186: Rare Earths, Energy, and the Green Agenda (Money Maze Allocator Summit 2025)

23:36Per Lekander:Slow. It's kind of slow.

23:40Bill Orum:But everything stagnates. And now coal has stagnated. Unfortunately, not really gone down, but it's stagnated. I think we are enormously, enormously close to oil stagnating. Because China has clearly gone next growth now. You still have some growth from India, et cetera, but just a matter of years. So everything is happening in power. and so that brings both my ideas number one, avoid all those things which are not growing then of course you can do a tactical trade but you can't buy it and then go on holiday for five years but whereas the power system is going to expand multiple times and here you have many ideas it could be a utility, electric utility It could be someone manufacturing transformers, you know, someone doing power plants there.

24:41Bill Orum:And then you mentioned this with 30 times growth, I think you said initially. I'll give you a number which is more brutal. And I was in Kyoto 1997 because I was working at the International Energy Agency. And then, you know, that was kind of the start, really, of any sort of climate regulation. So I actually checked today. How much has wind and solar developed since 1997? Yearly wind installations are up 1 ,000 times. Yearly solar installations are up 10 ,000 times. Of course, from an enormously low base. but actually the installed solar and wind right now if you take that in power equivalence, it's equivalent to two times Saudi Arabia and for the next four years we're going to add another Saudi Arabia so clearly there is growth there so that's my two ideas, avoid your stuff and go more for your stuff

25:49Per Lekander:I'm going to get you back by letting you know that I was still in high school when you were in Kyoto but

25:58Per Lekander:But I think to your point about stagnating commodity demand, that's I completely agree with you with the exception of power, as you say. Right. And so now it's fulfilled that demand at any cost. Right. Without it doesn't necessarily have to be green as it has been over the last several years. But now it's gas is a transition of fuel and can be an ultimate source of that. And we do that. So it's OK. Yeah.

26:23Bill Orum:OK. Fine. You're half in.

26:27Brian Menell:I think what we find a bit vexing is that the vast majority of asset owners in the world are trying to address long term liability streams. And this is one of the most secular and long dated, you know, capital intensive programs that certainly, you know, we in this room will kind of experience. It's very well suited for these type of asset owners and infrastructure in particular. There was a panel on it earlier. You know, you listen to Larry Fink. I mean, infrastructure as just a as an asset class with a whole variety of expressions, you know, as Parrott mentioned, seems to be the most obvious way to express it.

27:08Brian Menell:And if you look at, you know, from the from the U.S. context, if you look at endowments and pension funds, you know, last 20 years, the top endowments have earned 10 percent, 10 to 11. And they have introduced enormous complexity to do that. They have taken on significant risk to do that. And they've paid exorbitant fees. And that's that's basically what they've earned. And that's a that's a nice return. It's 300 basis points over equities and a nice spread to inflation. But it's always confusing to me that so many asset allocators are unwilling to entertain the idea of investment into infrastructure because the perceived rates of return are too low.

27:49Brian Menell:But for a long-term asset owner, it is not how much you can earn over any given period of time. It's earning the highest rates of return for the longest period of time that you can. And asset class like infrastructure is incredibly well suited. If you can compound at 9%, you're going to ultimately be extraordinarily wealthy or very well positioned to meet your liability streams. And so figuring out what are the market structures, fund structures, fee structures that enable more asset owners to move into this asset class is probably going to take up a lot of people's time in the coming years.

28:27Per Lekander:Sorry, of course.

28:29Annachiara Marcandalli:And I just want to agree with Per that you want more of my stuff.

28:36Annachiara Marcandalli:I mean, to be serious, I mean, you know, we do need the imperative of more dedicated allocation on the part of capital providers and allocators to critical minerals is a very pressing one, not only in terms of doing your duty to your investors from a value creation point of view, because it's quite unusual to be in an industry where the drivers of demand growth are really inescapable and unstoppable, and the sources of supply are very inefficiently scalable, even with adequate funding support, given the long lead time and challenges of building mines and metal processing. So the outperformance of our metals, medium to long term, is very, very difficult to not be convinced by.

