Dealing with net zero's mining dilemma

The often-held notion that companies are either ‘sustainable’ or ‘not sustainable’ can at times lead investors astray. Mining companies are not normally front of mind as ‘sustainable’, however they are expected to have a core role to play in decarbonisation technologies. We believe how miners manage the social, political, and environmental risks of their operations will be crucial to the industry’s ability to deliver metals the world needs for a net zero transition.

Watch as James Abela, Daniela Jaramillo and Sam Heithersay discuss this mining paradox, with a deep dive into global EV supply chains.

Simon Glazier:

Good afternoon everybody. Thank you very much for joining us today. My name is Simon Glazier and I'll be hosting the discussion today on what is a very hot topic at the moment, not only in the investment in corporate worlds, but also a very prominent in discussions in the mainstream media. And even last night, there was a conversation on the news around this very topic.

Before we do get started though, just some housekeeping. We're planning on going for about 45 minutes today and if you have a question, you can submit it via your Zoom portal and we'll do our best to accommodate and incorporate those questions as we go. We may have some time at the end, but we'll see how we're tracking for time. And also, a reminder that CPD points will be available post today's session, usually around 10 business days after.

And as I said, the topic for today is so very relevant of great interest and topical for us here in Australia and that is the Net Zero Mining Dilemma. And as we set about exploring this further, let me set this in a little bit. The often held notion that companies are either sustainable or not sustainable can at times lead investors astray. And interestingly, mining companies, well known companies in Australia like BHP, Rio, Fortescue et cetera today are not normally front of mind as sustainable. However, they have a core role to play in decarbonization technologies and how miners managing social, political, and environmental risks of their operations will be crucial to the industry's ability to deliver metals and materials the world desperately needs for a net zero transition.

To talk us through this paradox and the opportunities and challenges, asset managers and investors face are our expert panel. We're joined by Daniela Jaramillo, a director of sustainable investing here at Fidelity, Sam Heithersay, analyst for the Australian Mining Sector and James Abela, a portfolio manager for our future leaders strategies.

Without further ado, Daniela, I might throw to you and really just ask the open question, what do we mean when we talk about the decarbonization and mining dilemma?

Daniela Jaramillo:

Thank you, Simon. I'm really excited to be talking about this topic. I think probably a year ago I was just an ESG generalist and I feel like in the last year I've been spending probably 50%, 60% of my time really looking at this.

It kind of already started with an initial conversation with James, our PM here in the panel about understanding why his portfolio had a positioning and he had a lot of lithium stocks and it was all driven in a way by the mega trend driven by decarbonization technology, so electric vehicles. So we said, "Well, how about if we do some research and write a piece about this?"

And so, as we started talking to Fidelity analysts, so I started talking to Sam, our mining analyst here. We started talking about our mining analyst in the UK, our energy analyst, our auto analyst in Asia, we started reading the research. It became really evident that we don't only need mining to decarbonize, but we will need a lot more mining than what we're currently producing.

Predominantly, it is in around those more well known transition minerals, but it is also, we need a lot of steel to expand the grid, for example. We started looking at the numbers and for me, it was a bit of an eye opening situation because in my mind, when I think of investing in sustainable companies or those companies that we need to invest in to decarbonize, mining was not front of mine. I was generally thinking of your classic Cleantech company, your wind turbine company, but it was not mining. But as we were looking at demand and supply and sample touch on this later on, it became really evident that the demand for minerals will only increase.

That was, I think, the first initial finding. We have on one hand, we don't normally think of mining companies when we think about sustainability. But then, we could get to a point in which as we're trying to decarbonize, they become a bottleneck because we don't have enough supply. And then on the other hand, it's this sector that's still very misunderstood because people, when we normally think of mining, we often associate it to a dirty industry. We think about coal often, we think a lot of the things that we read in the mails about the disasters that in a way have happened because of mining.

It's not a sector that you normally think as a sustainable sector from an operations perspective and I think more and more, what we are seeing is some of these risks are materialising.

We saw earlier in the year one of the Rio Tinto's mines in serving the [inaudible 00:05:26] Valley, the permits were revoke because the community didn't want the mine there. This is a lithium mine that's very needed for the transition, but it is an industry that's quite disruptive to the communities where they operate it. Yes, it does great jobs and creates a lot of economic development, but it is also disruptive and it's very energy intensive. This is where the paradox occurs. You have a sector whose product is very important, but then, it has a really large environmental and social footprint, and this footprint creates risks, and this risks could prevent us from actually having the right supply that we need.

