The Rabid Capitalist

Professor Glenn A. Okun

It is inevitable that minerals will become the dominant centenary trend of the natural resources world.  There are short, intermediate and long-term sources of demand that will fuel this outcome.  In September 2023, the Rabid Capitalist recommended investments in Rio Tinto (RIO), Vale (VALE) and BHP (BHP) as the most effective approach for taking advantage of these secular developments (see https://therabidcapitalist.com/2023/09/11/green-energy-it-is-easy-being-green/).  These stocks have become more attractive over the last eight months.

RIO, VALE and BHP provide investors with a compelling combination of current yield and capital appreciation.  Their risk profiles are highly attractive as well.

Expected returns are significant.

These firms provide investors with significant dividends.  They have committed to a capital allocation policy reminiscent of the oil and gas majors’ approach launched five years ago, balancing capital expenditures required for developing reserves, the source of capital appreciation, with cash distributions in the form of dividends. 

The miners’ commodities reserves can serve demand in the old and new economy.  These minerals are critical for industry generally and military hardware specifically.  The trio intend to be major suppliers for the electric-vehicle market, through their domination of the nickel market.  Their vast copper mining operations are also best positioned to profit from the transition to electrical energy. 

It is unusual for an industry to be positioned to exploit short, intermediate and long-term demand trends.  In the short term, miners will benefit from general economic expansion as industrial firms ramp up manufacturing.  The restocking of military hardware will drive purchases as a result of the United States’ supplying munitions and other equipment to combatants in conflicts around the world. 

In the intermediate time frame of a decade or more, the expansion of the electrical grid has become mandatory.  This infrastructure investment is required in order to accommodate the growing demand for conventional and alternative power, not only for environmental benefits but also for energy-intensive artificial intelligence applications and data center operations.

The long-term transition to green-powered transportation will require vast commodity supplies over many decades.  Our miners are among a relatively small number of firms that can possibly meet this need.

Risk management characteristics are numerous.

These companies possess attractive risk profiles by virtue of diversification.  These firms produce all major minerals, including iron ore, aluminum, copper and nickel.  In addition to their commodity and geographic market diversification, they serve multiple large commercial markets further diversifying their revenue and cash flow streams.

These suppliers mitigate clean energy’s technological innovation risk as well.  The major miners, as dominant suppliers, possess a breadth of commodity assets that position them as essential vendors and beneficiaries regardless of the resolution of the uncertainties inherent in the green energy transition.

Their high dividend yields protect shareholders from the uncertain timing of the green energy and electrification transitions.  Technological innovation in energy is unpredictable (see https://therabidcapitalist.com/2023/09/11/green-energy-it-is-easy-being-green/ and https://therabidcapitalist.com/2023/09/20/generative-ai-stunt-or-transformative-tech/ ).  The clean energy future relies on many inventions and discoveries that have not yet occurred (EV batteries for example).  Effectively, the investor is being paid to wait until these demand sources provide rewarding capital appreciation.

Current income protects the investor from the delayed demand that has been typical during green energy investment cycles.  Historically, once economic growth slows, nations cut a variety of discretionary expenditures, including subsidies that drive green compliance.  These adjustments usually take the form of postponing compliance deadlines and reducing the compliance requirements, damaging revenue streams for solutions providers and their suppliers.

Attractive short-term performance.

We have been paid to wait since establishing our positions in these miners.

Long-term stock prices have very high potential rewards.

The Rabid Capitalist expects our mining portfolio to generate compound annual returns in excess of twenty percent over the long term based upon the historical evolution of oil prices.  Oil demand increased five times and prices surged by a factor of thirty-five during the mass adoption of the automobile between 1910 and 1946. 

This scenario is conservative due to the nature of mining.  I expect that supply shortages will drive up commodity prices over time.  Copper production from existing mines is forecasted to decline in the short to intermediate term.  Capital investment has been declining.  Development of a producing mine requires an average of sixteen years, compared to three years for an oil well.  The mining industry is much more concentrated than the oil and gas industry, reducing the risk of intense price competition.

These miners remain fairly valued.

RIO, VALE and BHP remain reasonably priced.  The geopolitics of copper has begun to attract the attention of governments and the press.  The threat of China’s controlling reserves and the current response of the United States should focus investors’ attention on these stocks.

The Rabid Capitalist reiterates its investment recommendation on these miners.  Long-term performance will be highly rewarding.

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