29:25Annachiara Marcandalli:That does, however, require, in terms of the global growth and supply we need to meet this climate change mitigation, energy transition demand, two years out, five years out, ten years out, several hundreds of billions of dollars that is presently not available. and that is to transform our industry in terms of volumes and in terms of standards, which we also want from an ESG and carbon footprint point of view, and in terms of independence from China, who saw this 15 years ago and did allocate$150 billion of state subsidy to build their overwhelmingly dominant positions. So from a value point of view, we're at the beginning of an enormously compelling 2, 5, 10, 15-year opportunity.

30:09Annachiara Marcandalli:and from a necessity point of view, you know, the world is going to be a very unsafe, unclean and unsustainable place to five, 10 years out if we don't do what we need to do to transform our industry. So we've got asset allocators, big financial institutions, largely appreciating what I'm saying because it's not, you know, a particularly novel story anymore than it was when we started TechMare eight years ago, but still saying that, yeah, but we kind of lost our skills and our expertise in mining and metal because it has been unfashionable for a few decades and we don't really know how to assess value and risk.

30:45Annachiara Marcandalli:And it's really a sort of ESG and PR risk, which we'd prefer other people to take because we don't know quite how to judge the PR and ESG risk and therefore best left to others, namely the Chinese for most of the last 15 or 20 years. And that's irresponsible and highly problematic and needs to be countered by government agencies in terms of government sovereign sources of funding, which we do a lot with, and de-risking by government regulatory environments and support in order to encourage, incentivize or force private sector sources of capital to do what is necessary for domestic economies, industrial competitiveness, climate change, global energy transition, which is not happening.

31:32Annachiara Marcandalli:You know, it really is not happening and it's a major, major problem.

31:36Brian Menell:schroders is an international active asset manager working with institutions intermediaries and individuals around the world to create prosperity for them and their customers over two centuries schroders has given their clients the edge by seeing things differently schroders active perspective combines rigorous research innovative thinking and deep market insight to help you see opportunities and risks in a new light whether building portfolio resilience, seeking return opportunities, generating income, or decarbonizing your portfolio, Schroeder's offers a heightened perspective to help you stay ahead.

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33:09Brian Menell:Look, with this global reset on climate change and energy transition, it's been healthy to some degree in that I think for many years, folks like myself or peers would talk about climate change, as you said, as do you have a climate change strategy? And it was this thematic and it, you know, is either creative or it wasn't. And that's very simple thinking. Right. Investing is difficult, you know, in any form. And so some people will do it well. Some people will do it less well. But it also implied a monolithic bet, right? Some sort of thematic exposure. And I think what you see with Brian's strategy, Paris' strategy, these are highly idiosyncratic.

33:53And in a dynamic and volatile world, which most people kind of believe we're in or entering into, a lot of the ways to express the energy transition, climate change, agriculture, natural

34:08Brian Menell:capital, they're decentralized and they're distributed. And they're actually quite idiosyncratic in terms of how you express them in a portfolio. And I think that's healthy, right? Because it actually works in a much more robust way for long-term portfolio allocation.

34:24Bill Orum:I totally agree on that. I think this AI theme has become enormously helpful because suddenly it's something positive. It's the same thing, but it's positive. I think the problem is not the energy transition. The problem is that nothing disappears. That is the problem. Exactly. That actually last year was a record for global coal production. It was not massive, but it was up. So that is the problem from a climate perspective. And then I have to make one point to our researcher up there. I think the communication from research on climate change is terrible. because I worked on it so long and I thought, still all thought, you know, one and a half degree, it sounds like nothing.

