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Investing in Real Assets in a Digital World

7investing advisor Matt Cochrane speaks with Massif Capital's Will Thomson about ESG, green energy, mining, and oil.

January 19, 2023 – By Samantha Bailey

Investing in natural resources and commodities is a tricky business. Investors in these sectors must look at individual companies and the macro variables that go into intrinsic values, such as future precious metals and energy prices. These prices are known to go through volatile cycles, the timing of which can be hard to get right. 

Walking us through this process is Will Thomson, the founder and managing partner of Massif Capital. Thomson’s fascinating journey took him from Afghanistan to Lloyd’s of London before founding Massif Capital. 

The Massif Capital Real Asset Strategy is a global long/short equity strategy built around bottom-up stock picking.  The firm is focused on creating a portfolio of businesses within the Energy, Basic Materials, and Industrial sectors that balance the environmental and economic realities of achieving a carbon-neutral economy.

Before founding Massif Capital, Thomson served as a strategic and economic advisor to NATO in Afghanistan. Cochrane and Thomson begin their conversation by looking at factors that might determine when emerging economies are ready for investment and when they’re not. Specifically, Thomson details the elements that make Afghanistan a challenging place for profitable investments at this time. 

Thomson describes Massif’s strategy to Cochrane as one that is not focused on future commodities prices, a risky proposition at best, but one that instead drills down to specific catalysts for individual companies. For instance, if a copper mining company is trading at a steep discount to its net asset value (NAV), Massif Capital will take a closer look to explore its long-term prospects and how soon it can come to realize its true value. When inputting the future prices of copper into the equation, Thomson looks at its historical prices, including its 10-year lows, highs, and averages, to determine a realistic idea of how copper prices can react to a range of conditions. 

Thomson also shares his unique perspective on ESG investing. To promote more meaningful change, Thomson believes investors should focus more on companies transitioning to a smaller carbon footprint than companies that will inherently enjoy such advantages because of their business model. 

Thomson also looks for opportunities in green energy from political catalysts. When the Inflation Reduction Act was signed into law in August 2022, it included almost $400 billion in energy- and climate-related initiatives, making it one of the most significant environment-focused bills the U.S. Congress has ever passed. Thomson said while several companies will experience rapid growth from this sudden surge in revenue from the measures in this bill, only a few will be able to do so profitably. 

Thomson believes Siemens Energy ADR (OTC:SMNEY) is one such company that will benefit from the bill’s passage. Siemens Energy is an engineering technology company that manufactures a wide range of products needed by electric utilities, including wind and steam turbines, natural gas generators, grid technology applications, and hydrogen energy solutions. This makes it a one-stop shop for energy companies with various needs across different ways of generating and distributing power. 

Centaurus Metals Ltd (OTC:CTTZF) is another company Thomson highlights as a compelling opportunity. Centaurus Metals is an Australian-listed mining company focused on developing a nickel sulfide project in Brazil. Geological tests indicate the project might ultimately produce 20,000 tons of Class 1 nickel annually, making it one of the world’s largest, high-grade nickel mines. This is important because while lower-classed nickel can be used in applications such as stainless steel, only Class 1 nickel can be used for batteries. As electric vehicle usage expands, batteries may account for up to 35% of nickel demand by 2030 while only accounting for about 10% of nickel demand today. 


Matt Cochrane  00:09

Greetings, fellow investors. I’m Matthew Cochrane, the lead advisor at seven investing where it is our mission to empower you to invest in your future. We do that by providing monthly stock recommendations to our premium members, and educational content that is freely available to everyone, listeners today, I am very excited to introduce Will Thompson, the Founder and Managing Partner of Massif Capital. Will has a fascinating journey that took him from Afghanistan to Lloyd’s of London before founding Massif Capital. Massif Capital’s real assets strategy, the global long short equity strategy built around bottom up stock picking, they are focused on creating a portfolio of businesses from within the energy, basic materials and industrial sectors that balance the environmental and economic realities of achieving a carbon neutral economy. As regular listeners know, this is an area where I’m a little out of my depth. So I’m excited to learn more, and Will, welcome to the show.


Will Thomson  01:04

Thanks for having me. Of course.


Matt Cochrane  01:06

Why don’t you just share with us briefly I kind of alluded to it in our introduction, but just share with us your your background and how you came to found massive capital and what you what you do there.


