The Role of Critical Minerals in Clean Energy Transitions

Have Policy-Makers Given Investors a Secular Growth Story for Cyclical Stocks?

Our research is empirically based and tends towards places that are uncomfortable and out-of-favor. In 2020, as investors gorged on crypto, loss-making tech and growth stocks of dubious merit, we wrote a wall-of-work explaining the empirical case for the opportunities in energy and staples. One sector we purposefully avoided was the mining sector.

Our small and midcap model accumulated a mining weight roughly 3x the index by June 2020. Trying to pitch oil, gas, and grocery stocks amidst a speculative frenzy was a plenty-miserable affair. Miners struck us as a bridge-too-far. Interestingly, despite their explosive performance, the fundamentals have run even faster.

These commodity stocks face operating challenges that vary widely by geography, the resources they are extracting and relentless cost pressures from ruthless competition. Worse, a good deal of the long-term thesis for end-demand relies on the movement to a green electric grid and shift the world from internal combustion vehicles (ICE) to battery electric vehicles (BEV). That led to further hesitation. Here’s why:

In 2021, Toyota explained that three hybrids (HEV) cut CO2 output by the same amount as one BEV. At the time of publication, Toyota had sold 18 million hybrids. Those 18 million HEVs cut CO2 output by the equivalent of nearly 6 million BEVs. So, 18 million hybrids got us the benefit of ~6 million battery electric vehicles.

The difference? The batteries used to make Toyota’s 18 million hybrids would only make 260,000 battery electric vehicles. The importance of understanding this cannot be overstated.

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Let’s beat it to pieces using this very real-world example:

1. You are intent on reducing the world’s CO2 emissions and you have some batteries
2. Those batteries can make either 18,000,000 hybrids or 260,000 battery electric vehicles
3. 18 million hybrids will reduce CO2 by the same amount as 6 million battery electric vehicles

Same number of batteries. You get the benefit of 6 million BEVs by building hybrids rather than actually building 260k BEVs. 20x the CO2 reduction by building hybrids.

We thought facts like these would resonate with environmentalists looking for the most efficient method to cut CO2 output. We were wrong. To the degree society cares about the CO2 benefits, the limitations around mining supply and the impact of battery manufacturing, the appeal of hybrids and plug-in hybrids is obvious.

But that narrative is in the “middle,” less prone to polarization, dogma and, apparently, policy adoption. To be clear, Toyota has long embraced a scientifically driven approach to CO2 reduction that included everything from hybrids to pure BEVs. As Gill Pratt, the remarkable head of Toyota Research Institute explains, their diverse approach acknowledged the limitations in supply chains and the benefits of a diverse set of scientifically sound solutions to a complex problem.

For the open-minded, we highly recommend reading some of his work found here, here, here and here. Reading his practical and evidence-based thoughts, it is difficult to believe the press has lambasted this company’s environmental intentions and credentials.

Under relentless pressure from environmental groups, Toyota appears to have recently caved. In October the press reported the company may be overhauling their approach to electrification. The world appears to be going “whole hog” on BEVs as the solution.

For fans of Tesla’s stock and the green grid, we think this article may be of great interest to you. The electrification of transportation is going to require a massive amount of mining. The stocks are incredibly cheap. KCR’s model portfolios are investing in these stocks and, if you are a believer, these stocks may offer tremendous leverage to a long-term secular story.