere else in the value chain. 

And that’s what has been missed out in this whole thing, that when you think about how you position yourself in terms of the true value proposition, you basically have to own the value chain. 

If I had all the money in the world and the capacity to reach across the system and secure things, I’d make sure that I owned the whole value chain, because then I’d be sure that not only could I have access to the optionality that I could realize the optionality and I was entirely resilient with that optionality. 

AH: Sir Mick, I do want to turn quickly, and I know we are probably running out of time, but I do wanna turn very quickly to M&A because given your experience I recall from conversations previously when you created Xstrata, that alone was over 40 M&A deals just to create it to the stage before you did the Glencore deals, so you got deep experience there. 

We are seeing a lot more interest in mining M&A at the moment. A lot of that’s because companies are struggling to permit and find new tier one assets that doesn’t actually solve the issue of running out of having new growth units. Do you see that consolidation is a kind of a rational response to that or do you think the sector’s just really gonna be in the same position, just bigger companies, but with the same units being produced? 

MD: Well, I actually think it’s both. I think it’s both a rational response as it a sign that the sector is running out of organic growth options. I think the majors face resource depletion, there’s no doubt. They haven’t invested for so many years. They have been denied the opportunity of investing in their own brownfield capacity expansion possibilities and looking at near term greenfield options to supplement what they have. 

So they face its resource depletion. It’s very difficult for them actually often to get a permit for greenfield projects. Permitting takes years and years. And so they, by producing assets, that’s a rational response.  

AH: And are they having to overpay as a result, do you think? 

MD: Well, well maybe they’re overpaying for functionality and it certainly does concentrate risk. But I guess, paying x amount of money for an ounce in the ground of a producing mine. When you’re getting certainty and you have the permits that’s a hugely valuable proposition. 

Versus paying less money for something where you don’t have the permit, you’ve got greenfield risk and everything else going with it. So I think that M&A is everything about buying jurisdictional certainty as it were. And existing permits it’s easy to buy a permitting asset in a country than it is to get a new asset permitted. 

So that’s the reason why consolidation like this makes sense. But basically it’s not a long-term proposition of including the stock available to service the demands at some point in time, if that’s not addressed. We are gonna get a rising price of these resources and curtailment in what can be done. 

The market is without doubt, still defaulting to skepticism. 

M&A is not that easy. I know it’s in vogue, but it’s actually not that easy because people still worry that even M&A opportunities which look great on paper, don’t end up so great in reality because, the merging of the entities, the consolidation that needs to take place, the realization of the synergies. Just doesn’t seem to happen in the way that the companies project they will happen when they produce their deck to go out to the market. 

It’s not that M&A is so easy and it’s happening in such a profound way either. So I think we actually have quite a level of dysfunctionality in the industry in terms of realizing not only the value opportunities which are on the table, but creating the value opportunities that need to be there to service the demand that is burgeoning over the next few years. 

AH: I could keep talking about this for ages, but I feel we have to move on and start to get into the wrap up question. I do want to look a little bit forward. All of this is feeding into that energy transition, energy security, whatever we want to call it.  

If the West fails to materially lower the cost of capital for mining and processing over the next several years, what does that mean? For the energy transition, for secure supply chains, for energy security, for the timelines that they have for the competitiveness of the industry that they’re trying to create. 

MD: Look, I think the consequences for me are clear. Hopefully I’m not being too simplistic. I think supply chains break prices spike the energy transition slows, the strategic deficit, the critical strategic deficit that’re speaking about doesn’t get resolved. And I guess what breaks first? 

Is it the whole pricing envelope? Is it the political consensus? Is it the supply chain? I’m not sure. I’m not sure which breaks first, but that’s ultimately what happens. And my concern, I guess is that we underestimate, how visible the consequences are gonna be. 

Because the copper price goes to the roof and goes over say $15,000 a ton. The rare earths price double, battery costs stop falling. That’s, I guess when politicians will have to wake up and voters will certainly wake up by then. And by then it’ll be too late to fix very quickly. 

So you really have to act now or face, I think consequences in five, 10 years time, which are gonna be significant on society, very significant on society, both in terms of how people perceive and their actual real standards of living are, and the fact that it is gonna be more and more difficult to find quick resolutions to that.  

And so what does that mean? Does it mean that we enter a secular, structural change to the direction of travel of world economies and which is downwards? I think there’s a risk. So I think that, it’s something which we need to respond to. 