Will Thomson  01:23

I guess there’s sort of three formative events, if you will, almost in my life that brought me to this point. So I was lucky enough to have a family that worked in finance and had some strong relationships on Wall Street. So I got my first job on Wall Street at 16, as a summer intern working for Bank of America’s health care, equity research group. So I’ve spent basically, my entire career in finance, almost, you know, my entire formative life in finance, in some way, shape, or form. But I went to grad school. And in grad school, I wrote a paper that looked at Afghanistan, I didn’t go back and get an MBA, I had a choice, you know, it was 2008 2009, or by was going back to get MBAs, I made a decision to go off and do something else, because it sort of seemed like if everyone’s getting MBAs, I should do something else. Ended up in Afghanistan. And as a result of that paper that I wrote, and it was quite, it’s quite a fascinating experience, because you go over to go over to places like Afghanistan, and now we invest globally, I go to places, I go all over the place, all over Latin America, Africa, etc. So go to a lot of these sort of developing countries, and one of the things you see right away is, just sort of look at the environment, and some environments, clearly lend themselves to development, and other environments don’t lend themselves to development very well. And Afghanistan is not an environment that lends itself to development. It’s they’ve got resources, but monetizing them is very difficult. And I think equally important, there’s a bit of a feedback loop between development and the environment where, you know, our development has an impact on it. And sometimes that impact can be positive, sometimes it can be negative, sometimes it’s negative, but we have to accept the fact that it’s negative, because there’s a greater good that’s created. Afghanistan is one of those countries where it really crystallized to me that, you know, some environments are favorable for development and growth, and some environments aren’t. And we want to do the best we can to make sure that the environment we have sort of writ large is a good one for development. I came home from Afghanistan and worked at Lloyds of London, actually starting up a New York office for Lloyd’s of London insurance Syndicate, and focused on writing political and credit risk insurance policies, mostly for commodity traders, project finance for banks, things like that. So commodity trader Glencore would come to us and say, We want to buy $100 million worth of copper over five years. Will you write us an insurance policy? If on any given year they don’t deliver that copper to us? Sure, we’ll write you an insurance policy. The challenge with that is that of course, you know, insurance, if everything goes right, you make the premium. But you don’t get any additional upside if it goes wrong. And in the case of political and credit risk insurance policies, the asymmetries are quite nasty, right so that Goldman Glencore example I gave 100 million dollars for the copper 20 for 20 million a year. That policy you know, I don’t know would have been 2% per annum. So obviously if it goes wrong, I’ve wiped out a lot right? My my, my premium So, I loved the industries that we worked in industrials, Materials, Energy. They were my focus in grad school, when I looked at I studied political risk for for Natural Resources Development. In Afghanistan, I worked on natural resources laws in Afghanistan. So, you know, businesses that I loved, but that asymmetry, that sort of negative asymmetry, if you will, and the inability to benefit from things go working out, I’m sort of what was a bit of a drag, especially given if you run a clean insurance book, that almost by definition, means that everything worked out and worked out, but I didn’t get any additional benefit. So I started massive capital after going around and started talking with a lot of hedge funds in New York, and you know, everyone was like mining man, not interested, energy man, every once in a while, industrials, short all the time, but, you know, not not our bread and butter. And everyone sort of said, these are interesting ideas, but we, you know, we’re tackling biotech and healthcare and stuff like that. And so there really was only a couple of firms that were, say some long only energy companies or long only energy funds, there was a couple long only mining firms up in Canada. But nobody was really looking at what we’ve now come to call the real acid ecosystem, which is energy materials and industrials. Combined, they’re, you know, a tightly interrelated group of businesses, industrials, tend to consume the immediate output of the other two, and via, and they tend to produce a lot of products that are consumed by the other two. There’s this tight inner connection. And when you throw in infrastructure, which is also a real asset we focus on, you know, those businesses form the foundation of society, though, whatever comes after computers, tiktoks, Twitter’s etc, it all depends on this foundation. And so that’s, that’s really what we focus on the foundation.


Matt Cochrane  07:13

So let me let me just pick out something you said that I thought was interesting. You said, you were in Afghanistan, and, you know, you you had written a paper about it in college. You said, you determined Afghanistan was not an environment conducive to investing? Like what what? So when you look at like those kinds of, I mean, I don’t even know if you call them emerging markets, almost like these pioneer markets, right? Like, just on the outer edge of like, like, even the emerging economies like, what what are you looking for? And like, so what about Afghanistan, if you can just like maybe boil it down to like, a few like, you know, principles, but like, what, what are you saying like about Afghanistan? It’s like, that’s really not investable? And then what would you look for in a economy like that, that would be like, maybe that is investable? Yeah.


Will Thomson  08:03

So one of the things we focus a lot on is this concept of sustainability. Now, usually, when people talk about sustainability, they say, Yes, we invest in sustainable companies, and then they move on. In my opinion, every time someone says that you should raise your hand say, wait a sec.


