CEO of Solaris Resources (TSX:SLS) Daniel Earle recently sat down with Tom Bodrovics of Palisades Gold Radio to discuss everything from copper, work, and the mining industry. Daniel’s background is in mining engineering and has worked in banking, commodity forecasting, and financial analysis.
Daniel discusses his choice to invest his life savings in Solaris and become the CEO of a copper mining company, the reasons why copper is so critical, Ecuador as a mining jurisdiction, and the company’s ESG strategy in a changing world. The full interview can be found in the video above.
Copper is Key
With all the attention on rising copper prices and the push for decarbonization around the world with electric vehicles (EVs) and battery storage, Solaris is in the middle of a favourable copper cycle. Mr. Earle explains his decision to become the CEO of Solaris, and why the current copper price cycle is both impressive and completely normal: “We’re at a period in this copper price cycle where we’ve essentially completed the first leg of the cycle. Coming off the pandemic, or the cycle lows in March of last year, copper prices basically more than doubled and then corrected a little bit.”
“This is actually pretty normal for a copper price cycle. If you consider the perspective that’s provided by the prior two cycles, then you would have seen a similar thing with the copper price basically doubling in one year and then going on over the next couple years to double again.”
“So you get a quadrupling across on normal copper price cycles. You would have seen that in the mid-2000s cycle for example, copper went from about $1 at the start of the cycle, to a peak price of $4/pound in 2007 in less than three years.”
The Copper Supercycle
The current copper price cycle has been called a “supercycle”, with Goldman Sachs pegging its copper price target at $15,000. If the current price cycle continues in a similar fashion to those of the past two decades, the doubling and then quadrupling of the copper price could see the industry continue to heat up.
Earle noted: “I think it’s important to just keep in mind the kind of framework that this exists in. We spoke about copper and the industry dynamics of supply and demand, geopolitics, and so on, and how they would affect copper. But just bear in mind the bigger picture; people talk about a supercycle for commodities which, if you define that as just sort of above trend price growth for commodities as a whole then yes, I think you can make a case for that.”
When Do We Get to Peak Copper?
If there is a peak, we are likely not there just yet. “If you look at the existing supply profile, peak copper lands around the middle of this decade, maybe 2024 maybe 2025 if you look at existing production, planned production and then possible production.”
“Then from there, the production that’s committed starts to roll off and that’s when the gap really starts to open up to demand, growing through a steady pace through to the middle of the decade, and then accelerating from there when green demand really starts to take off exponentially,” Mr. Earle commented.
World War Copper?
Electric vehicles and battery storage are likely to be the two main drivers for copper demand over the coming years. Many countries have pledged that sales of new cars will only include electric vehicles by 2030, with others pledging a slower but committed transition away from combustion engine sales.
The evolving dynamics could eventually put copper in the middle of a geopolitical spotlight as it could be considered a critical or strategic metal. However, the market is not there yet but could translate to not just higher copper prices, but much higher multiples for equities measured against EBITDA.
“I think we wouldn’t say today that copper is considered a strategic metal. Certainly among investors, you haven’t seen a lot of rhetoric out of governments around copper supply. So that discussion is confined to some of these battery metals, and before the battery metals, the rare earth space is where you saw that kind of discussion. And then of course investors take that discussion and they apply it in the market.”
If the situation were to change and put copper at the forefront of national strategies for energy storage and infrastructure, that shift could play out in the market in a similar fashion to lithium companies: “You see it reflected in higher market multiples, so if you look at lithium companies, you have these companies that are trading at twenty to thirty times EBITDA. If you look at the copper companies without this kind of rhetoric, without this emphasis on the importance of these companies and the metal they’re supplying, you need copper companies to quadruple before they get to those kinds of multiples.”
“You’d be talking about Freeport trading at something like $160 a share, or $280 a share for Southern Copper, $120 First Quantum shares if you were to get the same kind of strategic consideration and appreciation by the market.”
“So we’re not there yet, but I think as this cycle evolves, as the supply deficit that we’re talking about actually materializes and then widens, and you get a really dramatic price response from the middle of this decade through the end of this decade, you get well into not just record price but multiples to prior record prices. Where we get to $6 and $8 copper prices. That’s when I think that you can expect that copper will begin to be considered a strategic metal, and that’ll have obviously really dramatic implications for the equities.”
“Dramatic Implications for the Equities”
What that means for Mr. Earle’s Solaris Resources is yet to be seen, but with the stock up over 1,100% since its IPO, it seems that the current copper price cycle could be supportive of a continued run higher. With the added possibility of copper being classified as a strategic metal for several governments, higher copper prices could translate to equities with multiples far higher than have been seen thus far.
“It’s obviously going to be uneven because you’ve got these different profiles of costs, different commodities. But certainly we’re going to have really rapid demand growth, where as we get to coordinated, synchronized global growth stimulated by all this incredible fiscal largess in an accommodative policy environment. And then we’ve got constrained supply so we have had tremendous under-investment in the mining sector over the last seven years or so,” Mr. Earle explained.
Under-Investment Could Accelerate Effects of Price Runs
That under investment has fueled a dearth of new copper projects that is amplifying the effects of the supply demand dynamics for copper. Pushing the timeline a few years ahead and this could play out on an exponential scale reflected in commodity prices and equities.
While the current climate has all the makings of a supercycle, not all commodities will react the same way, with some winners pulling ahead far faster than others. Most of the metals and minerals needed for the green transition like copper and lithium will be the fastest runners, with most other commodities being pulled up alongside them.
Earle went on: “So we would have gone from something like $200 billion a year of investment in the last cycle to a quarter of that coming towards the beginning of this cycle. So tremendous under-investment because of this investor push for the return of capital. Which is wonderful during the trough of the cycle to keep share prices strong, but it doesn’t make sense across the next cycle when you need to be bringing on supply.”
“Because this is a depleting business and you need to continually reinvest. I think when you look at that contrast between the demand that we’re going to have, and this inability of the supply side to respond, you see the makings of this supercycle here, uneven as it may be across different commodities.”