And, I would hate in five or 10 years time to say, with perfect hindsight, shit we screwed up? When today we have enough signals to know that we have to act. And there are things happening in the world which tell us to act, this, data centers, which are being built so quickly. 

Well, they demand a huge amount of energy. Therefore they need a huge amount of copper wiring. And there is a significant new level of demand, which is entering the whole dynamic of copper driven entirely by data centers. That’s an easy metric to see. We need to respond to that.  

AH: Do you think that’s the next thing in critical minerals, that when you look back, it’s obvious in hindsight? 

It’s obvious now, as you say, but it isn’t quite priced in yet. Or what is that thing do? Is there something you can pinpoint at the moment?  

MD: Just the fact that people, people live in a state of inertia. And it just takes a hell of a lot for that state of inertia to be rattled, to get them out. 

Because, some big exogenous event forces big and quick reaction. But be talking here about, the frog being slowly boiled in the kettle as it were. This is something which is taking place over time. And so people don’t respond in a timeframe, which reflects the urgency and the gravity of the situation because they’re not getting the signals that come with big extraordinary exogenous events. 

AH: Sir Mick, this has been a fascinating conversation as I knew it would be. What really stands out is that this isn’t just about geology, it’s about how markets are structured, how that policy aligns with the market and whether these systems can actually execute. 

I really appreciate you taking the time to share your perspective and experience with us. Thank you so much for joining us.  

MD: It’s been great. Thank you, Andrea. I’ve enjoyed it as well. 

AH: Well, I really enjoyed that conversation. I had a feeling I would, and there is a lot to unpack, so to dig into some of the points he raised, I’m going to bring in my friend and colleague from Fastmarkets, William Adams, who’s been listening in the background. 

Hello, Will.  

William Adams [WA]: Hi Andrea. How are you doing?  

AH: I am not too bad at all. We are living in a very interesting time in the markets at the moment, aren’t we?  

WA: Yeah, certainly are. Something’s changing all the time, but yeah, that was very interesting conversation that getting deeper into some of the critical factors which are affecting the market and have some long-term implications as well. 

AH: Absolutely. I mean, one of the things I found most interesting was his cost of capital paradox. He said that demand, conviction and critical minerals has never been stronger, and yet the cost of capital has never been higher, which creates this structural paradox. The world needs more metals than ever, yet the financial system is making it harder than ever to produce them. 

I thought that was a really interesting observation, do you think we are seeing a failure of capital allocation or do you think this is a response to real risk at the moment? 

WA: I think there are a number of parts there. I mean, I think it comes down to the market and more to the point governments are realizing that time isn’t on their side to bring on new projects. And I think what’s really interesting that Sir Mick said was there’s so many more risks today in bringing on these big projects.  

You’ve got to get a social license. You’ve got to get permitting, you’ve got to get sort of the ESG factors. You’ve still gotta go and find a new world class ore body as well, which are harder and harder to find, and often when you do find them in more remote places. So all the costs of these things go up. 

And that is just making it harder and harder for miners to get these projects up and running and to get the financing for them.  

AH: It’s really interesting, isn’t it? I mean, it’s very powerful takeaway to think that the energy transition requires massive mineral supply, but the cost of capital is preventing that growth. 

And it implies that the bottleneck isn’t actually the geology, it’s the financial architecture.  

WA: A bit of both. I think a lot of the world class mines have been found. So yeah, it is still hard to find them and then, hard to get that finance as well. 

But also the length of time it takes, and I don’t think people really sort of understand that and mean it can take, 15 to 20 years. And if you are investor. You’re not gonna get a return for that length of time, then that’s potentially a major deterrent when you can go and invest that money into Silicon Valley or into AI and get quicker return and probably a less risky one as well. 

So yeah, you can imagine why it is difficult for these projects to get finance. 

AH: Yeah, exactly. I think you made that point that mining is this long-term, 20, 30 year business, but capital markets offer it quarterly as you just pointed out there. And I think that mismatch of time horizons is really a key problem. We’re trying to finance multi-decade physical assets with capital structures that are designed for short term liquidity. 

And it just makes me wonder, if public markets won’t fund these projects and private equity wants a five year exit, then that traditional capital stack just doesn’t fit the asset cost anymore to a certain extent.  

WA: Yeah, and I think, that’s why China has been so good at it. ’cause it tends to have much longer timeframes. 

