There demand for “critical” raw materials for the energy and digital transition is constantly increasing and risks causing a increase in inflation and expand the volatility of these materials, which are generally scarce. This is what Generali Investment finds in a report dedicated to critical raw materials, in particular metals.
The scarcity of critical materials
It is estimated that on average 50 to 80 kilograms of mineral, metallic, agricultural and energy raw materials, excluding water, are needed to support the lifestyle of a person living in a rich country, but the energy and digital transition which constantly require more infrastructure (servers, data centers, electricity networks, power generation facilities), expanding the demand for critical raw materials and, consequently, volatility.
Inside the raw materialsmetals have specific physical and economic characteristics: they are a lot more expensive of mineral materials (sand, chalk, kaolin…), they are neither renewable nor replaceable and extraction and refining processes are increasingly expensive both from an environmental and financial point of view. Furthermore, mines are complex infrastructures, involving heavy work in often remote locations and over a very long period of time.
For all these reasonsor an inflationary picture is emerging which, according to experts, it will fuel volatility influencing long-term commodity prices as well as the valuation of mining and metals companies on the stock market.
Eleven critical metals
But what are the critical metals? The 11 items highly critical which, according to Generali Investment, will be more exposed to imbalances are: Zinc (Zn), Nickel (Ni), Copper (Cu), Tin (Sn) and two rare earth elements – Praseodymium (Pr) and Neodymium (Nd) considered ultra-critical; Graphite (C, name of carbon which is not a metal), Silicon (Si, a metalloid), Lithium (Li), Tungsten (W) and another rare earth, Dysprosium (Dy) considered highly critical.
This selection can be expanded and included 20 other chemical elements that are simply critical: Platinum (Pt), Lead (Pb), Bismuth (Bi), Iridium (Ir), Tantalum (Ta), Tellurium (Te), Antimony (Sb), Silver (Ag), Palladium (Pd), Rhodium (Rh) , Ruthenium (Ru), Germanium (Ge), Cobalt (Co), Vanadium (V), Titanium (Ti), Scandium (Sc), Magnesium (Mg), Beryllium (Be), Aluminum (Al) and a non-metallic element, Selenium (Se).
What are the prospects for investors?
The expected misalignment between supply and demand will tend to increase volatility and prices, especially during negative supply-side shocks. Metal mining and refining will be key to maintaining a robust economy, in particular to enable electrification, digitalisation and the long path to a low-carbon energy mix. Additionally, the metals sector focuses on substantive environmental, social, human rights and governance issues that have the potential to generate significant risks.
These factors combined to create a concentration of attractive opportunities for those selecting investments in such a risky and volatile environment: confirmation of high risk/high reward can be expected soon.
There selectivity based on ESG extra-financial criteria it is essential as a basis for risk analysis. In fact, this type of investment represents a perfect combination between the economic impact and the impact in the real world, in particular for the environment and society. 75% of industrial mines are concentrated in just 13 countries: Russia, China, Australia, United States, Indonesia, Brazil, Canada, Chile, South Africa, Peru, Guyana, Argentina and India.
Imbalances between supply and demand they do not manifest themselves uniformly across market segments, and the human and environmental costs differ significantly between industry players and site locations. To choose investments, Sycomore AM uses a strategy investment based on aextra-financial analysis thorough and stakeholder-oriented known as SPICE and up an environmental analysis granular and holistic structured around the Net Environmental Contribution (NEC). Based on this analysis, a broad universe of over 150 listed companies was narrowed down to a buy list of 32 stocks based on regional, size, liquidity and criticality criteria. Further ESG-based sustainability screening then narrowed the list to two dozen listed companies.
These include smining companies (Imerys, Freeport-McMoRan, Teck Resources Limited and MP Materials Corp., which operates the Mountain Pass rare earth mine in California), integrated extraction and refining companies (Boliden, Eramet), mining equipment manufacturers (Epiroc, Metso Outotec), recycling company (Befesa, Umicore) e refining-recycling company (AMG, Aurubis).