As investors, we look at this from two angles. One of them is the opportunities, which is where we're going to focus today and Sam and James are going to talk us a bit more about where are the opportunities, how do we navigate those risks that I've just discussed. But we also look at it, we have made a commitment to net zero by 2050 and to have the emissions of our portfolio by 2030 and we can only do that if the whole system starts to decarbonize. We can't just do it through our portfolios. Identifying where these bottlenecks are and there's gaps at the system level and trying to see what can we do as investors, how can we engage with the sector where the policy makers or with companies, it's really important for us to be able to meet our own net zero commitments.

I'll leave it there, but as you can see, it's a topic that we're very interested in. We do have a longer paper if people are really interested and want to learn more, but I'll leave it there for now.

Simon Glazier:

Thank you, Dani. It seems to me that it's actually not quite as easy as we hope. There's a lot of influences and impacts underlying. And as a consumer and as an investor, electric vehicles is something that are really linked to decarbonization and the planet going green. But Sam, I might throw to you and deep dive into EVs a little bit more. In terms of the demand for the EVs, what actually inputs are required to be successful in meeting that demand over the time.

I know you're just off the back or in the middle of Azure Review week, so maybe there's some insights and context you can bring to that. Any comments? I hand out to you.

Sam Heithersay:

Sure. Thanks, Simon. Lot to say about the space right now and I think that your comment there on the transition to electric vehicles, it's a very important part of the decarbonization trend, but it is just a part that we're kind focusing on today of the decarbonization trend that Daniela has talked about. It's certainly one of the more mineral intensive parts though. When I, as a mining analyst, look at the mineral contribution towards EV transition, it's quite startling. EVs need about six times the minerals that you typically find in a conventional car, and most of that comes down to the battery itself. And that's what we talk about when we talk about critical minerals. When you consider that each EV is more mineral intensive and then, you start to understand the demand trends that we're just seeing in EVs, taking share from conventional cars, you begin to understand just the scale of demand growth that we'll likely see in critical minerals.

What do I mean by critical minerals? As Daniela said, we adopted a fairly broad definition of what crit minerals are in the paper that we published, but clearly, the ones that are most relevant for EVs are lithium, nickel, cobalt, copper and graphite and it's probably just worth unpacking what each one of those does and why it's relevant. Graphite generally just forms part of the battery. It's the negative sign if you've ever had the misfortune of jump starting your car, it's the negative electrode. It forms part of the anode. Copper is used in the battery as well, but its main appeal is an electrical conductor, so it's very much used in the rest of the car, the inverters for wiring.

And that's not even to mention that the charging infrastructure that we're going to need to support an EV fleet, which is very copper intensive as well, so copper is definitely another critical mineral. And then, we have lithium, nickel and cobalt and they all form part of the battery as well, the positive electrode of that battery, the positive sign, the cathode.

When we mainly talk about the critical minerals, a lot of people generally are talking about the cathode makeup because you can vary the proportions of the critical minerals in that part of the battery and so, all these minerals are clearly critical, all of them will see demand growth.

But I think the key learning that I took away from the Asia review week, which you mentioned was that some of them are substitutable and we need to be very aware of the trends that we see across battery chemistries to understand where the demand growth really lies.

The Asia review week, it's just finished up. We had the last three days. We've got 400 investment professionals around the world and we basically try to meet every now and then to try and gather as many people as we can on the Hong Kong time zone and that's what we were doing with the Asia Review week. One of the areas that we wanted to deep dive in was this EV supply chain because we have the advantage of having mining analysts like myself looking at the raw materials, but we also have people covering the cell manufacturers, the battery makers, and all the way through to the auto manufacturers of electric vehicles.

It's really important to understand where the raw materials fits within that entire supply chain because there is such a demand variance in the minerals that are required for EV transition. One easy example of that is probably cobalt. Cobalt as I mentioned, is a critical mineral in the battery technology but the problem with cobalt is that 70% of the world's production comes from the Democratic Republic of Congo and they have 60% of the reserves as well, so there's immense concentration of supplier power there.

When prices started to rise in 2018 and '19, some of the companies further up the supply chain, started looking at this concentration of supplier power and they didn't particularly like the mining practises that we saw in the Congo. They were [inaudible 00:12:16] force health and safety regulations, it's a volatile political environment. What we saw as a result was a lot of these battery manufacturers moving away from cobalt as one of their key elements in the battery.

To put some numbers around that, that can have a big variance in the critical mineral demand. The international energy agency forecast that cobalt demand could be 21 times what it is from 2020 to 2040, but they acknowledge that the variance is massive. It could as low as six times or could be as high as 30 times, depending on these battery chemistry trends.