Matt Cochrane  08:24

When you say sustainable, what do you mean? Right? Because that’s a big concept.


Will Thomson  08:29

It’s a big term. Sure. And so from our perspective, you know, it’s two things. And if someone said to me, it’s three or four or five things, there are other ways of looking at this. But at a minimum, there are two variables here. One is the economics. And one is the environment. At a minimum, you could also throw in some other ones. But sustainable economics from a business perspective, would be something like a business that is held finance, right, so it doesn’t have necessary recourse to capital markets to continue its operations. It can look maybe a time it needs to borrow money for a merger or an acquisition. That’s different. But the business itself can run on the cash flow, it produces.


Matt Cochrane  09:14

It’s just generating cash flow, it’s generating profits, it can sustain itself.


Will Thomson  09:19

Yeah. The other side is the environmental component of it. And, you know, from our perspective, how we evaluate it, is whether we think a company can continue to operate in whatever likely environmental regulatory environment comes down the pipeline in the next 10 years. Basically, they can continue to do what they’re doing without a significant impact from regulatory change. You could look at it in different ways. That’s a very functional way for us to deploy the the term. So when you go to a place like Afghanistan, or you go to any number of other emerging economies, one of the critical questions you’re asking is, can one build a sustainable environmental and economic economy and society on this plot of land. In the case of Afghanistan you know you so what, what would what would sustainability start with? Well, sustainability would start with one of two things would start with either the ability to produce enough food that you can feed yourself, or the ability to produce some product on a continuous basis, with enough margin in it such that you can import all your food. The second of those two is not quite as sustainable as the first. But in the case of Afghanistan, they don’t really have either. So how do you even get the economy started when the best they can do is subsistence farming. And even that, they struggled to feed themselves and a function, but you know, that is in some regards a direct function of the land. Right? They don’t have it’s not terribly great land to grow things in. Look, they’ve got some resources. And amusingly enough, the Chinese just cut a deal with the Taliban to pump oil. I don’t remember how much it is. It’s a modest sum. I would short it if that was a company. And I could short it. I would, because that, you know, short, little logistical issues are the other problem. So you look at a place like Afghanistan, and you say, well, so the DoD wrote a report before I arrived there that said, there’s trillion dollars of minerals in the ground. minerals in the ground is great. Very useful to know. I’m glad I know that. But of course, the difference between minerals in the ground and monetization. Is it sustainable mining for us to Dana, well, mining firm needs to be able to export its product to market at a reasonable cost. Afghanistan is one of the few landlocked countries in the world. And we’ve got Iran on one side, we’ve got Pakistan on the other, we’ve got a mess of other stands to the north, and then actually, technically of Pakistan to the south. Also,


Matt Cochrane  12:15

not ideal, not ideal, not ideal getting raw material out.


Will Thomson  12:19

Yeah, getting raw material out, there is a teeny, itty bitty little corridor that you could take into China. But then you’re dropping yourself off on the the far the far western edge of China. And of course, everything’s on the eastern edge, Pakistan, it’s getting over mountains. It’s quite, it’s beautiful, but it’s very mountainous. And then of course, Iran is just not friendly to anyone. If Iran was a friendly country, things might change. I recognize that, and I would, you know, I I would love to go back to Afghanistan. And, you know, I hope that massive capital survives another 20 years, and I’ve got enough money that maybe by that point, Aranda will be friendly. And I can go back to Afghanistan and maybe try to help by building building some mines or something, but until Iran is a friendly country, it’s, it’s tough. Sure, sure.


Matt Cochrane  13:22

We’re gonna like, kind of go out of order and what I laid out to you for our conversation because like, doesn’t matter, it’s good. It seems like what you invest in, it has a very cyclical nature. And like, like, like I was explaining to you a little bit like it’s not investing we we try to focus more on just like very long term things. So like, what I would incorrect me if I’m wrong, but what you’re probably doing is not long term buy and hold investing. So how do you if I’m, if that’s what if that’s wrong, correct me, but like, how do you like time cycles for that? Like, how do you time entries and exits into positions? How do you say like, and again, correct me wrong, but like, how do you say like, okay, like, the environment for energy, or copper or nickel is good, right now, we think prices are gonna go up. So we want to invest in, you know, companies that mined those resources, or drill for those resources, or say that those are bad. And we want to maybe short companies that are in those resources, how do you how do you time the cycles for these companies?


Will Thomson  14:28

So I think that So our average investment is sort of three to five years.