It has its five year plans but it just generally knows that it needs something and it will invest in it. Even if the economics aren’t necessarily there at the moment, it will do it with the foresight that it actually knows, by the time these projects come on board, they’ll be needed. 

And, we saw that in nickel in Indonesia. When they started to invest in 2018 the economics weren’t really there for doing it, but by the time those projects started coming online then, the nickel was needed at the time.  

AH: So basically, I mean, what you’re saying is that China thought strategically that the Western investors thought more financially, which is probably why they’re so behind now and trying to play catch up. 

WA: Yeah, I think that’s right. And I think, that happened at a time when China was, needing a lot of the resources as well. So it needed to invest and it did that and it’s done it very successfully. But I think now what we’re finding is that the west is realizing that it has fallen behind the curve.  

I think, it also coincides with the fact that we are moving away from a, a globalization era into sort of deglobalization era and therefore can the west, can countries outside of China rely on those old models, the old supply chains. 

And I think they’re suddenly realizing, certainly in the US they can’t do that. And they want to build up these local supply chains. And that is, happening. But now they realize one the time is against them but also raising them money is against ’em. If you leave it to the market to do it. And I think that’s why we’re seeing much more government involvement as we’ve spoken on previous podcasts.  

How, you know that is changing that and you are getting more, especially in the US you’re getting a lot more government involvement there. Government pushing and providing finance as well to try and speed up and rebuild those supply chains. 

AH: Yeah, I thought something else that was really interesting that he said was the moral hazard narrative around mining that negative narratives about it are deterring pension funds, for example, and that reputational risk has existed since literally the beginning of time. I feel since I definitely started in this industry, and I’m sure with you as well. 

I think institutional investors still see mining as environmentally or socially problematic. And the irony is that the energy transition depends on mining, but the capital pools that support the transition are reluctant to fund it. Or do you think that the reality is a little bit different? 

WA: No, I think that perception is very much there and I think it’s another sort of hurdle for miners to be able to raise capital. But I think, we probably need a, to change the mindset of people, you know, they all want their modern kitchens. They all want their modern cars. 

They all need these things with electricity. They all want their web access and AI and everything like that. So you do need these metals. And I think what needs to happen is the public perception needs to change.  

And we need to think about this in a different way. We need to mine today so that we move towards that sort of circular economy in the future where because you’ve got recycling coming on you won’t need to be doing so much mining. 

You’ll still have the metal there and that can then just be recycled. So it’d be a lot more sustainable. And I think that’s the way to look at it. But also on the same way, ESG standards have picked up a lot. So a lot of the concerns about mining should have faded down as well.  

AH: Yeah. I’m gonna sound like a broken record because I say this to anybody in an industry association who will listen to me here’s my challenge to the sector Super Bowl advert. 

You need to do a Super Bowl advert about the benefits of mining and get around this reputational risk. Explain it to people and you can make it very cool and very sexy. And if every mining company in the world put in a little bit of money towards it, I think that they’d be easily able to finance it and hit a massive world audience. So there you go. There’s my challenge to the mining sector to get around a little bit at least of that reputational risk and help people understand what critical minerals go into and why they’re important  

WA: More than important, they’re essential.  

AH: Yeah. Yeah.  

WA: They are essential. So, yeah, I think that is the message that needs to be delivered.  

AH: Yes, definitely I, and I also think his closing metaphor was excellent. 

Actually. He described the system as like a boiling frog problem, where those supply constraints gradually build up until prices spike and political systems react. It made me wonder whether policy makers are reacting early enough. Or is the signal going to be only when prices start to surge and we get to that crisis moment? 

Because the danger of gradual shortages like a boiling frog is that they are politically invisible until they suddenly aren’t.  

WA: Yeah, and I think we are in that situation and I think that’s why we’ve started to see governments, especially the US government wake up and get much more hands on and provide the money and talk about quicker permitting. 

So I do think they’ve seen the sort of the writing on the wall now. And they see it as a real sense of urgency as well.  

AH: Well I think that brings us to a very good point to bring this episode of Fast Forward to an end. My thanks again to Sir Mick Davis for such an insightful conversation and obviously to you, Will, for your deep expertise. 

It’s always great chatting.  

WA: Well, thank you. No, very enjoyable. Really interesting.  

AH: And also thanks to you, our audience for listening. If you enjoyed the show, please rate and review it. And if you didn’t, well then don’t. And don’t forget to listen to our market briefing episode when it drops next, we will be back soon with another episode. 

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