I think the lesson for me is that yes, we are going to see immense demand growth for these critical minerals, but there are nuances at play and one of those nuances is very much the battery chemistry trends. I think being able to talk to people, who are analysts who are covering other parts of the supply chain is very helpful for me as a mining analyst to be able to pick where those trends might go.

Simon Glazier:

Again, the complexities are mind blowing, to be honest. I think about your example there of the car battery and I just thought to myself, it's pretty hard to clutch start an EV, but that's a problem for down the track.

Just to dig a little bit deeper there, what are the considerations as an investor when you are investing in this thematic and what does it mean for the Aussie companies we cover?

Sam Heithersay:

Yeah, well you're right. It'll take an adjustment for all of us to adapt to EV, clutch starts one of them but there's certainly workarounds.

The implications I guess for Australian companies and how we approach investing in this thematic, just like any thematic, there's a lot of factors that we need to consider. I've just talked about the strength of demand that we're likely to see at a structural demand, but there's also questions around the duration of demand, the availability of substitutes that I alluded to with battery chemistry trends. And one we haven't really touched on yet is what's going to be the supply response, not just from traditional mining of commodities, but also any disruptive technologies that come up with a new wave providing these critical minerals or substituting them out.

I guess the key considerations we have when we're approaching this thematic is very much what we focused on in this decarbonization paper, which is around the environmental, social and governance risks of mining these critical minerals.

ESG risks are of course relevant for all commodities and for all miners but I do think there's probably a higher burden of proof for EV metal miners when we're all trying to go green and we demand that the critical minerals we're supplying into those batteries, into those cars, we want to know that they are sustainably mined. Our concern I guess is that this drive towards the EV transition might be accompanied with an unwillingness to have an EV metal mine in your backyard.

We had to unpack that to understand the risks associated with the ESG risks, associated with metal EV, metal mining and how that might impact, I guess, the supplier response because...

We acknowledged that mining's, by its very nature, is dirty and disruptive, but it's incredibly necessary and critical mineral mining is not really escaping this. We have the associations with coal and bulk commodities. We don't have as much of an association with or history with lithium, but lithium certainly has its issues. You can make lithium from brine or you can make it from a hard rock substance like we do in Western Australia.

And mining that hard rock [inaudible 00:16:19] is incredibly difficult. It's a very hard rock. It's mostly waste and it requires very high temperatures when you're processing it, so it's very energy intensive. Brine is also very difficult. It's uses vast amounts of water and solvents and reagents in the process, so they both have an ESG footprint that we need to acknowledge and be upfront about and it certainly can disrupt local communities. Some of these brine deposits are located in areas of high water stress, so if we are to mine them, we're probably going to have to acknowledge that we'll have an impact on the local community and it's the burdens upon miners to basically try and navigate that.

This could certainly challenge the supply response. And Daniela mentioned Rio Tinto's mining lithium project in Serbia. That was certainly a challenge to Rio to try and improve their social licence to operate in that country, to bring a mind that is desperately needed, particularly for EV manufacturers.

ESG risk, I think, will play a very important role in how we measure the supply response. Not all companies have the capabilities and so, I think the implication for Australian miners in particular is that we have a good reputation for holding high ESG standards and holding miners to account in that way and creating policies and the miners themselves are very advanced in their approach towards sustainable mining. We have that reputation. Auto manufacturers know that consumers are going to care more about where their critical minerals come from and so, I think it creates a lot of great opportunities for Australian miners to be able to provide those EV metals with a sustainable mining footprint.

Simon Glazier:

I hear that. I hear that. And just looking at the paper on one of the pages here, we do graph the minerals and metals needs for the different clean energy technologies and it's not just EVs. Obviously, with most EVs with battery storage, because that's another key topic when we talk about getting off the grid and being sustainable, et cetera as a society. You look across those metals and minerals required, and for EVs and battery storage, they're high across the board.

One of the most obvious answers to a decarbonizing world is energy storage. But yet, to get there, the metals and minerals required is higher than any other way, any other path to get there.

As you say, I'd encourage everyone to read this paper and we'll send the link out post today's session but to pivot a little bit, James, I might throw to you from a more of a portfolio perspective in terms of where do you see the opportunities in what... Is this a mega trend?

James Abela:

It definitely is a mega trend. It is a global mega trend and it's not going to go away. It's going to be the future, basically. When this gets talked about, it is called future energy, future technology, future resources basically. The opportunity really is a lot of those things that Sam mentioned, copper, nickel, lithium and also, battery technology and also rare earth.