Matt Cochrane  14:36

So it’s not short. Yeah, it’s not short. No, it’s not necessarily


Will Thomson  14:41

we I would be, and we’ve had some investments go seven, seven years, eight years. But But you’re right, they’re not they’re not buying hold. They’re not compounders in the idea of sort of, they all have high opportunities to reinvest capital at high rates of return. You know, sometimes they do if they have a new deposit, or if it’s a mine or the new deposit, but mostly they don’t. So what I would say is So, the buying hold mindset, okay, what what you’re trying to do, at least as I understand it and have a deployment, let’s say in my personal account, sure, buy good things. Right? I try to buy a company, I’m willing to pay a reasonable price, it doesn’t need to be in the dirt, because it’s got reasonable compounding potential going forward. So trying to buy good things, that we try to buy things well. Okay, so what’s the difference? The difference is, with your mindset, you immediately went to, okay, there’s a there’s a cycle. And, and you are correct in noting that sort of, because of that cycle, there’s a window of time where these companies make a lot of money.  And with that, buy and hold mindset, you want to be invested at that time? Sure. But when we try to buy things, well, there’s a different mindset or a different approach. Okay. The question is not are we going to buy and own this company when it is a good thing? It’s more a question of the nature of the mispricing. So we could buy a bad company that was terribly mispriced. Now, that’s not usually what we do. But but that’s sort of the the focus is more on the mispricing and buying things at a good price. Right. And so what that means is that with with oil, natural gas mining firms, it’s not about being invested, such as you capture that period of time when they’re making bunch of profits because of the cycle. But rather capturing capital appreciation as a result of a catalyst that is company driven. That is separate from and different from the commodity cycle. So the example, the good at best example, the simplest example is a single asset mining firm. Okay, they have one asset, they’ve entered a period of building, okay, and they’re building and because they’re building and you know, it’s operational risk in some country, let’s call it the Democratic Republic of Congo, everybody gets out a bit, but what’s actually happening, they’re building an asset, they financed it, they permitted it, they’re moving it towards production. And so as they take steps towards production, the risk that they don’t turn on that asset actually decreases. And so there’s a period of time where you enter and you buy it when you buy it cheaply. And when they turn on the asset. If let’s say it’s a copper asset, let’s say coppers running against them. Okay, so we bought it and it’s trading at point three of nav, coppers running against, they turn on the mind, catalyst, that nav, it’s going to go from trading at point three to point eight of nav. So is this a good return? Now? With us, it’ll go to 1.2 of nav.  Okay. So we found that there are situations basically, especially if you just focus on company level catalysts that are sufficient to overwhelm commodity price impacts that you can invest on the basis of companies. So rather than investing in the commodity cycle, we’re investing in companies that are catalyst driven that happened to produce commodities. If there’s a commodity tailwind. You know, it rises further and faster. If there isn’t a commodity tailwind, it doesn’t rise as much, but it’ll still rise because the catalyst is sufficient to drive the stock price higher.


Matt Cochrane  19:06

So like, what I find interesting is like, so I would have assumed going into this conversation, you would have looked at like, say, and I’m just picking any random but like copper, and say, copper low or the supply is tight, the demand is gonna go up whatever the case is, we think copper prices are gonna go up this year, let’s let’s buy a lot of companies that are in copper. And you’re saying, that’s not what? Again, please correct me if I’m wrong, but that’s not what you do. You’re looking for, like specific company catalysts, like for that copper mine in and I don’t mean know, where copper is mine, but like in Congo, or in, you know, in emerging somewhere, probably or wherever it is. You’re looking for that compromise and saying, Okay, right now, the you know, it’s trading like what we believe it’s very cheap for its long term net asset value. Let’s get into it now. And as it starts producing it We’ll, you know, inflate to basically go back to its net asset value, and we’re gonna hold on to it for that period of time. So you’re looking for, like specific times in these specific companies and you’re not looking at like, say, the bigger copper prices this year are going to go up. So let’s get into copper companies picture. Is that, is that correct?


Will Thomson  20:21

No, that’s very much correct. Now, I mean, we’re cognizant of commodity prices. We don’t, you know, look, we do invest in commodity producers, we can’t ignore them entirely. But what I think the big difference is, and this is not my phrase, this I heard this somewhere, and I don’t remember where someone else deserves credit for this. But what you just described in our opinion is sort of an approach that we characterize as a what often happens is timid bets on a bold forecast. So to your point, they say copper is going to eight, what should I do? About 2% and Freeport, Mac Murano 2% and southern copper company, to Rio Tinto, etc. And so they’re basically what you’re doing is you’re you’re you’ve made a macro commodity price forecast, that you’re then choosing to execute that idea, the equities. Now, I think that part of part of investing well, is not only having a good idea, but figuring out what is the best and most efficient way to execute that idea with, you know, sort of the the the menagerie of financial products that are available. Now, if you think copper is going to aid and you’ve done all this work on copper price, it’s not clear to me why you’d then go into equities. Why not go into futures, and actually execute the idea directly. The ideas about copper prices, why not executed directly? Now the opposite approach is how we think about our approach, which is a bold bet on a timid forecast. I don’t know where copper is going. I haven’t got any idea. I’m usually my track record on commodity price prediction is I’m decent with the trend.


