The Current State of Natural Resource Companies

In this episode of Industry Focus: Energy, Nick Sciple and Motley Fool analyst Buck Hartzell chat with the founder and managing partner of Massif Capital, Will Thomson, about the state of listed real assets, principally mining, energy, infrastructure, and global investment opportunities for the long and short terms. They discuss how the move toward renewables and carbon-free energy sources is impacting these sectors. Thomson also shares how his group factors in political risks and the regulatory environment when making investment decisions, what the future looks like for value investing, and much more.

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This video was recorded on July 23, 2020.

Nick Sciple: Welcome to Industry Focus. I'm Nick Sciple. Joining me today is Motley Fool analyst Buck Hartzell. Our special guest is Will Thomson. Will is the founder and managing partner of Massif Capital, an investment firm focused on global opportunities in listed real assets, principally mining, energy, and infrastructure. Will, welcome to Industry Focus.

Will Thomson: Thanks for having me, guys.

Buck Hartzell: Thanks for joining us.

Sciple: Yeah. So great to have you on, Will. Just the first question off the bat. Massif Capital was founded in 2016. This is in the middle of a decade that has been pretty difficult for energy and some of the subsectors that you invest in. Why did you decide at this particular focus for your funds?

Thomson: I guess, there are, sort of, two reasons. So the first reason is just, in terms of my background, I've worked in project finance with commodity firms on the insurance side of things, writing insurance policies for banks, providing project finance to mining companies, oil and gas commodity traders, credit insurance policies, things of that nature. So my background is all in servicing the industry. In addition to that, in grad school, I studied political risk and specifically focused on areas where -- or looking at how companies would integrate political risk into their emerging market activities, most of which were natural resources or extractive industries of some kind.

So there's an industry background. And then on top of that, there was just sort of a general trend that I observed that these, what I call liquid real asset companies, who are just wildly underserved, and there was a potential opportunity to carve out a niche for myself in the equity space there, so.

Hartzell: And you don't do insurers, but you have a lot of experience in insurers, and they're a little bit off cycle right now, fairly cheap across that industry, maybe a new area to go into.

Thomson: I guess anything is possible. My experience with insurance tells me that they're difficult to analyze; I've asked a few times. Quite similar to the loan book of a bank. It's a bit of a black box of what's going on in there.

Sciple: Yeah. So one of the first things I wanted to ask you about. You take a value approach when it comes to your investing style. How do you think about approaching value investing? You know, obviously, if you go out there and just look for low price-to-book-value companies, you're going to have a bad time. So how do you think about value investing from a strategy perspective?

Thomson: So at the moment, it's quite difficult. [laughs] I think that, you know, we don't do a lot of screening or anything like that, so we don't pick on, say, price to tangible book value or some sort of ratio like that when we're looking for value. We tend to run DC apps on all the companies that we look at, and so in terms of value, I mean, we're just -- again, I think the concept of value investing should best be summed up as, we're buying $1 for $0.50. And so that's what we're looking for. And if that takes the form of a company that the operations, as they currently are, suggest a value of the company that is at discount to the current market price, that's great; if, on the other hand, there is still some expectation of growth that needs to occur in the future to justify a valuation greater than the current price, you know, that's still value, in my opinion, as long as you've properly calibrated your expectations for whether that growth is going to come through or not.

You know, I think that if something outrageous needs to occur in order for a valuation to be justified, say, something growing at 20 or 30 times revenue, at 20 or 30 times a year, you know, now you're outside of the world of value investing, but if there is some sort of reasonable expectations of growth, that can also be value. So I think value is a pretty big tent that gets often talked about in a very narrow way.

Hartzell: Will, we have a lot of retail investors in the Motley Fool platform that are listening today. And some of them are newer investors, right, they're kind of new to this. Is there any tip, like, one or two things that you would ask them to kind of avoid as value investors or stay away from? Maybe a suggestion that you've maybe learned a hard way or not?

Thomson: Yeah, well, I guess, for our areas of focus, the place to start would be junior mining. You know, junior miners are -- we run into a lot of retail in some of the stocks we own. My advice would probably be to stay away from junior miners. It seems like a lot of people like to take them as sort of a lottery pick and put them in their portfolio. And I guess that's fine if you want to do that and you understand what it is, that it is a lottery pick. But, you know, mining tends to be a pretty technical area. And so my experience suggests that you should bring some real study and expertise to the question rather than just throwing money at some good drill results. It seems like a lot of people get in trouble with that.