Sam mentioned we had review week just a few days ago and that included the engineers, the chemistry, chemical engineers, battery, autos, right from Asia through to London and exposure to the US as well. These things are really valuable. We did the same thing in, actually, 2017, '18 and that's when I started to become exposed to these areas and it was that these areas today, particularly copper and lithium but then, also a little bit of nickel as well.

The companies there are OZ minerals, IGO, Pilbara, Alkem, Novonix, [inaudible 00:20:26], Lynas. These are all the names that are the opportunities there. Now, in this fund, it's currently between 15 and 20% of the fund will likely be that position unless there's some significant change because the opportunity is very, very significant over the next few years. A lot of them contribute differently, so OZ minerals is the key copper exposure and that's under take over by BHP, so I won't comment on that too much.

But IGP, Pilbara, and Alkem are the big ones because lithium is really required for a lot of the battery technologies that the world has currently in process, lithium is a big provider. Lithium has obviously been, as you mentioned right at the beginning, a very hot topic and the [inaudible 00:21:09] price and lithium prices has gone vertical, I guess as you say, it's gone up a lot.

Pilbara minerals to put that in context, that share price was around 20 cents a few years ago and is now at $5, so that's just been a phenomenal ride. IGO, a bit more diversified and we consider it a higher quality one, bit more established as well and that's got a good quality asset that's had significant upgrades as well and so has Alkem.

Those three names are ones that are quite prominent in the fund, but it's all because of lithium and really, the battery technologies available. There is other ones as we mentioned just to... Novonix had an announcement today and the big thing linking in what Sam and Dani has said is the fact that they got funding from the Department of Energy in the US and Joe Biden actually issued the money to them from the DOE of the US.

These companies have said to us, in company meetings, we have easy access to very attractive capital that's very long term, so sovereign funds and the sovereign funds and green bonds and also, some of the banks, especially in Europe are very keen to provide capital. That's probably where I'll end it there, but that's really where the opportunities are in the Aussie mid and small cap space.

Simon Glazier:

Thank you James.

And Sam, I might again come back to you because we've covered a few topics and conversation points there, but one was around new technologies and destructive technologies. We know the current state of play and the companies that are leveraging the current demand, but how do these companies evolve as they go through this mega trend?

Sam Heithersay:

Yeah, it's a good question because it is quite an immature industry really and commodity class that we're dealing with here, companies are adapting, companies are transforming. The companies I spoke to 10 years ago exploring for nickel or gold are now talking to me about lithium, so we're all adapting as an industry to this rapid demand.

A good example, I guess, of transformation is the transformation that we've been seeing and a company that illustrates that pretty well I think is IGO. This is a company that Fidelity's been a long term investor in when it was initially focused on gold and nickel. And then, it saw I guess the demand trends that we're now all observing in EV adoption. And so, it started to transform and pivot its way towards becoming an EV diversified miner from really a gold and nickel company.

In 2020, they acquired a percent interest in a lithium mine green bushes, which is what the lowest cost highest grade lithium mine in the world. I consider it to be one of the original lithium mines and they also had a 49% stake in Kwinana lithium hydroxide plant, so they're processing of that lithium as well. Then, they divested their gold mines Tropicana in 2021 and retained their flagship nickel mine Novo and then, acquired another nickel company, Western Areas this year.

In that, time you basically saw IGO, the mega trend that we're talking about and shift from a lithium, sorry, from nickel, gold, more base metals focused company towards a lithium nickel miner and processor and we certainly welcome that shift. We supported the company's transition and we continue to maintain a large position in the company. I should definitely say here that this transformation can certainly be credited to the strategic thinking of their CEO, Peter Bradford who tragically passed away over the weekend, which is very, very sad to see.

We had regular meetings with Peter and his team. We formed a great working relationship over time and we were really struck by Peter's vision for IGO and the broader industry, particularly his commitment to sustainable mining.

I think this is another important point. It's not just enough to transform your business to mine EV metals and hope that's enough. I think you also need to mine them in a responsible way and IGO certainly embodied that. We had discussions with them through the transformation and we're very pleased to see that they aspired to become carbon neutral by 2025, they adopted a carbon price for assessing projects, they've got a battery energy storage system in Novo and a solar farm. But it really was Peter's, I think, dedication to the diversity agenda, the support of young people in the industry that really stood out to us among other countries.

From a social perspective, IGO was definitely recognised as a great place to work, committed to the 40-40 vision and Peter himself was definitely an advocate of women in mining. From a mentor there and he was a board member of CEOs for gender equity. When Peter talked to us about sustainable mining and greater diversity, we certainly believed it because he backed it up with a lot of the work he did outside of the company. I think IGOs transformation and leadership and sustainable mining and diversity, it's a very important part of the company and why we own it. It's a very small part of the giant legacy that I think Peter leaves behind as a highly respected part of the mining community.

