Thursday, 21 December 2023 — Melbourne, Australia

By James Cooper Editor, Fat Tail Daily

Twitter (X): @JCooperGeo

[6 min read]

Dear Reader,

Fossil fuels have been ingrained through the industrial fabric of our society for more than 100 years.

It’s the driving force behind everything we do, from global conflicts to putting humans in space.

Giving up our reliance on this economic lifeblood will NOT be an easy task.

The costs will be extreme.

And I don’t mean economically.

Paradoxically, the biggest harm from this major energy transition will be the environment.

In a twisted fate of irony, mining the vast supplies of raw material needed to ‘clean-up’ the way we generate energy might just turn out to be far worse than the impact of global warming itself.

It’s something environmentalists pushing ‘carbon zero’ haven’t fully digested.

I doubt they’ve ever stepped foot on a mine to see first-hand the change these operations have on the landscape.

What makes this issue pertinent is that the world’s largest rainforests host some of the richest mineral deposits on the planet.

South America’s Amazon is endowed with gold, potash and iron ore.

The vast Central African rainforests are home to endangered mountain gorillas but they also host some of the highest grade copper and cobalt deposits in the world.

Meanwhile, Indonesia’s rainforests are destined to become giant wastelands as authorities step-up mining efforts to exploit the region’s vast nickel laterite deposits.

The battery anode material that’s set to feed EV batteries and ‘save the planet.’

The scale of mining that’s needed in the years ahead is difficult to comprehend.

But to get some idea…

According to Associate Professor Simon Micheaux, based on current output for lithium, we’ll need more than 9,000 years’ worth of production condensed into just 20–30 years!

That’s so we can have enough lithium material to shift away from conventional vehicles.

The ‘green energy revolution’ could be about to drive the planet towards an environmental catastrophe!

But whether you or I like it, this megatrend is in motion.

So why does this matter for resource investors?

If you think the environment is irrelevant to your bottom line, think again…

Large, shallow, high grade deposits are no longer a ticket to guaranteed riches.

If the community is not on board, a miner potentially risks losing everything.

Just take the latest example from Panama.

First Quantum, holding one of the world’s largest copper mines shut-down operations last month after officials declared its contract with the miner ‘unconstitutional’.

It was the government’s response to the country’s mass protests over the potential environmental impact posed by the mine.

First Quantum’s operation is situated in the biodiverse Panamanian jungle, a wildlife corridor that connects seven countries across Central America and southern Mexico.

As the green energy transition pushes more mining into frontier locations, expect to see hostilities ramp up.

But the ESG trend is another important factor…

A recent survey conducted by PwC showed 8 out of 10 US investors plan to increase their allocation to ESG products.

PwC expects the trend to exceed $1 trillion over the next two years.

Given mining is an inherently destructive industry, miners could miss out on an enormous pool of capital, critical for development.

Operators located in rich biodiverse regions may become un-investable in the years ahead.

But that also opens the door to opportunity…

A mining hub ideally suited to an ESG future

There’s many reasons mining investors should be focused on Australia…

A skilled labour force, established infrastructure and stable governance are the obvious reasons.

But Australia is also a destination that has far less environmental impact from mining.

It’s inevitable…pulling ore from the ground will always involve some level of damage.

But some places are BETTER than others when it comes to ‘sustainable’ extraction.

With its vast outback, mining has a relatively small effect on communities or the environment.

Populations are sparce, meaning social impacts are minimal.

In fact, large mining projects often deliver windfalls for remote communities…employment, the construction of schools, housing, and hospitals.

And while Australia does contain unique flora and fauna, the biodiversity is dispersed over many hundreds of kilometres and holds nowhere near the same DENSITY as a tropical forest.

Limited rainfall across the outback also means tailings dams can be controlled easily with little potential for leakage or failure.

A problem wreaking havoc in high rainfall areas where mining contaminants impact rivers and downstream communities.

Just take the Fundao Dam collapse from 2015.

Ranked as Brazil’s worst ever environmental disaster, BHP and Vale now face litigation from more than 700,000 Brazilians seeking claims for the deaths and illnesses that resulted from the disaster.

This is set to cost the miner up to $9 billion…

A sum larger than BHP’s acquisition of OZ Minerals last year.

Given the entire premise behind future demand for commodities rests on helping the environment, ESG will be a mammoth consideration in the years ahead.

That’s why investors should be focusing on projects set to command a premium…

Not just high quality assets, but those located in regions unlikely to pose significant environmental harm.

With its high rates of evaporation, reducing the potential of tailings contamination in the vast outback…Australian-based operators have a clear advantage in the years ahead.

If you’re looking for ways to try and find opportunities on this, my resource newsletter Diggers & Drillers aims to do just that. In fact, I’ve just gone through the entire portfolio with members to try to optimise it for 2024 — a year I think will be crucial for commodities.

Right now, we’re running a special 70%-discount offer for new members — likely the best deal we’ll ever have on offer. And it’s backed by a 30-day money-back guarantee. Definitely worth checking out!