Hartzell: Yeah, no, that's a good suggestion for folks. So there's been a lot of debt taken on among even the best of companies from the S&P 500. I mean, I just read something, there was an article the other day that said companies were paying out 13% more than they earned the year before if you combine buybacks with dividends. That money has got to come from somewhere. It's come from very cheap debt, and buybacks have been almost double dividends in the S&P 500. So almost $730 billion from buybacks in 2019. But my question for you is, you deal with cyclical companies, with typically some of them have high fixed costs and operating leverage. How much does the examination of debt on the balance sheet play into the analysis that you guys do on the businesses you look at?

Thomson: Yes. So for us, everything starts with the balance sheet. The balance sheet is very much an opinionated snapshot of what the company is. It represents the resources the company has to work with to produce cash flows. And we care principally about cash flows. So I think any analysis that starts anyplace other than the balance sheet, especially these days, is a risky proposition. The more debt a company takes on for whatever reason they take it on increases their fragility in the long term. And so to the degree that you take on debt, for example, to buy back shares, which is something that does not deliver sort of a positive growth in cash flows; it delivers a financial engineering growth perhaps in cash flows. You know, that's a risky proposition, because that debt does need to be paid back at some point. And if you've invested it in something that's not going to increase your earning power, then at least in our book, that seems like a significant misstep.

So I think that the share buybacks that have occurred over the last, we'll call it, decade -- you know, in theory, share buybacks are a nice way to return capital, but it seems like, especially on Wall Street, everyone takes everything to, sort of, a point of absurdity. You know, once it becomes a good idea, it's a good idea that everyone has got to do it all the time. I run into a very few companies these days who don't seem to have a, you know, sort of, share buyback mandate. Why everyone has a share buyback mandate I don't know. It's a good idea sometimes, not all the time, so.

Sciple: Will, you mentioned the importance of the balance sheet to your approach; and I pulled a quote from your fourth-quarter 2019 investor letter where you say, "We view the firm as not just having the characteristics of a going concern but also as an institutional structure with the resource conversion capability, with the resource being the balance sheet." Can you distinguish for us the approach to valuing a company on a going concern basis, like that capital asset pricing model you might have mentioned earlier, versus this resource conversion basis that you mentioned in that letter?

Thomson: Yeah. So our own version of an idea is the same as investor Marty Whitman had. And basically, a business as a going concern is a business producing cash flows and income doing whatever it already does. Coca-Cola is producing Coca-Cola or mining firms are selling copper. So they are operations that produce cash flow. But they also have these assets on the balance sheet that can be flipped to someone else. They can be sold to generate returns. They can use assets on the balance sheet to buy other assets. They can leverage the balance sheet up a little bit. It's not -- you know, I did say, of course, you have to be concerned with debt, but it's not as if you can't use debt whatsoever.

So the businesses as an operation are returning the balance sheet over on a continuous basis. The business as a resource, if you will, is the balance sheet in a snapshot and what you can do with those resources at any given moment outside of, sort of, cycling through them in the operations.

Sciple: Okay. And how do you measure this as an investor? So I know as an investor, I go look at the statement of cash flows and I can get an idea of what cash flows are going to maybe project those into the future. What metrics do you look at to identify these opportunities on a resource conversion type investment?

Thomson: Well, I wouldn't necessarily say there are metrics to look at, and part of the reason for that is because it's about what kind of creative ideas management has about what they can do with the business. And so resource conversion is much more about the management team and knowing, you know, they have an idea about combining themselves with another business or they have an idea about how they can flip some asset they've got in some other country and reinvest that money into growing a mine in the United States or something. So it's much more about getting a sense for management's strategy and focus and outlook for their business than it is per se about actual numbers on the balance sheet.

That being said, one does, of course, want to look at the tangible book value for a lot of businesses we look at, because that's the substance which the management team has to work with. And then, of course, for a lot of businesses these days, there's also intangibles and those will have various ways you can attempt to evaluate the value of. But that's the material the management team has to work with.

So I would say, you start with the management team, though, and whether they have some sort of creative ideas about how to use those assets.

Hartzell: And to follow up on that a little bit, we love management. We love investing in owner- and operator-run businesses at The Fool, we have a lot of those within our recommendation list. And often you mention balance sheet, we say, you know, you've heard a lot that when you buy a company, you get the balance sheet and the CEO. I mean, that's essentially what you get.