I guess our role in all this was to identify the macrocommodity shortfall ahead of time and then to seek responsible suppliers for that shortfall and to support companies that need to transform to fill that supply, if need be and also advocating for the best sustainable practise and I think IGO is a good example of that.

Daniela Jaramillo:

If I can just add there, I think something that was really impressive and when I think of my meeting with other mining companies, something that is really impressive about IGO is we hear from most of the miners how they're struggling at the moment for retaining talent and recruiting talent. And IGO has a very diverse workforce, which means that it keeps on attracting more women because obviously, if women go and see that there's a great culture, that attract women, it almost creates this virtual cycle that keeps on attracting, so they almost have opened themselves to a border pool of talents that other miners might struggle to do it.

They said to us that one of the things that their uptake of parental leave by male employees was something that was completely different from what we see in other companies. It's really that positioning that has now allowed the company to actually be quite resilient in times where we hear from many of the miners who are struggling to retain and track talent.

Simon Glazier:

That's great insights, Sam and Daniela. Thank you so much for that. We spent a lot of time today talking about the opportunities. And James, I might throw to you in terms of the challenges for this going forward. I don't know, Sam. You can jump in whenever you feel the need. Same, Dani.

James, you should come off mute, mate.

James Abela:

There we go. That's better. Yeah. Certainly, the big one is probably lithium [inaudible 00:29:29] that's very topical at the moment because you've had such huge upgrades in lithium price, huge upgrades in the share prices and I mentioned just huge movements in commodity prices and there's different talk of demand destruction, but lithium is going to be used right across the space. As Sam mentioned, lithium extraction processing and putting into the battery technology is proving to be quite challenging. And it's.

The thing about also, it's not exactly a commodity. It is, in some ways, people say a specialty chemical. The lithium bubble is something that's still very topical and it's probably not going to go away. It's very topical amongst the battery manufacturers and the battery chemistry kind of considerations but that is probably the most topical. It's also quite abundant. There is a lot of lithium around, but it is extracting it, processing it, doing it in a sustainable way, which is what needs to be done, so that's where you get delays in projects, delays in approvals, delays of licencing, et cetera, which creates more or lower supply and therefore, the more anxiety over the price.

What I'd say as a portfolio manager and as a resources analyst too, it's a difficult one because it's not an established market. This is a very, very new market. This is a new technology, much like the iPhone 20 or 30 years ago. You don't know what the demand could be, therefore, what the final prices could be. There's no parameters like you can get in steel or in nickel or doing cost plus analysis so you could work out what a reasonable margin is to make or a reasonable price. It's very much driven by supply and demand, especially over the next couple of years. But because there isn't a nice little neat paradigm of decades of history, for example, steel margins and things like that, it's still very much a debate at what is the price and what the market structure is.

That's the, I guess, one of the major challenges that is really, I guess, around for this market. Scarcity, as I mentioned, it's still there, it's abundant, but it really is a specialty chemical. But ESG is still very topical, there is still a lot of pressure, so many of companies in lithium space and other EV related vehicles do have significant support from the financial industry. But others who aren't ESG compliant or doing things for example in the right way, it costs them a lot more.

There's a lot of issues and the other one is just securing supply. Over the last two years, there's been different little pockets of news of big companies trying to secure supply whether you buy out the commodity, whether you put in a contract to get supply and different countries obviously, having a different strategy around making sure they secure supply especially in Europe. They're very advanced on taking out combustion engines from the economy over a 10 or 20 year period. If you do that, then it needs to be lithium and copper and nickel going into the battery.

If you're a European auto manufacturer and you've got your ICE conventional engines dropping off to zero over the next decade, you need battery supply secured so that you can therefore build a factory and these are 10 year to 20 year investments that companies are going to make. Therefore, they need surety of supply, surety of resource, but surety of quality of resource as well and that is, I guess, one of the challenges for the battery and the car manufacturers, which is really critical and that is what is putting the heat and the pressure right into the lithium market. I'll hand it over to Sam to comment.

Sam Heithersay:

Yeah, I think James is talking to exactly the point we were making earlier of trying to understand there's a structural tailwind here, but it still has cyclical elements. Battery chemistry can trends can change, it is still a fairly immature market, we're going through assessments of how to appropriately price a lot of these critical minerals appropriately.