35:17Bill Orum:And it was quite recently when I realized that, of course, we're not going to hit one and a half degree. We're going to go to three or something. But that's actually the main point is we are living on land. We are not living in water. And land hits more than water. And we are not living on the equator. we are living off the equator and off the equator it hits more so you know London hits like two and a half times and then if you realize that okay I'm going to hit six degrees then you realize it's a big difference London is getting Rome's weather I'm going to ask one of my reserve questions first

36:04Per Lekander:before we go to some last because we've got some time Net zero. Is this a good idea that needs better implementation or a really bad idea that we should have never really gone to? And I'm going to ask Perra first.

36:20Bill Orum:I think so. I think there are elements in this climate. You know, let's say Trump is bad, but he's not wrong on everything. And I think this is one of those areas where where politics have colored it. Net zero is my view about eating a cake and still having the cake because because it kind of gives an impression of that. you can emit and then you're going to remove it. But the thing is that this removal doesn't exist. And if it exists, it's so exorbitantly expensive that it's not going to be used. And so, you know, it might be that one day we can remove stuff, but right now we can't. So to me, the only true mitigation strategy in my view is you do not emit.

37:16Bill Orum:And if you emit, you have to use it as efficiently as possible so you emit as little as possible. So I think it's a terrible idea.

37:25Per Lekander:Anybody want to counter that or build on that?

37:30Brian Menell:You know, absent a carbon tax, which certainly in the US was supported by Hank Paulson and Jim Baker, and it was kind of this conservative potential solution, right, where you didn't start to pick winners and losers within industry, but kind of allowed the market to respond to a pricing mechanism. And I think most economists agree that if you actually want to reduce emissions, that is the most efficient manner. If you're not going to do that, then this idea of a net zero framework is really imprecise and theoretical at best. But I do think what it did do, if I had to take the counter argument, at least from an asset owner perspective, is it's perhaps better than ES or G.

38:22Brian Menell:It's better than than, you know, a very loose framework around environmental footprint. It forced some level of quantitative measure in a true north around which people could think about, you know, how they're being compensated for this hypothetical risk of a carbon tax to me. Right. And so some organizations I've seen use it, they've used it in that framework, which is if you were to tax the portfolio, where do you take risk and seek return net of that hypothetical carbon footprint? But that's an entirely hypothetical world. And the governance framework around it was challenging. And admittedly, I don't even really know where it stands today.

39:08Brian Menell:I mean, it clearly just disintegrated, right, very quickly.

39:11Bill Orum:The net zero?

39:12Brian Menell:Yeah.

39:13Bill Orum:I think, you know, if you look at companies, most of them have, I think, 84 % of our portfolio companies have a net zero target. But I have no idea what it means.

39:24Brian Menell:2050, right? Yes.

39:28Per Lekander:Listen, Bill, any additional thoughts? Nothing material to add. I think it's interesting to think about it as an investment framework, to Bill's point, and how you align your portfolio rather than a – the math doesn't add up to your point. And is there nothing really valuable to add there? All right. So I asked them that they should be prepared for this. So people here in the UK know Desert Island Discs. So you get stranded on an island. You've got to choose. You have to choose. At the beginning, you get eight pieces of music. You're not going to have anything else. But then you have to choose one.

40:06Per Lekander:So I ask they need to choose their one investment that they would sort of this incredible opportunity. But I'm sorry you're stranded. You only get to do one. We know what you're going to do. But no, but I'm going to push you. Like, which are the critical, because you can't say they're all important. No, no, you have to choose. So you're stuck, you know, you get one shot. What is, like, the one investment that you would do and why? Who have I not asked first, or do we go back to, I think we start from the beginning. There you go. No, I'm sorry to be boring and say take Matt, because I think, you know, while I...

40:50Annachiara Marcandalli:Can't help it. And why, you know, we do seven critical minerals. And I think -

40:56Per Lekander:That is cheating. It is cheating. That's all right.