How important is management, and in your particular sectors, what are some standouts or things that you look at to evaluate them?

Thomson: Yeah, so I think that management is critical in every business. I would say in real asset businesses, in some way, it's almost more critical than other industries, just because the operations leave very little room for error or misjudgment. And so from an operating, from a day-to-day perspective, the management team needs to be very good.

But when they go to allocate capital, they also need to be extremely good, because what we've seen is a history of management teams, especially in natural resources businesses, who, you know, they feel quite wealthy when the commodities are trading at all-time highs and whatnot, and they deploy capital unintelligently. So I think, you know, with a lot of resource companies, it is important to look at the history of write-offs and impairments. That can tell you a lot about the way that company has, as an institution, thought about how to allocate its capital going forward.

Now, that doesn't necessarily mean the current management team thinks the same way. But, you know, institutional memory changes pretty slowly. So the capital allocation acumen of the management team is one of the first things we try to, sort of, suss out. You know, there's return on invested capital is an important measure of that. Return on capital employed would also be an important measure; return on assets. You know, those types of statistics would be quite helpful in addition to a more qualitative assessment of the management team.

The history of the management team also, especially with mining companies, and especially with junior miners -- which I did suggest people stay away from, but we don't stay away from them, because we spend all [...] you get management teams that cycle through a lot of different junior miners. And not necessarily because they failed at a previous miner but just because, through the lifecycle of a mine there are different types of management teams that are required to operate the mine. And so you know, looking at that history is quite valuable.

We find that searching for management teams on LinkedIn and really getting a sense for their full work history is quite useful and informative.

Sciple: One of the factors when you talk about looking at a history of a company -- you mentioned the word "cycle," management cycling through management teams. I want to ask a different cyclical question. So all the sectors that Massif invests in are heavily affected by the market cycle, and as a result, understanding the macroeconomic cycle is got to be important to investing success in those areas. When you write about your investing approach, you mentioned that your analysis of the macroeconomy is grounded in Austrian economics. What does that mean for you in practice as an investor?

Thomson: It's going to start with, and this is definitely not in vogue at the moment, but it's going to start with a concern for the currency that a company operates in, and that's a very, obviously, high-level macro for your commentary, but it's also going to have a concern for what appears to be the capital cycle and the levels of investment in a particular industry. And the idea that there very much is a business cycle that runs on, in some regards, the capital that is flowing into an industry. So to the degree that there is a lot of capital flowing into, say, gold mining, let's say, just for example, it may be suggestive of a future supply [equipment] if a lot of mines come in. And so to the degree that you can get a sense for the way capital is flowing into and out of the business or industry, you can get a sense for where you are in a potential business cycle.

A lot of it comes back to business cycle analysis, which has roots in Austrian economics. As I said, we're also intensely concerned with inflation and currency and the debts associated with the countries that these businesses operate in or are headquartered in at the macro level.

Hartzell: Yeah. And speaking of inflation, I mean, that's a huge thing. We're all trying to invest, so that we earn a return above inflation, increase our purchasing power. We've had a pretty big stimulus program here recently, I think, you know, over $4 trillion. How does that factor into what you think about the prospects? I mean, we've been in a very low-interest-rate, low-inflation environment for a long time. And I think there's not a whole lot written about potential inflation, and I don't think it's on a lot of people's -- they just kind of take it for granted that inflation is going to be 1% or 2%. But we have this huge stimulus. Any thoughts on the impacts of those, or maybe give us high acts, would he think about that, I don't know?

Thomson: Yeah, I mean, the Austrians would be crawling up the walls if everyone was going through inflation. So one of the things that we try to make sure we're always thinking about is the fact that while the macroeconomics or business cycle that's going on behind the companies we invest in is very important and we definitely have sort of a reference narrative, what we think is going to occur, we try to be, sort of, cognizant at all times of the fact that it's a very low probability that what we think is going to occur is actually going to occur. So we try to assemble a portfolio that thrives under multiple diverse scenarios.

In regards to inflation. I think that in 2008, everyone got really concerned about inflation with QE [quantitative easing], I mean, I guess it's a little after 2008, but 2009, 2010, you know, everyone was crawling up the walls concerned with inflation, talking about [...] republic style hyperinflation. And as a result, I think a lot of investors just sort of missed some opportunities.

