Natural Resources Investing

EMS:
Absolutely. So to kick off the conversation, tell us a little about the firm and how you got to where you are today.

MG:
I'd be happy to. So the MJG Fund is an open-ended limited partnership focused on long term investments in natural resources, namely metals and mining. Our investments are generally publicly traded, but we're focused much more on the junior end of the mining spectrum with a median market capitalization of around 50 million US. And I think our largest holdings market cap is around 1 billion as it stands. When people with no familiarity with this business ask me what I do, I find that it's easiest to explain it as venture capital for those teams that are exploring for and developing the next generation of mines. And I myself am from Silicon Valley, so a bit on the other end of the spectrum in terms of the value chain. And I actually launched this fund, fun fact, out of my sophomore year dorm room at the Wharton School undergrad program back over 12 years ago. And here we are over a decade later and still going strong.

EMS:
Love your journey, Matt. So given that, wanted to hear your overall outlook for investing in metals and mining.

MG:
Sure. Well, it's really anybody's guess what happens over the next 6 to 12 months. When looking forward, I really try to think in longer time horizons. Three, five years, even longer. And that's reflected in the fund's structure. We actually have a 10-year lockup for all investors, which I think is the optimal way to structure a long term investment vehicle in the mining industry. That said, I can say with confidence that over the course of 2020s, the outlook for the mining industry is exceedingly bullish. And I say this for a few reasons.

The first is the relative valuations to other asset prices. Whether you look at commodity prices themselves relative to general equities, whether you look at commodity producing companies relative to general equities, we are at century lows and there's some good data on both of these fronts. The first from Goehring & Rozencwajg, the second from GMO in terms of equity valuations. And also if you look at minings waiting within the S&P 500, it's about 0.5%. So half of 1% of the S&P 500. Where at the peak of the last cycle in 2011, we reached 1.5%. So relative to other asset classes, mining and natural resources more generally are cheap.

The second point is that there's been significant underinvestment in the industry over the past decade, both in expanding existing mines, developing new mines, and going out and exploring for new deposits and just looking at sustaining CapEx investments relative to EBIT, we're at 60% below the level that we were just a decade ago. And this has been a pronounced trend, so there's not going to be a quick supply response to higher prices that are coming.

And then third, there's the global decarbonization push, which I view as exceedingly bullish for most of the metals complex over the medium to long term as the world adopts metal intensive alternatives to hydrocarbons. So we're talking wind, solar, nuclear, and associated battery storage that's needed for renewables. These are incredibly metal intensive applications and it's my belief that this fact will drive the next surge of interest in the mining industry. We're already seeing initial signs of generalist and new investor attention returning, but it still feels quite early.

EMS:
So based on that, Matt, where do you see some of the greatest opportunities and why?

MG:
Well, I think the greatest opportunity stems from the global decarbonization push that is continuing to gain steam. And I'm a long term believer in this. I think governments globally and the majority of populations globally are pushing for cleaner, less CO2 intensive sources of energy. And we simply cannot get close to our climate goals globally without pulling significantly more metals from the ground. Whether it's copper, nickel, uranium, lithium, cobalt, graphite, there's dozens of metals that need to be pulled out of the ground for these more environmentally friendly environmental sources. Wind power, solar power, nuclear are incredibly metals intensive. And if we're going to transition away from hydrocarbons, the world needs to rely on the mining industry. But there's a real disconnect currently between how society views the industry. But it's importance for society's goals moving forward.

And I'd also say quickly that the onshoring and friend-shoring that we're seeing in supply chains are also creating really interesting opportunities across the metals complex. We've actually seen governments come out in US, Canada, Europe, Australia, and just earlier this week, Japan, went through some major financial support behind metal projects. So this is a trend that I think we'll see continue going forward.

EMS:
Matt, on the other hand, I'd like you to address some of the greatest challenges you face and what you're doing to conquer them.

MG:
Sure. I referenced this previously, but mining really is viewed by society as a dirty, stodgy, old-fashioned business. And honestly, that keeps investors away. It also keeps talent away from the space, and I view it as a critically important space for humanity at large going forward. And also because of this perception, it makes it much more difficult for the industry to achieve permitting and social license to develop our next generation of mines. So the industry does desperately need to improve its image. And I do believe that this global decarbonization push, if the industry plays its cards right, provides the opportunity to do so. The reality is that we simply do not have an alternative energy build out without mining, but as it stands, society is unaware of this and it's up to folks like myself and others with a platform in the industry to share that there is responsible mining taking place out there and we have to embrace it if we want to meet our climate goals globally.

EMS:
Matt, that's the next segue into the next topic on ESG and DEI, which are obviously top of mind for the industry and wanted you to discuss how your firm's integrating both of these.

MG:
Sure. So the ESG framework, it's really integral to our investment process. And I will say the first thing that I look at when viewing any investment is the people. Always bet on the jockey and not the horse, at least in the early stage mineral industry. And so starting with the G, who are the people? What are their previous achievements? Are they well incentivized? How is the government set up? How do they receive their shares? There's so many things to look at just on the people's front, and if it does not pass the G box and this does not pass muster, then it's an immediate pass for us as an investment.

But then moving on, think of a development stage mineral project where maybe there's a deposit that's been discovered and the company's trying to advance it through permitting, obtain social license, and then ultimately build the mine. The ESG and the E aspects are essential. It's true that all mines have negative externalities, but some are significantly more disruptive than others. And with the internet and social media obtaining social license from nearby communities to mine, it's as critical as it's ever been. And environmental permitting as well, at least in the Western world, is also lengthy, onerous, and fraught with risk. So investors who ignore the environmental and social aspects when considering a mineral investment risk out investing and projects that may make sense on paper in terms of an economic perspective, but simply won't be built due to these other factors.

EMS:
Matt, we've covered a lot of ground today, so I wanted to see what your future plans are for the firm.

MG:
Sure. So we're sticking with the plan for the foreseeable future here and we'll continue to add new limited partners that share the MJG partnership's long term vision. We're still early in this mining cycle and there's significant opportunity over the course of this decade. That said, I do anticipate that at some point in the late 2020s that we will see a mining market that has swung from its undervalued, unloved state today to something that's more over-exuberant and overly bullish. At that point, the plan is to dissolve the limited partnership, perhaps go hang out on a beach for a few years and then pick back up again when the industry is again unloved. Again, this is about the most cyclical industry out there, and so it's very important for one to choose their exit and entry points wisely.

EMS:
Matt, I want to thank you so much for sharing your perspective with our listeners, and thank you for listening to the EisnerAmper Podcast Series. Visit eisneramper.com for more information on this and a host of other topics. And join us for our next EisnerAmper podcast when we get down to business.

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