Latin America leads the way in the raw materials for clean tech – here's how to invest
Whichever type of green energy prevails in the next few years, Latin America will benefit, says James McKeigue
Many analysts think that the pandemic is accelerating the shift from fossil fuels to clean energy. It’s too early to say if that’s true, but it has certainly increased the green grandstanding from politicians and CEOs. BP aims to be “carbon neutral” by 2050, while Toyota, the world’s biggest carmaker, will no longer make internal combustion engines from 2040. The UK was the first major economy to make a legally binding commitment to “net-zero” greenhouse gas emissions and similar pledges are now being announced by governments across the world. With Glasgow hosting COP 26 – the World Cup of environmental shindigs – this November, expect plenty more ambitious green commitments.
The problem? Most of these promises are impossible to deliver. Take electric vehicles (EVs). Replacing today’s global fleet of internal combustion engines with EVs would require mining every single pound of copper in all of the world’s copper mines (EVs use four times as much copper as traditional cars).
Another solution could be biofuels. Yet even in BP’s most optimistic scenario, bioenergy will only make up 10% of demand for primary energy (natural resources that have not been converted into other forms of energy) by 2050. And that’s with billions of dollars of investment and massive increases in biofuel production. It’s a similar story for hydrogen, which under BP’s most radical assumption would provide just 18% of primary energy supply in 2050.
I am not belittling the efforts to fight climate change, just highlighting how difficult it will be to wean ourselves off oil. Simply meeting the legally binding pledges already made will radically upend natural commodity markets. Still, the energy transition will continue to pick up speed. For politicians, fighting climate change helps to win votes, while touting a company’s green credentials helps CEOs boost the stock. The energy transition bodes well for one part of the world in particular: Latin America. The region is home to the world’s largest reserves of copper and lithium. It is the biggest biofuel producer and is also emerging as a leader in green hydrogen (hydrogen created with renewable energy, not fossil fuels).
Commodities are still cheap
Clean energy is already a crowded trade. Copper is at record highs, while shares of EV manufacturer Tesla have tripled in the last year. Yet despite all the talk of a commodities supercycle, the prices of key natural resources are still well below previous peaks. The Commodity Research Bureau index, which tracks 19 raw materials, is currently at less than half of its 2008 peak – lower than at any point during the last supercycle, from 2004 to 2014. Rising inflation should also boost natural-resource prices. Last month’s 3% rise in US core consumer prices was the highest monthly increase since the mid-1990s. With the Federal Reserve seemingly unperturbed by rising prices, we’re likely to see higher inflation. Commodities are one of the few asset classes to thrive in an inflationary environment.
Michael Scherb, the founder and CEO of Appian Capital Advisory, a private-equity mining investor that owns mines in Latin America, believes clean-technology metals will go higher. “Mining companies are classic ‘lag’ businesses with long lead times for mines to get into production, so they were slow off the mark in responding to demand for clean tech. That’s reflected in the current prices for copper and nickel. People realise that there is going to be a supply and demand mismatch. However, I don’t think that even current prices reflect the full extent of the gap between supply and demand, which will become more apparent in the future.” Another factor is the declining quality of ore, says Scherb. Companies will have to “mine deeper for poorer-quality ore, which will increase costs. That will feed into the industrial production chain, which will push inflation in the sector”.
So the world will need immense amounts of copper. And that’s where Latin America comes in. Chile and Peru are the world’s largest copper producers, accounting for 44% of global output. Yet their neighbours have more exciting exploration potential. Miners up and down the Andes believe that Ecuador and Argentina have as much copper as Chile and Peru. Wojtek Wodzicki is the CEO of junior explorer NGEx Minerals and has overseen three massive copper discoveries in Chile and Argentina. “All along the Andes you see incredible deposits. Chile and Peru have exploited that, with their long history in mining, whereas Ecuador, Argentina and Colombia probably have much more to be found. An area with promising geology but little exploration equals opportunity.”
Nickel, cobalt, manganese and lithium are also clean-tech metals used in EV batteries. All four are abundant in the region, but Latin America is particularly dominant in lithium, where the “lithium triangle” of Bolivia, Argentina and Chile holds 55% of global reserves. Latin America also has advantages above the ground. The forces calling for the energy transition are part of a wider move to improve environmental and social governance (ESG). The money in global funds targeting ESG-friendly investments grew by 50% in 2020 to $1.7trn. So new mining projects will henceforth have to explain their social and environmental impact.
And that will favour Latin America. For example, its main competitor in cobalt production is the Democratic Republic of the Congo, where child labour is rife. Another advantage is electricity. Thanks mainly to massive hydroelectric plants, Latin America has the greenest power grid in the world, with around 60% of the region’s electricity coming from clean sources. Being able to hook up to a green grid improves the environmental profile of Latin American mining projects, which will help them attract more investment.