Now, we try to not go that extreme on the inflation issue. We do think there is inflation coming. We do think that it's quite likely we get a period of deflation first followed by a period of inflation. We also tend to think that inflation comes in a couple of different flavors and different forms. And especially with commodity producers, can crop up and you can get weird industry inflation as a result of supply constraints. So sort of, broader CPI inflation; I don't really have much to say on it. I don't find CPI to be terribly -- it measures some kind of inflation, it's just not a type of inflation I'm terribly concerned with.

So I do think we'll get more inflation down the road. I suspect we'll have a period of deflation first, though, just as a result of this weird mix of government cash, low interest rates, high debts. It's going to be a confusing period for a little while.

Hartzell: It's an interesting period, because you saw at one point, we had 20 million people unemployed, yet the highest savings rate [laughs] I mean, a huge spike in savings rate, it's just, it's tough to look back for those that like to study history and go, what's a good comparable? We're kind of in an unprecedented area here, what's going on, yeah.

Thomson: Yeah. And that savings rate, just, you know, the velocity of money this year has -- I mean, it's just fallen through the floor, which, of course, is going to be very difficult. It's going to be difficult to create inflation, if you will, in such an environment. To the degree that that savings rate is maintained, that's the period of deflation we're talking about prior to an inflationary period.

Sciple: Will, you mentioned capital flows and what that can do to supply-and-demand dynamics in some of the industries in which you invest. And that's an area I wanted to get into a little bit. It appears like we might be at an inflection point when it comes to our energy infrastructure. There's clearly a mandate from governments to reduce emissions. Which a lot of people, obviously, point out, that's going to impact oil and gas companies, but it also is going to affect the mining companies that you own, shipping companies that are subject to these types of emission regulations. How are you thinking about this transition to clean energy as you build your portfolio?

Thomson: Well, I think we have a bit of a -- you know, at the moment, I think it's out of -- I wouldn't say out of favor, it's just a perspective that's not very common. And our perspective is that a lot of the physical real assets that are carbon producing, the businesses associated with those assets represent critical industries that we cannot continue our economies without. And so physical assets have a critical role to play in actually facilitating a transition to a low-carbon economy.

Now, oil and natural gas is a bit of a funny one. There absolutely is going to be a fall in demand over some, sort of, long period of time, assuming, you know, electric cars take off and whatnot, but there are other industries that are carbon intensive that we just can't afford to live without, nor can we create a low-carbon economy without.

And so the prime example is mining. Mining is a carbon-intensive industry. Mines now in the DRC [Democratic Republic of the Congo] or, say, Mongolia copper mines, things of that nature. These operations run on diesel power generators and things of that nature. Yet, you know, you can't build a solar panel without aluminum and copper and silicon and various other natural resources. You can't build a wind turbine without steel, concrete, and again, copper. We can't power these electric cars without nickel, lithium, copper again, and a whole host of other metals.

So the idea that we are approaching a transition, we think, is true. And that it represents a significant opportunity for those who are willing to do the work to understand which of these, sort of, real asset businesses that are carbon producers have management teams and business models that are trying to set themselves up to transition, rather than simply, sort of, continuing to do business as usual.

Hartzell: And you've mentioned, I think, in some of your letters, I think, lithium is one that you kind of wrote about. Like, once people get on board, I'm talking about investors now, you know, some of these stocks can go crazy, because they anticipate all this demand. And then you see, kind of, a fallout down the end. Are you guys more on the early side, kind of get in early before the trend and it becomes popular, or you kind of like, after the bubble bursts, we'll get in at the other end when everybody is, kind of, given up on the big thing?

Thomson: I think it probably just sort of depends on what we see. So lithium, we avoided the first sort of bubble, if you will. I guess, if you were early enough, it was probably a great ride. We didn't see a setup or a series of investments that made sense early enough. You know, the major producers had great assets, but they weren't necessarily, you know, pure lithium plays. And then there were so many juniors, and a lot of them just had no -- you know, the one thing that happens with commodities, especially in mining, is you'll just get people piling in, teams of geologists come together and say, "We got to start finding lithium," and all of a sudden, you've got all these lithium companies, but nobody has ever mined lithium before on the team.

So I would say that it just, sort of, depends on what we see. I'd say most of the time, [laughs] we probably are on the other side of the initial bubble. There's a lot of de-risking that occurs during that initial bubble, especially for mining firms. And so our preference would be to get in on the other side.