40:58Annachiara Marcandalli:But it is not a random driver of our strategy that we have chosen diversity, not only across those key critical minerals, but across the value chain for those minerals. You know, it's really difficult to judge the evolution of battery technologies and know whether in five years time LFP relative to high nickel cathodes for automotive will be 40 percent or 60 percent or what role solid state batteries will play and how their cathode chemistries will look relative today. But we do know that across our basket, all of them will, you know, we need all of them in many multiples of present global production, regardless of how those chemistries and technologies and configurations evolve for electrification and mobility, for humanoid robotics, for AI data centers, for renewable energy systems.

41:54Annachiara Marcandalli:So, you know, which is why we did what we did in TechMet, to give a balanced basket across the key metals, key technologies and key low risk geographies in this 20 year supply demand dislocation. So I really there's nothing I'd invest in differently to that, which we're doing and investing in and spending our lives building, you know, in a diversified critical mineral supply chain security TechMet private strategy.

42:23Per Lekander:I'm going to say three things, but they're related, so I'm not really cheating. So still AI, but meeting rising power demand through developing grids and better grid resilience. It's a complex theme, right? Much more than just demand is increasing for one commodity and how are we going to get there, But how we weigh the balance between the data centers and their interaction with the grid, what that means for availability and affordability for electricity for the consumer. It's a thematic that I think is really investable, but also defensible in terms of still having a sustainability agenda to it.

43:09Per Lekander:And I think it's one that also has a moat. there's high barriers to entry to bring the power to the data centers. You also need the land, you need the water supply, and obviously you need the technology input. So I think it's a space that's multifaceted, defensible, and with a moat. Great.

43:32Bill Orum:So a security or an area?

43:35Per Lekander:You get to choose. I'm so, so curious.

43:37Bill Orum:Okay, so I'll go for security.

43:39Per Lekander:There you go.

43:39Bill Orum:You should buy first solar. I believe in Trump.

43:43Per Lekander:I'm saying you're contradicting yourself now.

43:46Bill Orum:I believe Trump means business with make America great again, building barriers on the borders. U.S. has currently 50 gigawatts of solar demand. Give it another six months, there is a couple of steps left, some 232s, etc. etc. Then there is not going to be. Essentially, you have a US, you have first solar ones, they are up and running, have 16 gigawatts of production capacity. The rest is essentially pseudo China. That pseudo China is going to go within the next six months. It's impossible that that demand is not well exceeding 16 gigawatts. It might go down to 3540 because prices go up. But this company is levered like crazy on higher prices.

44:40Bill Orum:On top of it, Biden's, this IRA actually survived in the solar area. It was, and it goes for batteries as well. It was totally crazily generous. It didn't make any sense whatsoever. So here you have a company which very easily could be on, it's net cash at the end of the year, and it's on 35 % free cash flow yield. I claim that this is going to last at least for another five, six years. They haven't done any buybacks because they thought it was a bit, they were heavily investing. And also they were a bit afraid during the Democrats to do this. Of course, with a new administration, there is nothing stopping them.

45:28Bill Orum:So they're going to announce the buyback, in my view, at the full year results, end of January. And the stock has.

45:35Per Lekander:This does not institute financial advice. I just, I'm like, it's not financial advice, right?

45:42Bill Orum:I said in my view.

45:43Per Lekander:In my, there you go.

45:48Brian Menell:I think clearly a form of infrastructure around grid resiliency and services related to power generation. I mean, I think as renewables continue to penetrate markets, I mean, these guys would know far better than I, how prices respond. But clearly, there's this narrative if you look at any forward curve on solar developers, right? It's just with prices continuing to go up and up. And that's not necessarily obvious to me. It could be the case, and we'll see how it all evolves. But AI, technology innovation, and frankly, just penetration into some of these markets may actually have a depressing effect on prices.

46:28Brian Menell:But this idea of grid resiliency and services related to the provision of power. If I had to choose one thing to own over the next 30 years, that would seem relevant.