Matt Cochrane  22:19

Okay, directionality.


Will Thomson  22:21

But like, how high no idea, timeline near directionality over a long term? Pretty, pretty good. So we’ve thought rather by a junior, for whom, turning on the mind doubles the price, regardless of what copper is doing, then, you know, that spread of copper bats and a bunch of copper majors.


Matt Cochrane  22:48

So now, when you’re figuring the net asset value of a mine, or you’re looking at like the future cash flows that the mind might produce? How do you know like, how do you factor what the price of copper will be? I guess, in your projections, like you just said, like, I don’t know, I don’t know what the price of copper will be. So how does that you just come up with like a bare case, base case, bull case kind of scenario? Or just figure we believe it’ll be in this range? Or like, how do you? So you know, you don’t know what the price of copper will be? How do you don’t do?


Will Thomson  23:26

We’re always told to think probabilistically, right? All of us are told to think probabilistically. And so we take that quite serious. And so what we do is in the case of a mine, right, we will lay out, you know, the layout a DCF, a model, that it’s a project, right? So it’s got capex does rely on DCF DCF, for mine is very easy to lay out. And then we will take say, usually, we do something like what was the copper high over the last two years? What is the copper low over the last decade? And what’s the average over the last decade, we’ll run the DCF. And each of those, then we get our singular price produced from those DCF. Now we’ve got three of them, let’s say one at that, that high over the last two years, one at the average and one at the 10 year low or something. And we’ll say so we’ve got confidence in the trend that it’s up, the supply situation looks bad demand looks good, but 50% probability on the base case 25% on the high end, 25% on the low, then we’ll do a probability weighted sort of value. And so we’ve taken into account all three of those cases, and that’s our target price. Now, over time, those probabilities may reweighed themselves as we own it, and as new information comes out We may adjust those probabilities. But that’s sort of how we approach it, we are making an effort at all times to bet on a spread of possible outcomes. As opposed to picking a singular commodity price and betting precisely on that.


Matt Cochrane  25:20

That makes that makes a lot of sense. So and it makes a lot of sense to to look at a more granular level, like for these companies specific catalysts and say, trying to predict what copper prices will be in a year, and then trying to make, as you describe it, like timid bets on a bold prediction. Let’s shift to energy. You know, in 2022, a lot of the stocks I was in did not do well. And when you look at the best performing stocks in the s&p 500 of the of the last year, it was dominated by like the legacy oil companies such as Occidental Petroleum has Exxon Mobil marathon Valero like, right, they just had a great year after a lot of years of down performance, you know, yet going into the year, like, I think a lot of people, especially forward looking investors considered oil, kind of like this dying sector, not that it’s going away tomorrow, but like, you know, it’s a slowing dying sector because the world is shifting to green energy, and we’re gonna have electric vehicles and cleaner sources of power. So after energy’s run up last year, like, I mean, are you interested in any oil stocks? Now? Are you you know, you how do you think energy? Looks for 2023?