It's exactly right that the auto manufacturers are trying to secure supply because they are quite alarmed at, I think, at what they're seeing and they don't want a lack of raw material supply to impact their projections in future, so that starts with basic off takes and securing supply and signing agreements to take a supply from a lithium miner. But we've seen more direct intervention. Only recently, Ford loaning money to Lion Town for the development of their mines, so this is a mine not yet in production but they're trying to secure supply there. Stellantis is another one investing in Vulcan energy, a geothermal brine project.

And I've seen this interest grow over the last few years as auto manufacturers recognise the risk to the supply chain that are willing to move further upstream from battery maker, cell component manufacturer, all the way to miner to make sure they secure that supply.

Yeah, it's definitely a structural thematic that we're talking about here. It's certainly has cyclical elements but knowledge again of that entire supply chain and where the auto manufacturers are interested is probably critical to calling the sector, I think.

Simon Glazier:

Daniela, we've had a few questions come through. I'm not sure if you want to chime in there, but there's been questions around some things along the lines of the social licence. Do we really think BHP and Rio are sustainable or ESG companies? There's so many other considerations when looking at particularly miners and resource companies from an investment perspective. How do we consider the environmental and the social impacts when we're deciding where to allocate capital?

Daniela Jaramillo:

Thank you, Simon. And those are very complex and difficult questions, I'll try to answer best I can. But I think the main thing we need to remember is that when you compare, for example, mining to a tech company, the exposure to ESG risks is always going to be much higher. The sector itself is much more disruptive than, let's say, a software company that the type of accidents you can have, that the fact that it involves so much large equipment and you're opening mines as opposed to in offices. It completely changes it risk profile and that includes a lot of ESG. I think that's the one thing that we need to remember. And.

Obviously, things like what we've seen in recent years that the large miners have been involved in big disasters with huge implications of loss of life, loss of cultural heritage obviously makes us understand why it's so controversial that we need this sector to decarbonize. This is why the mining industry to a certain extent doesn't have a great reputation, but it is really hard to get a really good reputation in the sector because it is a difficult sector to operate in.

What I would say is from our perspective as investors, we try to seek best practises and the miners do that as well and we try to understand what those best factors look like when it comes to safety, what does best practise look like when it comes to tailings and tailings management. But obviously, that these incidents keep on happening and it's what keeps the sector this reputational issue which ends up... And this is where the whole dilemma comes in because for example, we see students wanting to join the mining industry. There's a decline in students wanting to join the sector because they have this reputation issues and they don't want to be associated to that. They don't want to work in the sector. I think it was last week, some universities in the UK are banning mining companies from attending their work experience and their career days in universities because there's a campaign going on by students that say we don't want these sectors and this is what creates the social licence of the sector.

We need to separate and think because one thing is the social licence of each company and then, there's this whole social licence as the sector and there's a lot of work that needs to happen at the industry level, so this is not only company by company and trying to address that because at the end of the day, if we want to decarbonize or if we want to take advantage of these investment opportunities, we will need the brightest minds to an innovation to try to reduce the environmental and social footprint of these companies while at the same time, increasing production so we can decarbonize.

It's really important that the sector works together with their value chain. There's also a role for value chain there's a role for EV manufacturers and show and raise the profile of mining and how much we need mining if we want to decarbonize, if we want to rely electric vehicles. Yeah, I don't know if I have any specific answers. We're definitely engaging at the industry level, not only at the company level, but it's a very complex issue. I don't know Sam if you have any thoughts on that.

Simon Glazier:

Sorry. Sam, go.

Sam Heithersay:

No, I was going to say that it's incredibly complex. Some of it is obviously self-inflicted. Some of the poor reputation of mines is self-inflicted. When we look at some of the disasters of the past, they have been reforming, of course, that reputation. And my comment earlier about Australia being relatively better regarded, it's really in comparison to some of the other countries that we are seeing to try and fill the gap in critical mineral supply. The example we use in the vapour that I mentioned earlier of the Congo versus Australian miner has certainly influenced the uptake from battery manufacturers.

Yeah, there is ESG risks as we said earlier, adds another level of complexity to this whole debate because if there is a great chance that we won't be able to meet the supply the demand needs, if ESG risks materialise enough that we aren't able to see the supply response.

Simon Glazier:

Well, the question... We don't need to answer this now, but where does that lead us to if we can't meet our decarbonization targets yet, we can't supply the demand from a materials and mining perspective. We're in this, what would seem, a no man's land.

But I just want to pause for a second, just coming up on time, we've got a lot more questions to cover. I think the panellists can spend another 10 minutes going through some of the Q and A making some final thoughts. But if you do need to drop off at quarter to one, please feel free to do so. We'll obviously send out the supporting material post this session today and thank you for your time but one of the questions we've had come through is we talked about a systems approach to this, where do governments fit? Dani?