46:44Per Lekander:The audience. A question, two questions, how much time? Or is it cocktail hour?

46:50Brian Menell:A couple of questions.

46:53Please.

46:54Per Lekander:Yeah. China and the U.S. are having this arms-racing AI, and energy is really a very fundamental necessity. Can you comment on what kind of energy is most cost-effective for AI? Training the model, usage of the model, maybe one million token usage. What kind of energy is it?

47:13Bill Orum:Nuclear, solar, or coal mining? So China has coal mining and solar, and the U.S.

47:19Per Lekander:has oil, and they're building nuclear power station. Can you give us a landscape comparison? and which energy is most effective, cost effective for training the model and the usage of the model. Anybody want to?

47:34Bill Orum:Me?

47:35Per Lekander:Yeah.

47:37Bill Orum:Thank you for the question. I understood someone in the morning here made a case for nuclear. I would say nuclear is three to five times out of the money. I did another calculation before. I'm going to ask you a question. I just have to say, If the UK wanted to replace half the current generation with a nuclear plant, and you took Hinkley Point as the base for the cost, it would cost£300 billion. The UK debt ratio would go up by 30%, and I can guarantee you that we would have at least trust on steroids. So there is a hype around nuclear. There for sure is going to be some nuclear projects because you have crazy governments which are prepared to pay an unbelievable amount of money.

48:31Bill Orum:I don't know why. But nuclear is out of the money and something which is out of the money can never be big. So it can only be marginal. And it's so far out of the money, I can never see it going in. Then on either its data center, I would actually say modern society requires stability. Because, you know, either it's a data center or this room or whatever it is, we can't have interruptions. And that is, of course, the problem with renewables, that God decides when it produces or not. So there is no question about that in reasonable environmental conditions, Now, renewables, either it's whatever renewable it is almost, is actually the cheapest form of energy, definitely in China and definitely in the US, which is contrary to what Trump thinks.

49:27Bill Orum:Not offshore wind is not there, but the rest is. So renewables are cheapest, but they are not enough because power is energy and capacity, and they do not have capacity. So I would say that you want a mix, but a lot of renewables, and probably a lot of gas turbines, which actually run at very low load factors, but just backing it up when it's winter night. Great.

49:55Per Lekander:And you, please.

49:58Brian Menell:I get the fact that we are going to be in an extraction environment for critical minerals for a good number of years,

50:05Annachiara Marcandalli:but I'm interested in where our ability to recycle is going and is there even a time that we could be post-extraction for the energy transition? Certainly lithium-ion battery recycling will grow to be a significant element of the supply equation as the energy transition or at least the battery-dependent element of the transition unfolds and progresses. Our view is that in 10 years' time with a fully developed recycling ecosystem, which has still got a way to go, but there's a lot of activity in that space, we could produce between 20 and 25 percent of the needs of battery metals, battery metal chemicals for new battery manufacturing from recycling of spent batteries, end-of-life batteries, and industrial waste from the production of new batteries, which is very considerable.

51:01Annachiara Marcandalli:So it's not a solution. And there's no post-primary resource extraction world as the energy transition progresses. But it certainly is and will become increasingly a significant contributor.

51:19Per Lekander:OK, that's a sign.

51:22Brian Menell:It's a great job. Well, I think the right word was that was electric. You didn't disappoint. It was absolutely sensational and I loved it and I'm sure we all did. So thank you very much. All content on the Money Maze podcast is for your general information and use only and is not intended to address your particular requirements. In particular, the content does not constitute any form of advice, recommendation, representation, endorsement or arrangement and is not intended to be relied upon by users in making or refraining from making any specific investment or other decisions. We try to provide content that is true and accurate as of the date of publishing.

52:02Brian Menell:However, we give no assurance or warranty regarding the accuracy, timeliness, or applicability of any of the content. Guests, presenters, and other individuals involved in the production of this podcast may have positions in any of the investments discussed.