How to invest in Latin America’s metal reserves – the key to reaching net zero

The US recession is bad news for investors. But at least it lets them retell an old joke. Dr Copper’s diagnosis was accurate once again: the price of “the only metal with a PhD in Economics” dropped before the current economic downturn.

Yet while copper is an excellent predictor of GDP movements owing to its widespread use, it is rubbish at spotting energy transitions. Over the next 30 years governments, investors and companies will spend trillions electrifying the global economy. The goal is to fight climate change by replacing carbon-emitting fossil fuels with renewable energy. The “great electrification” will require huge amounts of copper for the generation, transmission and consumption of this clean power.

A severe supply squeeze

There is just one problem. The world can’t produce enough copper quickly or cheaply enough to fulfil these ambitions. The largest copper mine in the world is La Escondida in Chile. Mining analysts Wood Mackenzie estimate that five more Escondidas would need to come online over the next eight years to prevent a copper shortfall. Those huge deposits haven’t been found yet, never mind built.

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Meanwhile, analysts at financial-data provider S&P Global estimate that annual demand for copper will double between now and 2035 to reach 50 million tonnes per year. In the 15 years from 2035 to 2050 we will need more copper than we have used in the last 4,000 years. The demand is being driven by the energy transition. Renewable-energy generation is far more copper-intensive than traditional power plants. S&P estimates that solar and wind use between two and five times more copper for each megawatt of electricity produced than coal or gas-fired plants.

As the world uses more electricity, it needs more electric infrastructure – from substations to car-charging points – which means more copper. Finally, the consumption of all this green electricity requires yet more copper. For example, electric vehicles (EVs) contain around three times more copper than a traditional internal combustion engine.

Yet nobody seems to have got the memo. Politicians talk about climate change, but are less keen to allow the miners to dig up the metals needed to combat it. It “is harder than ever to build a copper mine”, says Tristan Pascall, CEO of First Quantum Minerals, the world’s sixth-largest copper producer. It “takes 16 years from discovering a deposit to building a mine... two decades ago it took between six and ten years”.

Ironically the same environmental consciousness that is pushing electrification also turns public opinion against mining. It’s easy to bash politicians, but most investors also misunderstand the biggest investment story of the 21st century. The market focuses on technological solutions, such as batteries and electric vehicles, but the real bottleneck is metals supply.

“Mining companies trade on a 15.4% free cash-flow [FCF] yield,” says Michael Scherb, CEO and founder of Appian Capital Advisory, a mining private-equity firm. “Compare that with a prominent EV manufacturer that trades on a 0.5% FCF yield or renewable energy companies that also have a 0.5% FCF yield... The mining sector is making the most money from the energy transition, but mining still isn’t attracting sufficient capital.”

The lack of capital and political support means the world won’t produce enough copper. But other factors are also at play. Falling copper grades at older operations mean miners have to dig more ore to get the same amount of copper. That also means more energy has to be used, pushing up carbon emissions at mines, undermining the rationale for producing the metals in the first place. Solutions are being developed, such as electric mining vehicles, but they will add to costs.

The top producers

So, the world needs more copper, ideally new high-grade deposits with a low environmental footprint. Step forward, Latin America. Chile and Peru are already the world’s number-one and-two copper producers. Controlling almost 40% of world supply, these two nations have a similar market share to 13-nation oil-cartel Opec when it comes to oil. Their massive reserves, first and third in the world, means they will play a central role in the energy transition. Mexico, with the world’s fifth-largest copper reserves, also deserves a mention. When it comes to new discoveries, underexplored Ecuador and Argentina stand out. Mining accounts for less than 2% of GDP in these countries, compared with 15% in Chile, yet they are likely to contain similar copper reserves.

The region isn’t just rich in copper. The lithium triangle of Chile, Bolivia and Peru contains more than 50% of the world’s reserves of lithium, which is vital for the batteries needed to store all of this new electric power. Brazil has the world’s third-largest supply of nickel, another key battery metal. But the shift to an electric-powered economy will benefit more than just the specific “green-tech” metals.