With mining firms, again, in particular, we tend to, just in general, invest more frequently during, say, a construction period for a mine than we do when it is a -- say, just drill holes in a geological deposit. So we like to see a route to a sustainable business model before we invest. And so frequently, that's not in the first bubble.

Sciple: Will, you mentioned earlier these flows of capital into some of these spaces and that how that feeds into your analysis. You just mentioned how a lot of cash flooded into lithium a couple of years ago and created a little bit of a bubble there. As you look out into the market today, where do you see an area where capital is being under-allocated, where you think there's an opportunity? And on the other side, where do you think things are overinflated?

Thomson: I guess, we can sort of go through -- let me look at our portfolio here and sort of go through things a little bit. I would say that base metals, in general, are being underallocated to --

Sciple: Can you specify what base metals are, for folks who aren't familiar, our listeners?

Thomson: Absolutely. So things like -- well, actually, I can't really speak to iron ore. I don't know iron ore very well. So I'll say copper. Copper is being underinvested in. Very good, solid copper deposits are very hard to find. There haven't been very many discoveries of world-class copper assets in the last 20 years. You've sort of got two big ones in Turquoise Hill, which owns the OT mine [Oyu Tolgoi] in Mongolia and has been a bit of a troubled asset. And then you have Ivanhoe Mines, which has got copper assets in the DRC. Two world-class deposits, but other than that, there haven't been a lot of world-class deposits found.

The volume of copper we're going to need going forward is quite significant. Copper is one of these metals that is sort of technology agnostic, meaning, if we go hardcore solar panels, and no wind power, we still need copper. If we go hardcore wind and no solar panels, we still need copper. If we, I don't know, come up with some other way to charge batteries, it doesn't matter, we still need copper. So copper is a good one.

In the long run, aluminum is quite interesting. The level of flows in investment in aluminum -- aluminum is probably more about the businesses themselves getting their acts together than it is about under- or overinvestment.

One metal that is receiving no flows, no investment whatsoever, really, is nickel. We're going to need a lot of nickel going forward. And at the moment, there just aren't a lot of nickel deposits, and people haven't found them. The deposits tend to be associated with other metals, and it's just, it's been a tough metal to find things in.

If you look more toward, you know, outside of the raw commodities, but still within the sort of energy transition space, if you will, there is no question in my mind that there is a bubble in "alternative fuel" businesses. So people like Plug Power or Bloom Energy -- you know, the management teams are well-meaning, don't get me wrong, but some of these businesses just don't have a business model that is sustainable and haven't proved themselves in any way whatsoever, but the flows into them are huge.

So solar in the United States, in general, in our opinion is vastly overpriced. Wind power is underappreciated.

Sciple: So it sounds like the folks who are making that power, the final end commodity that's coming out that you're going to use in your power grid, is where you're seeing a massive amount of overinvestment, but on the actual commodities that are necessary to constructing those assets, there's incredible underinvestment. Do you think that's because just there aren't enough copper deposits, like, there just aren't mines that are easily accessible left in the world? Or because we're just not adequately investing cash in these subsectors for whatever reason?

Thomson: I would be very hesitant -- so the idea that there just aren't mines, I find that's one of those things where it's certainly a possibility, but that's, sort of, like calling peak oil or something. I'm not ready to do that. You know, I don't think we have some sort of inventory that we're aware of, of all the copper deposits. You know, finding a copper deposit -- finding, frankly, any mineable deposit is incredibly difficult and requires a ton of money and time. And so my gut reaction to that is, it's a capital question. And there's just not a lot of capital flowing into junior mining.

The structure of the mining industry and how mines are financed is -- I wouldn't call it broken, but the setup is a very challenging way to finance a critical industry. You know, you've got teams of geologists who go to the Toronto Stock Exchange and float -- for all intents and purposes, they float some geological idea that they've got. And who's going to invest in that? Well, you know, a couple of their friends and geologists. And then they've got to raise, sort of, friends and family capital, for intents and purposes, that level of capital in a public market. And then they go and drill some holes and hopefully raise some more capital by issuing more shares. It's a bit of a broken model or, at the very least, it's not the most efficient model for achieving the end result.