Daniela Jaramillo:

I'm happy to start. I think the role of governments is multiple. On one hand I think there is a need to help coordinate the sector and try to work in all these multiple challenges. But when it comes to climate policy, I do think that we do need more clarity on climate policy and we've said in our paper that we do think that climate policy is something that's useful to give some certainty but I think that's on of the question that what's the role of government in R and D? Probably Sam might be able to add a bit more on that but I do think that in general there is that the need of government to think at the system level and say, "How can we help coordinate? What's the role of government, what's the role of investors?" And help coordinate those efforts because we see the miners doing a lot especially...

We see many of them are doing a lot of things at the individual level. If you go through their materials and the amount of resources and people they hire to deal with these issues, they're doing a lot but there's things that can't be solved at the company level. And then, at the end of the day you're only as strong as your weakest link. If you still have companies in other countries or operating in different... It might not even be in transition minerals, it might still be coal, but that people keep on being associated to as miners, you're only as strong as your weakest link and so, that's going to continue impacting the reputation of the sector. There is that need of someone to come and coordinate and support the mining industry so that you don't have only the leaders and the laggers but they start bringing some of those laggers aboard and help improve the reputation.

Sam Heithersay:

Yeah, I think from our perspective, the alignment of policy supporting EV adoption and we've seen mandates for EV adoption and we've seen mandates ruling out conventional cars by certain dates, we've seen a lot of those policies. And the key comment I would make is that we need to see them aligned with policies to support the raw material supply.

An example of that is probably the inflation reduction act in the US. We saw more tax credit for EVs, we knew that the US government wants more of those components made in the US but we didn't really see much follow up support really until today. Today, we had an announcement about $2.8 billion worth of grants going out to different companies in the EV supply chain and that's more what we want to see as an alignment with mandates on EV adoption with support for the raw material supply and whether that's in the form of grants, loans, for R and D or traditional mining is all within their purview, but that align with [inaudible 00:44:46] we need to see more of.

Simon Glazier:

Brilliant and one final question before we do wrap up. Energy supply is obviously extremely pivotal in terms of the whole approach to this. Where does nuclear fit in? Should it, can we do it, thoughts?

Sam Heithersay:

Yeah, I think nuclear is obviously part of the conversation currently and has certainly increased as part of the conversation when we observe the European energy shortage. I think it is a worthy part of the conversation. In Australia, it's actually fairly well positioned in terms of our uranium endowment to fulfil those needs. I think, though, the ESG risks that we talk about all through the paper also apply to nuclear energy and uranium mining. We do need to be conscious about how we balance up mining of uranium and processing and using a nuclear power, how we weigh up the ESG risks and perceive ESG risks of that type of energy source and how we balance it against the need to decarbonize.

That's ultimately what we're weighing up. It's certainly part of the conversation. You can just see from the headlines, it's an increasing part of the conversation, but where if it's in the future energy makeup, I'll probably lead to the energy analyst to [inaudible 00:46:27] on.

Simon Glazier:

Very good. I think that brings us to time. Team, so I might offer a final word from each of you. And James, is it okay if we start with you, particularly from across the domestic and global perspective?

James Abela:

Sure. There's a lot of opportunity I guess from an investment point of view and the government, as I mentioned, Novonix got some government funding today that there's a lot of support for the movement towards this new energy including EVs. Yeah, it's a very exciting investment opportunity but the thing is, it is new and that is the issue at the moment. You've always had a lot of new concepts in the world coming and you don't really know how big that will be but this one is. Certainty is that it's our mega trend is very, very high but the commodity price movement, as Sam mentioned, the movement between the structural and the cyclical is the challenge as a portfolio manager. That's what you got to weigh up, so when you have portfolio positionings and of risk and then getting involved in...

At the moment, you've got multi-billion dollar companies that have zero sales, so you're buying a company at a price today that doesn't have revenues yet, so you're buying, basically, for sales that are going to happen in three years from today. You've got to be careful of that and that's where I think the lithium bubble and that it becomes very acute. You've got to be very careful of those more speculative type investments. Then, you've got to be careful of extrapolation, which is the current price being extrapolated into forever and then you've got to be careful of the industry responding to excel as in demand destruction and alternatives.