Will Thomson  26:39

Yeah, um, so from my perspective, so first of all, I would just, I would divide energy, right? Okay, we’re dying. Let’s talk oil first, okay. Or let’s focus on oil, because I think that’s, that’s what you were sort of focusing on? Um, I think oil is the most difficult commodity to think about the price going forward. It’s all right. It’s the one with like, the most variables, I mean, they probably all technically have the same number of variables at play, but it’s limited seems like it’s got the most variables in play. It’s also a commodity with the largest paper market relative, I don’t know if it’s largest paper market relative to the size of the the actual commodity traded market, but it definitely has the largest sort of just aggregate paper market. So financial activity tends to can move prices more in the oil market than it can in some other commodities, which might be one reason why we like metals more than than oil and natural gas. But so back to your question. So I think, if I remember correctly, and I’m probably slightly off on this, but I think actually 2021 and 2022. Energy was, obviously last year energy was was the best performer, I think, in 2021, who was also one of the top performers. Yeah, I think that’s probably wrong. If you look at, say, some broad us indices. So two years in a row, just from a statistical perspective, without any sort of thought process around what we’re actually talking about two years in a row and then a third year in a row of outperformance relative to the market is a statistically uncommon sort of event. Now, that’s just a factoid to keep in mind. The tails are what matter? From our perspective, I think while is in a particularly tricky place, and the reason I think it’s in a bit of a tricky place is on the long term, okay, the supply situation is quite bad. There’s been a significant lack of investment as a result, in part of what you noted, the the sort of idea that it’s an old and dead industry and dying industry, okay. And so as a result, investors have come to them and said, Look, we can put money in in Twitter or Facebook and get this rip roaring return, you guys need to give us something. And so the oil companies have mostly said, Okay, well, we’re gonna return as much as possible to you and not invest. Okay, we’re gonna sweat our assets for cash flow, and then return it all to you. So they haven’t reinvested so over some long term period of time, the supply situation is quite dire. And it’s quite dire, regardless, almost of what you think about a transition to a low carbon economy. Because the speed of that transition, at least again, in our opinion, and we’ve written about this recently is vastly overstated. This concept of 2050 Or say, you know, everyone, we see a lot of, we’re not going to sell oil, internal combustion engine cars in California after 2035 Right. There are some serious sequencing issues here in terms of availability of resources, production of EVs, etc. Okay, this this trend or this transition 2050 vastly overstated goal.


Matt Cochrane  30:12

And let me just so let me just throw in a quick fact from one of your papers. Like, I don’t know if you personally authored it or your team, but it says fossil fuels currently supply supply at 3% of the world’s commercial energy. This compares to 86% in 2000, to a miniscule decline of 3% in 20 plus years. So like, even, you know, even I was surprised by that, and I’m not a guy who thinks like, oil is going away anytime soon. But I was still surprised that it just declined three percentage points in you know, almost 20 years. Now.


Will Thomson  30:48

It’s, um, you know, look, the growth in renewables has been spectacular, right. It’s been exponential. Um, but this big globe, we use Sure. And so, you know, and I am not I’m believer in the science behind climate change. But I do think that the science behind climate change doesn’t tell us how to address climate change. It tells us technically how to do it, right. Technically, we can’t release more carbon. That’s very technical. That’s where the science ends. Right. After that. It’s a it’s a bit more of a discussion. It’s a policy conversation. It’s an economic conversation, how do we address this issue? The cells are in the details. Yeah, the devils in the details for sure. And, you know, the narrative and story that’s been told about the transition, I think over, you know, 20, where are we now? Where 2022 2022? To? 2075 2100? That seems reasonable to me. Sure. You know, what people I think, think, where people struggle, or where, where there’s a bit of a blind spot for, for a lot of the narrative. Is this idea, okay, we’re gonna change the utilities, they’re all gonna be renewables, we’re gonna get rid of our internal combustion engine, the problem is all? Well, the reality is, and I gotta, I gotta update my numbers here, you’re gonna be slightly off, but you know, at best, absolute absolute best, that addresses like 40% of emissions globally, or something that does not address now there’s some bleed because utilities, you know, power thing, you know, but um, you know, one of the, one of the largest sources of emissions, is agriculture, is feeding ourselves. And that’s, that’s it, that’s an oil painting, oil and natural gas, right? It’s oil to power tractors, it’s natural gas, for fertilizers, it’s, you know, energy, food is just energy that’s been turned into a form that we can eat to power ourselves. And so what’s what’s challenging with a lot of this is, if I came to you, and I said, we need to be carbon free, but our food is all produced by oil, your immediate, and we, we’ve got to get rid of the carbon emissions from the food and we’ve got to get rid of the carbon emissions from the energy, your response, or the logical response would be okay, well, first, let’s figure out how to get the carbon out of the food. Sure. And then we’ll figure out how to get the carbon out of the utility system. Right, right, you’ve sort of reversed this one. He said, we’re gonna get rid of the carbon over here on the energy side, the food B day. Right, right. And you’re sort of like, okay, well, that’s gonna be a problem. And, you know, I don’t know where I was going with this, but but there’s this giant sequencing issue.


Matt Cochrane  34:05

So let’s, let’s continue on that note, like, and I’ve heard you express your views on ESG. before. But like, so ESG. Like, it’s almost always like, our it seems like from, from someone who doesn’t look at ESG too much when I make my investments. It’s like, buy these asset light businesses that don’t have much of a carbon footprint. And now we can pat ourselves on the back and say, We’re investing in clean companies. And I don’t think you subscribe to that view, though, and that there might be a more especially for the E and ESG. There might be a more holistic or more realistic approach to that. So why don’t you just kind of explain like how, how you approach that.


