Mick Davis wants to feed 'ducks that are quacking' for energy transition metals

➤ The drive toward renewable energy is exacerbating a supply-demand mismatch for raw materials.

➤ That imbalance is creating potentially lucrative investment opportunities in metals and mining.

➤ Investors are putting more money into developing supply, but it may not be enough. Not addressing supply issues could stymie progress on climate goals and raise costs.

Vision Blue Resources Ltd. is an investment vehicle founded by Mick "the Miner" Davis, a prominent dealmaker who once led Xstrata PLC as its CEO before the mining group merged with metals heavyweight Glencore PLC in 2013. Now, Davis aims to build a portfolio of investments in assets essential to the supply chain for cleaner energy technologies.

The company recently announced a £25 million investment in Cornish Metals Inc. to advance its South Crofty tin project in the U.K. Vision Blue is also invested in NextSource Materials Inc., which has graphite and vanadium projects; Ferro-Alloy Resources Ltd., which is mining vanadium in Kazakhstan; and Sinova Global, which is focused on quartz and silicon metal.

After serving as an executive with multiple mining companies, Davis served as CEO and treasurer of the Conservative Party in the U.K. until mid-2019. He also played a role in the megamerger of BHP Ltd. and Billiton, where he was the CFO, that in 2001 formed BHP Group Ltd., now the largest mining company in the world by market capitalization.

S&P Global Commodity Insights spoke with Davis about the challenges of supplying the energy transition with crucial metals and minerals and some of the investment opportunities in the sector. The following conversation has been edited for clarity and length.

S&P Global Market Intelligence: Why are metals and minerals such a lucrative play right now for investors that want to benefit from clean energy resources and just how big are those opportunities?

Mick Davis: The world essentially has been in a situation for the last 10 years where mining companies have been under enormous pressure from institutional shareholders to conserve cash and send cash back to the investors. They have been really restricted from any form of significant exploration, projects or similar.

So, even if we were not going to have this energy revolution, the supply of commodities going into normal industrial usage actually would be quite constrained. But, something new is happening, which is not actually dependent upon an assumption of robust economic growth.

Your last secular change in mining came when China industrialized in the late 1990s, early 2000s. That saw an explosion of demand. That compensated for the declining demand for commodities in the [Organization for Economic Cooperation and Development] countries because they moved to service economies and therefore, metal intensity declined as a percentage of GDP.

This revolution actually is coming about in the first world, in settled economies that are changing the structure of the energy balance. Because of policy change, they're going to demand these commodities. A number of players see the demand for these commodities far outstripping, in growth terms, anything that was demanded through the Chinese industrial revolution.

If that's the case, we're going to get into a situation where the supply-side, which is already fallow, is going to be ill-prepared to actually cope with it. We have this mismatch and therefore, what you have is an opportunity for investing in projects.

The sort of projects that we're targeting are very large resources that can be built on a modular basis. You initially invest a small bit, but you can scale it up over time, and contain the risks normally associated with large project builds. With commodity prices undoubtedly going to rise, that's going to represent a very compelling return for investors.

Generally speaking, what kind of investment criteria are you using to look for these opportunities?

It all starts with the rocks in the ground, just to be very simplistic. I'm looking for the best quality resources that I can find. I look for resources that have been well-defined.

Then, I'm looking for high-value, low-volume commodities. My experience in the past running large mining companies is one of the big drains on the value proposition because is if you have to establish a large logistics system. You can only make it pay if you have a very large mine.

I want to be in geographies in which I understand how to operate. They can be complex geographies ... but I need to know how to operate in them. I need to know that I can identify and mitigate the risks.

The third thing is [that] I want to be able to know that I can enter into that project at a 0.2x, maybe 0.3x net present value. Then, put in the capital required for the project to progress either to feasibility, or feasibility to construction, etc. and inject my team into the investee, so that I can make sure that they are managing the risks associated with bringing up the value curve.

By the time we get into early-stage production, which is the time I would like to exit and hand over to the major mining companies, I consider maybe 0.8x to 1.0x NPV and therefore make my 3x to 4x without having to make an assumption about what commodity prices are going to be.

I'm looking for commodities that essentially talk to the energy transformation and the [environmental, social and governance investing] narrative. There is a hell of a lot of institutions that want to fund those sorts of projects. I essentially want to be the person who feeds the ducks that are quacking for that.

Do you think the mining industry missed an opportunity by not tying itself sooner to renewable energy and battery metals and pushing the importance of the raw materials that go into those technologies?

If you speak to most institutional investors today, and you're talking about mining, they have ESG-negative, not ESG-positive in their mindset. They see, by definition, miners impact the environment, they have large carbon footprints, tense relationships with local communities, etc.

The mining industry has missed the opportunity of explaining the importance that they actually have in the narrative of carbon emission reduction going forward. They are, in fact, absolutely essential to it.

First of all, the enormous pressure not to invest in exploration, new projects, or even brownfield expansion of the existing operations. The mindset hasn't been there.

Secondly, they are spending a huge amount of time because of the ESG revolution, trying to address an ESG discount on their multiple. The way they're doing that is trying to clear up their existing asset base's carbon footprint and other environmental impacts.

The third point is that this industry is growing very, very strongly, but it's still on a relatively small base. The large mining companies look at, something like, for instance, this tin investment, which we're putting £25 million into. Or look at our investment in NextSource and graphite in Madagascar; we put in $28 million to $30 million, and it's going to be one of the largest graphite producers, over time, in the world. They look at that, and they say initially, the EBITDA they're going to get from the first phase is going to be too small to move the dial.

The larger companies are going to be the people that are going to buy these types of asset because they're going to need them in their stable. Then they will run them for the lifecycle.

Do you see a world where market players and regulators "get it" and act effectively to meet the needed demand for energy transition materials, or are supply challenges inevitable?

Progress will be made, but I don't think targets will be met.

The increase in electric vehicles on the road will go apace, I've no doubt about that. But, it will be limited by the commodities available and the price of the commodities available. Some of the electric vehicles will ultimately be priced out of the reach of the common man, in my view, because they will be very expensive.

People are throwing out the targets, but they're not throwing out the strategy. We've got a very steep mountain to climb.

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