The other things that may happen in terms of commodity developments and regulations and government changes and the speed of infrastructure and being deployed and also, the speed of adoption by consumers as well. There's a lot of issues to consider, I think, as a portfolio manager. I think you can be quite balanced and luckily, in Australia and globally, there's a lot of options to be involved in this universe. Globally, we have the biggest exposures through Shinny, which is an LNG exposure. There is LNG and also, natural gas, which you can get exposed to, which we do, but there's also a lot of technology involvement, whether it's cameras or sensors, battery technologies, et cetera. There's a great opportunity in the universe globally and domestically, so I'll hand it over to Sam and Daniela, of course.

Sam Heithersay:

From my perspective, we've obviously discussed a lot of the challenges to meet decarbonization goals and policies. I probably would lead it with probably more hopeful tone despite the ESG risks. It's not an impossible task ahead of us.

I mentioned earlier the move today from the US on policy to stimulate raw material supply. That's just one element that will help solve the demand shortfall but I think the other main thing I would comment on is just a wave of innovation that I'm seeing as a mining analyst across all the raw materials from the miners themselves, the traditional miners as well as new startups. It's a very exciting space right now and there's lots of different technologies out there that are hoping to, not just to to fill the supply gap, but also, to try and make whatever supply we get greener than it currently is.

It's a really exciting space. A lot of different companies popping up all around the world. Some of them are in Australia and I think Australia probably has taken a leadership position in a lot of these new technologies. I guess the Asia Review week for the last few days has really reinforced me that we're in a pretty good position, I think, as a firm to be able to pick where those technologies are going to emerge from and any of the other trends in the supply chain.

Simon Glazier:

And Dani, just a final...

Daniela Jaramillo:

Thanks, Simon. From my perspective, I think it's really important that we look at this issue at the system level and that we, instead of... Well, as investors, we normally look at individual companies, we also need to think of what happens at the system level and try to address the challenge at the system level and this involves looking at supply chains but also, identifying our role as investors, communicating with policy makers, with other investors, with communicating with one voice. When we're developing taxonomies, we need to think about what's the role of mining in those taxonomies and in those technologies. So really, thinking much more holistically when we think about sustainability and less binary in terms of this good and sustainable companies and they're bad and non-sustainable companies.

Simon Glazier:

And with that, some really great insights, good conversation and appreciate everyone's questions. We didn't get a chance to get to everyone, so please reach out to one of the team at Fidelity.

I just want to emphasise, obviously, this is a highly complex but extremely important point conversation and journey that we're all on, so we thank you for your time and joining us today. Thank you guys for joining the panel. I encourage you to jump on our website, download the paper, give us some feedback, give us your thoughts, comments, and concerns. We're loving to have a further conversation around this.

As I say, CPD points will be out in around 10 days post this session. But again, we thank you very much for your time and we'll talk to you soon.


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For all investors

James Abela is the portfolio manager of the Fidelity Future Leaders Fund which was launched in 2013, after 10 years as a Fidelity investment analyst. James' unique process has seen him win the 2018, 2019 and 2020 Morningstar Fund Manager of the Year award for Domestic Equities Small Cap Category.

Prior to Fidelity, James worked as a portfolio manager and investment analyst for 4 years at Constellation Capital Management covering the consumer staples and consumer discretionary sectors.

James has also worked for BNP Equities for 3 years as a research analyst, covering food and alcohol as well as diversified industrials. His professional career began in 1995 at Ernst & Young as a senior consultant, accountant and tax advisor.

James has completed a Bachelor of Commerce (Accounting and Marketing) and a Master of Commerce (Finance, Business Law and Taxation), both at the University of New South Wales.

Daniela joined Fidelity in August 2021. Prior to that, she was a Senior Responsible Investment Adviser at HESTA, one of Australia’s largest pension funds. While at HESTA, Daniela set up and was the Chair of the investor group of 40:40 Vision, an initiative to achieve gender balance in executive leadership. Daniela has held roles in responsible investment across the UK (Legal and General) and US (Wespath Benefits and Investments) before settling in Australia. She is a non-executive director at RIAA (Responsible Investment Association Australasia) and was a member of the PRI Stewardship Advisory Committee between 2017 and 2021.

Originally from Ecuador, her career began as one of the founding members of a not-for-profit focusing on improving education and health outcomes in the region. Daniela holds an MSc. in Environment and Development from London School of Economics and a B.A in Journalism from Universidad San Francisco de Quito.

Sam joined Fidelity in 2018 as an Investment Analyst based in London, initially covering US Healthcare before transferring to Sydney in 2021 where he has since covered the Australian Metals & Mining sector. Sam's previous experience includes six years as a Senior Associate in Citi’s Equity Research Division in Sydney, where he also covered Australian Metals & Mining. Sam holds a Masters in Mining Engineering from University of New South Wales and a Masters in Business Administration from London Business School.