Will Thomson  35:02

If you’re someone like BlackRock, right, and you’re not an active investor, you are a retail investor you’re looking for someplace to put your capital. And you have concerns about the environment. How you service that audience. It is a challenge. Okay. BlackRock, they’ve got a gun a trillion dollars. I don’t know what they do. Okay, so the advent of the ESG ETF, I don’t think we should fault anyone for that. And I don’t think it’s necessarily like, you get some people out there who just think this is like an egregious idea that that borders on being in somehow in some way, shape or form, like evil, or immoral, because we’re going to deny the 2 billion people who live in Africa and Asia an opportunity to develop. I don’t quite subscribe to that. But what I do subscribe to is the idea that ESG is not exactly what it’s being marketed as. So if you buy ESG and ESG fund, because you just don’t want to be part of the problem. ESG Bill ESG probably somehow fits that bill. Right. It’s low carbon emissions, as you said, they just pick companies that have no emissions in the first place. Right. If on the other hand, you want to contribute your capital to companies that are solutions oriented and forward looking, you have to think differently. Okay, because you can’t decarbonize the economy by simply regressing to just businesses that produce no carbon. Sure, you’re already mentioned, there are businesses that produce critical economic goods, and those critical economic goods must be produced. And at the moment, the only way we know how to produce them is in a carbon, let’s call a carbon medium to carbon heavy one. So we articulate a strategy that’s based more on investing in solutions oriented companies. And we think about them as either companies that enable a transition to a low carbon economy, and they would be people like a copper miner. And we need lots of copper for EVs. You need lots of copper for the grid, you need lots of copper for all kinds of different use use cases, or Vestas wind turbines or Siemens energy, you know, they produce the equipment that that facilitates the transition, then there are companies that sell that are transitioning firms. Okay, so steel, we still need steel, still need cement, like everyone wants to house everyone, you know, we need to build buildings. Okay, so we need to come up with new ways of producing those goods. And so there are companies out there who have sat down. One of the most interesting parts about this is a lot of those businesses, right? Chemical businesses Steel’s. Cement business, their business models haven’t changed, maybe there are some details, right. But the management teams are now sitting down very hard science activities, engaged in research and development for new ways of producing their product that will create new business models. So those are the types of businesses we want to invest in. Now, at the moment, they have a heavy carbon footprint. But over time, that carbon footprint will go away as they invest and transition to new ways of doing things. Now, there are going to be some companies and some businesses where we just never figure out a new way of doing crafts, like they’re probably some chemicals. Chemicals, of course, are the great example. Right? All the chemicals we use are basically all petroleum based, right? Yeah. They’re probably some weird chemicals, maybe not even some weird chemicals, there might be widespread use chemicals, that we just never figure out another way of doing. You know, those companies still need to be invested. And there’s still going to be profits to be made there. So has taken up take a balanced approach, and you’ve gotten not part of the issue, or an invest in ESG fund, and just sort of not contributing, if you will, or you want to be investing in companies that are solutions oriented. Now, I can’t critique either approach. If you make a decision that that’s what you want, but at least from my perspective, I’d rather be solutions oriented. I also think the opportunity set is bigger there.


Matt Cochrane  39:31

So let’s let’s talk about maybe that opportunity set. We have a mutual friend, Bill Brewster, and he and he was talking about the inflation Reduction Act, and I asked him to come on and talk about it. He goes, You know, I mean, I can come on but I’m just a guy talking about he goes the guy you need to talk to his will Thompson. And that’s kind of what led me to reach out to you. So the inflation reduction act just for viewers because I didn’t know this either. Like it was signed into law last August and And it might have more in it about green energy than it does inflation, despite its name. It includes provisions for, I think, almost $400 billion in energy and climate related initiatives, maybe making it like one of the more significant environmental focus bills Congress has passed. So but let’s tackle this from like an investor’s per sec. perspective, like, what what can investors take away from this bill? And is there opportunities there? So there are opportunities, but we’ve got to be sort of careful. Okay, so the bill, I would divide it into sort of two components.