So I'd say that the commodities are definitely being underinvested in. I'd say the middle of a lot of the supply chains for things, like, batteries or solar and wind power are overinvested in, or at the very least, a lot of the shares are trading at sort of fairly rich premiums. And the reason, I don't know what the reason for that is. That investment in the middle seems quite robust, and that's especially true for something like batteries. Like, the number of gigafactories being built, far outstrips the capacity of the mining industry to produce the inputs. Where these gigafactories that are sprouting up on a weekly basis in places like China are going to source their materials from is beyond me.

Sciple: One area you talk about, demand, investment is going to have to flow into an area, that I think about, and you've written about some is nuclear. Not a lot of folks realize, when you look at production of energy in the United States, nuclear is the largest source of carbon-free energy production in the U.S., accounting for more than all renewable energy combined. What do you see the role of nuclear playing in the transition of our energy grid, if at all? I mean, it could be a tailwind, if we invest more in nuclear, or it could be a headwind, if that nuclear power production comes off the grid.

Thomson: Yeah. So we definitely hope it's a tailwind. We hope there's more investment. To the degree that policymakers incentivized the build out of nuclear, the transition will be easier, and frankly, it will require less commodity production, if you will, than if they don't. At the moment, we don't necessarily have a very optimistic outlook for growth in nuclear energy. You know, the European Union has written some policy that -- I mean, everyone recognizes the importance of nuclear, I guess I'd say, but nobody, as of yet, in our opinion, is willing to go out, sort of on a limb, and say, "We need to do this, we need to build more nuclear power plants and we are going to come up with a way of financing it, and we're going to move forward with it." The exception, of course, would be someone like China and India, both, of whom have made it a policy to build out their nuclear power fleets. Why the Western world has decided to basically cede their... what was a leading position in that industry, is beyond me.

Sciple: So among a certain subset of value investors, you mentioned nuclear, uranium has been this narrative of, there's a big opportunity here. Do you see that as an opportunity today, and if so, can you walk us through the thesis there?

Thomson: Yeah, absolutely. So despite the fact that we don't expect a significant buildout of this sort of Western world's nuclear fleet, there will be growth in the fleet just as a result of emerging market development. And uranium is one of those metals or commodities that has been, sort of, viciously hit by the capital cycle. There has been very little, if any, investment in actual expansion of, sort of, the world's uranium mining operations. And so over the last 10 years, what you've seen is secondary supply, which has been critical to keeping nuclear utilities fueled with uranium, has dwindled. That secondary supply came from places like Russia or Kazakhstan. It is basically uranium that was not -- no utility had, sort of, asked for or signed a long-term contract for. And so that secondary supply was significant enough, over the last 10 years, that there was really no incentive for anyone to invest in building out primary supply.

We have come to a point now where inventory levels at utilities and just, sort of, the existence of that secondary supply has dwindled to the point that utilities are all aware of the fact that they need to pay a higher price on uranium to incentivize mining, because quite soon, sometime in, say, the next five years, there quite literally will not be enough uranium to meet the demand of the existing fleet. And it's pretty easy to sort of draw this out on a piece of paper. As is, the uranium market is not a market that clears natural, meaning, if you add up all the supply from all of the world's uranium mines on a yearly basis, it does not currently meet our annual demand. So there's that gap. That gap was filled by the secondary supply. That secondary supply has dwindled, and now that gap is basically increasing, and interestingly enough, with COVID, we had even more mines shut down to the point that -- I'd have to double-check, but I don't necessarily know if anyone of substance besides for Kazatomprom, which is in the Kazakhstani state uranium miner, is actually mining uranium.

So Cameco, which is the big name that most Western investors know, they're not operating any mines. They own mines, but they're all in care and maintenance. They're all shut down. So the gap just continues to grow. And as that gap grows, the incentive price to get people to either bring mines back online or to invest increases.

Sciple: So this is an opportunity folks have been pointing out for a number of years. Why do you think it's taken so long for the thesis to come to fruition in the market?

Thomson: Well, so I guess there's two things. So one, is a lack of appreciation for how significant the secondary supply was, say, 10 years ago. There is also a lack of appreciation of the emergence of a -- not quite a spot market, but a trading market for uranium. And so utilities, which have historically, sort of, gone out and contracted for uranium on a five-year contract basis, to say, "We want uranium every year for the next five years and we'll sign a contract now and pay you $50 a pound." Because there was this growth in secondary supply and a trading market, they've been able to go into that market and rather than say, approach a mine, who says, "Well, if you pay us $50/pound, we'll give, you know, whatever 2 million pounds of uranium a year, every year, for the next six years," utilities have been able to go into the trading market and find someone who maybe can't provide them with uranium for the next six years but can provide them with uranium for the next two, and they can do it at $30 a pound.