Other metals will be used to build the new infrastructure to support the electric economy. One is iron ore, of which Brazil has the world’s second-largest reserves and Peru the seventh. Another is zinc, which prevents corrosion of steel and iron. Peru and Mexico jointly have the fourth-biggest reserves of zinc, while Bolivia has the ninth. Tin is another important metal in an electrified world as it is used in every circuit board in existence. Again, Latin America dominates the rankings, with Brazil boasting the fourth-largest reserves, Bolivia the fifth and Peru the seventh.

It also bodes well for Latin America that its vast hydroelectric power plants give it the world’s greenest electricity grid. More than 60% of the region’s electricity comes from renewable energy. That means miners can connect to a green grid, reduce their emissions profile and produce low-carbon metals. That bolsters their environmental and social governance (ESG) credentials, allowing them to attract cheaper financing. It also gives the end product a market advantage, as many environmentally conscious industrial customers don’t want to use “dirty” copper. This will become even more significant when carbon taxes are introduced.

The challenge in Latin America is not the geology – it’s politics. I am not referring to the left-wing governments that have assumed power in recent years, although many want to increase taxes on miners. The bigger problem is local politics. Independence from Spain created massive, sparsely populated weak states: 45 million Argentines inhabit a territory just 15% smaller than India, which contains 1.4 billion people.

All politics is local

What’s more, the cash-strapped governments lacked the wherewithal to build the infrastructure needed to connect remote areas with the urban centres. Many of these states were also home to dozens of indigenous cultures that were either ignored or oppressed by the creole elites who seized power from the Spanish. Over the last 30 years governments have tried to rectify these historical injustices with transport infrastructure, decentralised constitutions and indigenous rights.

The upshot is that local communities in the remote areas where mining projects are developed often oppose new mines. In Peru projects worth a total of $60bn have been stalled by community protests. Sometimes the protests are genuine. Often, they are manipulated by local politicians or crime bosses who don’t want the scrutiny, or competition for manpower, that a mine would bring. Being anti-mining is a vote-winner.

Bizarre as it seems, the key to humanity’s battle against climate change lies in local politics in the Andes. It’s also the key factor in determining if projects succeed or fail. Some zones are no-go areas. For example, Guatemala shut down the world’s third-largest silver mine. Sometimes the problem is the miner. Firms are under financial pressure to start mines operating as fast as possible, but those that don’t invest enough time and money in getting locals on board will face protests later.

Building community consensus in Latin America is a headache, but recent geopolitical tensions in Ukraine and Taiwan demonstrate the region’s strengths. Latin America is more peaceful than Eastern Europe and more democratic than Africa or Asia. Moreover, it should benefit as the US reacts to China’s dominance in critical minerals and secures its own supply chains.

One interesting way to play the coming metals boom is through Anglo Pacific Group (LSE: APF). It invests in royalties (which provide a share of a mine’s revenue) and streams (the right to buy some or all of the metals produced in a mine). Over the last eight years the company has switched from financing coal mines to finding funds for “future-facing” metals. So it has a big presence in Latin America, including a deal with a copper operation in Chile.

Southern Copper (NYSE: SCCO) is the fourth-biggest copper miner in the world and has the largest copper reserves, with mines in Mexico and Peru that also produce zinc. Antofagasta (LSE: ANTO) is a Chile-based, London-listed copper miner. According to the influential annual rankings published by the Fraser Institute, Chile is the best mining jurisdiction in Latin America. Moreover, the centre and north of the country, where Antofagasta owns its five mines, are generally free from community protests.

If you are inclined to take on more risk, consider SolGold (LSE: SOLG). It is developing Cascabel, one of the most exciting discoveries in Ecuador. When built it will be the world’s top underground silver mine, third-largest underground gold mine and sixth-largest underground copper mine. Argentina has also made some mammoth recent discoveries. Filo Mining (Toronto: FIL) is developing a copper, gold and silver deposit that would churn out 67,000 tonnes of copper per year for 14 years.

Mining developments are highly risky, although Filo is backed by the Lundin family, a Swedish-Canadian mining dynasty that has a good record of building mines in Latin America. In Brazil, Horizonte Minerals (Aim: HZM) has secured $630m to build a nickel mine. The shares will get a boost if Horizonte builds it on time and within budget, while it also has another promising project planned after that