A fifth of the world’s hydrocarbon reserves
Latin America’s energy-transition advantage is about more than just clean tech metals. By 2050 oil is still expected to make up 40% of primary energy demand. That’s about 120 million barrels per day of oil and gas equivalent that will need to be produced. And many studies have confirmed that oil isn’t going anywhere fast. Biofuels magnate Erasmo Carlos Battistella, the founder of ECB Group, a Brazilian firm building Latin America’s most advanced biorefinery, notes that in the last energy transition 100 years ago oil began to eclipse coal. Yet “even though oil is dominant, coal is still being used today”. However, as electric vehicles and biodiesel eat into oil’s stronghold of transport, while renewable generation does the same to gas in the power market, the world will start becoming more selective about which hydrocarbons it uses. Pricier and dirtier subsectors, such as Canadian oil sands or US shale, are likely to lose market share to cleaner and cheaper operations, and there are plenty of those in Latin America. It has 20% of global hydrocarbon reserves.
Conventional oil production will be complemented by biofuels. Latin America is already the world’s largest producer of biofuels and ECB Group is now building the region’s first-ever second-generation biofuel plant. Second-generation fuels can be poured straight into an existing engine without being mixed with conventional petrol or diesel. They can also be made with a wider range of feedstock (agricultural waste or by-products), which counters the old criticism that biofuels cut food production. BP and Shell have already signed contracts for 90% of the new plant’s production. Biofuels will never have the mass to replace oil completely, but they are very competitive in areas where it is difficult to electrify vehicles. For example, ECB will produce bio-aviation fuel, which is the most effective way to reduce air-travel emissions.
Hydrogen is also another renewable fuel where Latin America has an advantage. Hydrogen, the most abundant element in the universe, is found all over the Earth. However, extracting it from water via electrolysis is a costly and energy-intensive process. The only way it can really help countries meet their emission pledges is if the electrolysis is powered by renewable energy, making green hydrogen. That’s only economically viable where the price of renewable energy is very low. Step forward Chile. A solar boom in its Atacama Desert, one of the world’s sunniest places, has given it plentiful supplies of cheap renewable energy. Chile has announced a $300m fund to accelerate green-hydrogen production to 25 gigawatts of electrolysis production by 2030. That would be a massive amount for a small economy like Chile; the EU is aiming for 40 gigawatts of production by the same year. The energy transition won’t play out exactly according to the politicians’ pledges, but regardless of which technology comes out on top, Latin America will benefit.
The stocks to buy now
Chile looks very well placed to thrive in the energy transition. It has world-leading reserves of copper and lithium, while its solar renewable success gives it an advantage in green hydrogen. Uncharacteristic populist legislation has unsettled Chilean shares recently, creating a buying opportunity. The easiest way to back Chile is to buy a local bank with wide exposure to the economy. Banco de Chile (NYSE: BCH) has fallen by 15% this month. It is a cheap way to buy into the country’s energy-transition growth.
I have spent the last year interviewing miners in the Andes and there are two that stand out. SolGold (LSE: SOLG) is the best way to play Ecuador’s copper potential. It has several deposits to develop and its first target, Alpala, is the seventh-largest copper project in the world. In Argentina I like Josemaría Resources (Toronto: JOSE). It is developing a massive deposit with 6.7 billion pounds of copper, along with seven million ounces of gold and 31 million ounces of silver. The firm is backed by the Lundin family. CEO Adam Lundin is the scion of a Swedish-Canadian natural-resources dynasty with an impressive record of mega-mining projects in tough jurisdictions. As he told me: “I am not doing this for the salary, but for the share-price appreciation and if people invest with us they will benefit as we do”.
GeoPark (NYSE: GPRK) is my favourite oil and gas firm. Its main operations are in Colombia, where production has been curtailed by recent protests, but it also operates in Argentina, Brazil, Chile and Ecuador. Co-founder James Park believes the energy transition is good for his company. “The majors are making lots of noise about leaving oil and gas for renewable energy, which... creates more opportunities for independents such as GeoPark.” The firm has improved its environmental profile by connecting to Colombia’s 60%-renewable energy grid and building pipelines to reduce tankers’ journeys. It’s also a low-cost producer, with 95% of its oil profitable with oil at $30 a barrel. There are no listed biofuel pure plays, but Adecoagro (NYSE: AGRO) is a massive agro-industrial group with assets across Argentina, Brazil and Uruguay. Its sugar and ethanol business comprises 50% of sales.