And so utilities have made the decision to continue to go into that trading market. And as a result, there hasn't been that long-term contracting demand, and what's the demand that sets the price that incentivizes miners to develop mines.

Sciple: You mentioned Kazatomprom. That's a company that you've been invested in in the past, you mentioned earlier a background in political risk. This is a company that's 80% owned by the Kazakhstani private wealth fund. How do you evaluate the political risk in this type of investment?'

Thomson: So I think the political risk is -- it's very much just, sort of, like management teams, it's about incentives. And the incentives of the Kazakhstan government, based on the way the sovereign wealth fund is set up, based on where they derive their wealth to fund the sovereign wealth fund from, they are interested in the dividend from Kazatomprom. And to the degree that the dividend is financed out of free cash flow, which is what we're interested in the company growing, is free cash flow, our interests are aligned. And so we view the political risk as... I wouldn't call it insignificant by any means, it's certainly higher than it is, say, in the United States, but well, that's debatable, actually, but certainly higher than it is in some places.

But it's largely a question of incentives, and the incentives can only really be evaluated, though, by going out there and talking with government officials and, sort of, getting a sense for who the people you're getting in bed with are.

Political risk. You know, the thing about political risk that's kind of interesting is when you bring it up and people talk about it, they think about country risk, they think about things like interest rates and currencies and debt and security issues and things of that nature. But political risk is really a people risk, much more than it is a, sort of, aggregate statistics risk.

So you get one of these country risk reports from IHS or Moody's or something like that, they're going to talk a lot about the country from the perspective of some sort of economic model, basically, and evaluating the political rest within the confines of certain general statements about the country. But the reality is that political risk for businesses operating in countries is mostly about people and, sort of, what the power structure of the country is and what role those people play in that country's government and things of that nature.

Hartzell: Speaking of politics, we have an election coming up here in the United States. We have elected officials now, particularly in the White House, who have been very pro some industries, particularly coal and some of those. And even the ones that they've been pro, I mean, coal, we can, kind of, argue that it hasn't done well and the economics aren't that great. I'm talking about thermal coal, not met coal here. But what are your thoughts on the upcoming election, and how do you think that could impact the investments that you have?

Thomson: You know, personally I have no, sort of, political predictions. [laughs] So I'm not going to venture there. I would say that from our perspective, we would really like to see -- one of the things we see in Europe that we think is particularly interesting is that despite the fact that there is some fairly contentious politics, the EU and the EU's various member states are mostly getting on the same page when it comes to regulations regarding climate change. And as a result, there is significantly more clarity in the EU about what some of these industries, sort of, like the utility industry or energy industry more broadly, what the, sort of, regulatory environment, going forward, that they're going to be operating in is going to look like.

In the United States, there is no clarity whatsoever. And so for instance, the utility sector is a really interesting sector, but I personally wouldn't touch it with a 10-foot pole from the perspective of a long-term investor, just because you have no idea of what it is going to look like in the next 2 years, 5 years, 10 years, haven't got a clue. And a lot of that has to do with the fact that we can't all get on the same page about what sort of regulations we need or even if we need regulations. The diversity of opinions regarding environmental regulations in the United States is tremendous.

Now, there are strengths and weaknesses to that, and you want a diversity of opinions because you want a rigorous debate. We don't really see that rigorous debate occurring in the United States. And to the degree that this election can perhaps bring some more moderate individuals into power -- on either the right or the left, it doesn't really matter -- we view that as a positive.

To the degree that Trump and the Republicans sort of -- let's say Trump maintains his position as the president and the Senate is still in the hands of the Republicans and the House, you know, does whatever the house does. That probably is not going to impact our investments one way or the other greatly, and we also have a fair amount of international exposure anyway, so.

To the degree that the Democrats are able to take the presidency and maybe even take the Senate. I think, you know, there's a possibility that, at least we've heard that that's sort of a possibility that's out there. And that enables them to bring a singular, sort of, line of thought to the regulatory realm when it comes to climate change-related policies. That'll probably be a positive for some of our investments, although it will be a negative for a couple of the oil investments we've got.