Until next time,

James Cooper,
Editor, Diggers & Drillers and Mining: Phase One

James Cooper has been a working geologist in mines across Australia, Canada and Africa since the early 2000s. He’s led the operations of tiny explorers through to huge producer outfits. He’s seen booms and busts first hand and he also understands the cyclical nature of individual commodities. For example, James was right there when Barick Gold launched an enormous $7.5 billion takeover bid for Equinox. That was the peak of the last cycle.

With his background as a geo and finance professional, he brings a unique insight and experience to Fat Tail Investment Research. He writes the broader resource-focussed investing letter Diggers & Drillers and the ultra-speculative explorer focussed trading service Mining: Phase One.

By Bill Bonner Editor, Fat Tail Daily

[3 min read]

Dear Reader,

We’ve been exploring the ‘facts of life,’ the deep currents — unseen…uncharted…misunderstood….

Amid all the noise and distractions of ‘politics’…who talks about the hidden causes — the megapolitics — of public policy decisions?

Why does the US favour low interest rates over high ones…? Why does it favour deficits over surpluses? Why did it abandon the successful (over 18 decades) discipline of a gold-backed dollar in favour of worthless ‘paper’ money?

Did you notice that when Congress questioned college presidents about anti-semitism on campus, all three elite college chiefs — from Harvard, MIT, and U Penn — were all women? And now, a record number of women are employed in Biden’s cabinet and the leading Republican challenger to Donald Trump is a woman. Why so many women in prominent positions in public life? Why aren’t they at home baking cookies?  

Why did the US launch unnecessary wars with Iraq and Afghanistan….and now, why does the US government back Israel…and not Palestine?

Why does it back the Ukraine…and not Russia?

You will say that it aims to do the ‘right’ thing; but how does it know what is right?

A More Pressing Concern

We’ll return to these aggravating questions tomorrow. Today, we address a more pressing investment concern. Dear Readers must be asking the same question we are: what if we’re wrong?

The Primary Trend turned around…or so we thought…in two moves. First, bonds topped out in July 2020. Then, stocks reached their apogee at the end of the following year. We urged investors to move to MSM — Maximum Safety Mode — while we awaited a crisis. 

Deflation was the immediate threat, not inflation. Higher interest rates would cause financing problems, we believed. Another shoe was bound to drop — a penny-loafer of a big company suddenly unable to pay its bills…a steel-toed government debt auction going ‘no bid’…a fast-moving Nike crash in the stock market.  

This crisis, we figured, would cause the Fed to panic…to ‘pivot,’ lowering its key lending rate, while letting inflation rip.  

But what happened? So far, the bond market did as expected — with the sharpest selloff in bond prices (along with the steepest increase in yields) ever seen. When the Fed began raising rates, in February 2022, its key lending rate was actually more than 5% BELOW zero. Now, it’s more than 5% above zero in nominal terms…and inflation adjusted, (depending on which measure you use) it’s about 1 or 2% positive.  

The 10-year Treasury yield, on average through 2020, was under 1%. Now, it’s four times as high. Interest rates have come down recently. But they haven’t gone anywhere near the all-time lows of 2020. Inflation rates have fallen too, as expected. 

The Good Ol’ Days

Stocks behaved more or less as we thought they would too. The market sold off in 2022. Then, after losing almost 8,000 points, in September of last year the Dow stabilised.  But then, for no apparent reason, it recovered — led by a manic performance of the Big Techs, including a bubble-like enthusiasm for AI.

And last week…out of the blue…unprovoked…the Fed appeared to ‘pivot.’ No crisis. No panic. And no real reason to drop the fight against inflation; after all, core inflation is still about twice the Fed’s 2% target.

Was it a ‘pivot error,’ as we suggested yesterday? Or was the Fed trying to help the Biden Team win re-election by giving the system a little holiday cheer?  

We don’t know. But investors believe the good ol’ days are back. Here’s Markets Insider:

…the long-term bull market in stocks is alive and well after the Dow hit a record high this week.

The US stock market has been in a secular bull market since 2013, when it broke out of a 13-year sideways consolidation range that began at the peak of the 2000 dot-com bubble.

BofA highlighted the long-term nature of the Dow in its chart, as the index is typically marked by long periods of sideways consolidation, which is then followed by long-term breakouts to the upside. The firm expects that the long-term upside trend for stocks will continue. 

A ‘Weak Pivot’

What’s going on? Was the low of September 2022 just another opportunity to ‘buy the dip?’ Is the bull market that began in August 1980 still intact…with an even higher high still ahead?  

Who knows? But we’d be careful about coming to a conclusion too soon. While stocks are up, they’re still below the highs set two years ago when measured in gold or adjusted for inflation.

The lower rates of inflation we’re seeing do not mean that the Fed has won its fight with rising prices. Consumer prices are still going up; just not as fast. And inflation is probably ebbing largely because the economy is slowing, not because the economy is getting more colour in its cheeks.  

We stand by our forecast. All we have so far is a ‘weak pivot.’ No major crisis. No decisive swing to lower interest rates and higher inflation.

Is it time to get out of cash? Time to switch out of Maximum Safety Mode?

Where would you go — to stocks…when they are at all-time highs? To bonds…just as the US has its biggest monthly deficit ever?

No, we wouldn’t abandon safety mode. Not yet.

Regards,

Bill Bonner,
For Fat Tail Daily