But as I said earlier, we do try to invest in companies that can thrive in multiple environments, and for that reason, we're not investing, for example, in any fracking firms. So you know, I think either way we're in reasonable shape, although there will be more tailwind perhaps to a Biden presidency, assuming there is some sort of additional power captured in the House or the Senate.

Hartzell: I love the idea, like you said, and mentioned like, there's no policy. So to have some idea of long-term policy and regulations is super important, because when you're talking about uranium and nuclear power and stuff like that, I mean, you know how long it takes to build a nuclear plant? I mean, if all of a sudden the rules change halfway through or whatever, I mean, that's why the cost of these things escalates and they end up costing 3 or 4 times what they were originally projected to be. Just to have that standard in the regulations, that's what invites capital, right? Because an investor is going like, "I'm not going to put my money down on this new thing that I don't know how long it's going to take or how much it's going to cost, and then, by the time it gets done, it might not be allowed to use it." Like, I mean, that is a huge risk for people that are deploying their capital.

Thomson: Yeah, I know the regulatory risk is huge. And I think there's even more to it than that, because to the degree that the regulatory risk results in investors being uncomfortable with an investment in a particular company, that means the management team is going to continuously shorten up their perspective, and it's going to be about the next quarter, and it's going to be -- you know, after the next quarter, it's going to be about the next quarter. And it's not going to be about, you know, say, you're a concrete company, you have a large carbon footprint, you need to make significant investments into changing the way you operate, but to the degree that you have skittish investors who are ready to bolt for the door and no regulatory clarity, and both those things are connected, you're not going to make those investments.

And so the ability for real asset businesses, in particular, to invest in themselves and to grow the value of their business in the absence of regulatory clarity, it's quite challenging.

Sciple: All right. One closing question for you, Will. You mentioned earlier, you don't want to predict the future, and more things can happen [laughs] than do happen. But if you had to guess, you know, looking out 10 years from now that we're in this transition of our energy infrastructure, how do you think our energy infrastructure looks different ten years from now than it does today.

Hartzell: Nick, maybe provide some context for those people who maybe don't know what we are talking about. We're talking about coal, how much from coal now, and natural gas, and then we have the alternatives --

Sciple: Sure, happy to. According to the U.S. Energy Information Administration, electricity generation in the United States in 2019 broke down roughly as follows: 38% natural gas; 23% coal; 20% nuclear; and 18% renewables. And within renewables, that include, solar, wind, hydropower and biomass energy.

Thomson: I mean, I suspect that coal is going to continue to wither away at either the pace it's going or an accelerated pace. I mean, I guess it could always slow down too. But either way, the economics of coal, as a business, it just doesn't really work very well here. And that's not a result of regular -- you know, everybody wants to blame, sort of, Obama for that or something like that, but the fact of the matter is that natural gas is cheaper and renewables are cheaper, even absent government regulation.

I suspect that in the United States, over the next 10 or 15 years, we will just continue to see that steady growth in both renewables, but probably also to a degree, natural gas. Now, whether the natural gas gets used more for industrial purposes or whether it gets used for, sort of, electricity purposes is unclear.

But part of the challenge with electricity is that it's a source of power that can only be used in certain applications. And so from that regard, you know, solar panels and wind turbines are basically useless to a steel plant, but natural gas is most certainly not. Now, that's not necessarily an energy use of natural gas or an electricity use, but it is an energy use.

So I expect renewables to grow. I expect offshore wind is going to start to play an increasingly important role, as it is already starting to do in Europe, and it's getting there in the United States, but it's pretty slow. Offshore wind is a tremendous resource that we are just sort of letting blow by us, if you will. [laughs]

Sciple: I love it. But, Will, thanks so much for taking the time to talk with us today. If folks want to learn more about Massif Capital or want to keep up with what you all are doing, where can they go do that?

Thomson: Yes, you can just go to our website, it's MassifCap.com. We publish some research reports, one or so a quarter, we publish white papers, and we publish a weekly commentary on investing in real assets and in energy transition. So please feel free to sign up. You and 10,000 or so other people can enjoy our thoughts on a weekly basis. [laughs]

Hartzell: All right, we can benefit from all your work. [laughs]

Thomson: Yes, exactly.

Hartzell: Thanks very much, Will. We appreciate it.

Thomson: Absolutely. Thank you, guys.