Will Thomson  40:46

One would be various different support for energy, the energy system, if you will, that is, let’s call it transformative. And another that is supportive. Okay, so the supportive side would be, you know, tax credits for solar and wind, they existed, but now they’re, they’ve improved them, and they’ve locked them up for a longer period of times. There’s electric vehicle credits, there’s residential, clean energy related tax credits, there’s some stuff for low emissions, fuel, stuff like that. So it’s a lot of extension of things that have already been in place. And some of those those say tax credits around the edges, then there’s the what they hope, policymakers hope are slightly more transformative parts about it. Specifically things around, say, investment tax credits for battery storage, green hydrogen, energy efficiency solutions for commercial buildings. Carbon capture stuff, okay, so there are the these these two big buckets, if you will, now, I think that the transformative stuff, you’re going to end up, if you want to find companies that are going to benefit from that component, you end up with earlier stage companies, this is especially true stuff like green hydrogen, right? Green hydrogen, I think has very few use cases, but it does have a couple of good ones. But the company isn’t, this is the sort of industry, if you will, the value chain is very, very new, very young companies, the companies are going to be having going to have high rates of growth, mostly because they’re starting our very small footprint. And the figuring out the key, the key will be to figure out whether these companies are actually making money on a, say, a unit basis, or if they’re not making any money, and they’re just collecting a government rent, I suspect that you’re gonna have a lot of both. Sure. That’s just sort of the way it works out. On the other side, you have this supportive ones are the support of the shoulder, the wind, the tax credit, things like that stuff that literally reduces the cost, basically, of installing, installing solar and wind, and things like that. You actually run, interestingly enough into a very similar problem, which is, it’s very hard to tell whether a lot of these companies can actually make any money. This is especially true in solar and wind equipment manufacturers, this is where we we are solar and wind Absolutely. Have a place in our energy system. Have is your role as the universal source of energy? Sure. So solar in Nevada makes sense solar in Maine, does not. And so the so that that’s a challenge. Okay. But then all these equipment manufacturers that come before that question is even asked, with the price of electricity being driven down by solar and wind so much, the margin that’s available to these equipment manufacturers is quite limited. And so what we find when we look at the value chains from the equipment manufacturers, is that, you know, in the case of, say solar panels in China, we looked recently, and from the manufacturer of poly silicon to the end panel, there’s basically like four cents available in margin. I don’t remember I think it’s not on a panel basis. It’s on like a kilogram basis or something I don’t remember which we’re not talking about a bunch of a bunch of industries, not sharing a lot of margin here. Of the four companies that you can sort of think about as they’re being sold Were companies in that stack of the four companies in that stack. Only one of them made money, the rest of them lost money. And so that one company actually made seven cents. And the rest of the companies lost money. How do you come to the four cents? So there’s there’s this question about whether at electricity prices where they currently stand, which in some regards determine the profit pool, whether these equipment manufacturers can even make money. Now, the IRA Bill incentivizes bringing a lot of that production to the United States domestically. In China, they did so on government subsidized coal power. Right, bring it here to the United States. I, I’m not certain that, you know, you’re even gonna get that four sets might have a much higher labor costs and a much higher maybe energy costs and everything else if you’re not using government subsidized power. Yeah. So I do think that what we’re going to see a lot of is, if a company trades on its revenue, say top line growth, and you’re a trader, let’s say, then there’s opportunity, because those companies will probably do well on, you know, if they trade on revenue, but from a economic perspective, I don’t think they’re going to be making money. So if you want to buy as an investor, and hold them for three to five years, as we like to do with some sort of catalyst, and at the very least, we don’t want a business that is just being run on government rents, I don’t think there’s going to be a lot of opportunities on the equipment side of things, or utility companies, you know, utilities managed to deploy these assets profitably, but you know, utilities have the return that they get, which, you know, sometimes can be good, but generally speaking, utilities are not, you know, punchy investments, right? In the past two years, some of them have have run quite far. But, you know, again, you do have to separate out the government tax credit, and I don’t think they’d run as far as they have, if you subtracted that out. The earnings are not as robust absent those credits.


Matt Cochrane  47:18

And what about a company like Seimens Energy? Does a company like that have an opportunity here?


Will Thomson  47:24

Yeah, so we we do like Siemens energy. And we do like businesses like Siemens energy, which sort of cover the full energy value chain, if you will, from generation, traditional generation to renewables and everything in between. Siemens is kind of like a one stop shop. Let’s say you run an electrical grid, you could come to Siemens and say I’ve gotten natural gas plant, I’ve got renewables. And I’ve got, I’ve got some space for solar, and I’ve got some space for wind. Build it for me. Siemens will build the entire grid. They’ll build the natural gas generator. They’re the largest manufacturer of steam of turbans in the world, the second largest of natural gas turbines, the largest of steam turbines. Okay, so they’ll build a turbine for you. They have a lock on a lot of grid technology. They don’t make wires, but they make everything else that powers the grid, if you will, or that the grid runs on. They’ve got a bunch of hydrogen technology they own now, they’ve brought in house the entirety of Siemens, Gamesa, so they do manufacture wind turbines. There’s this sort of one stop shop that can address all your issues. And it happens to be in Europe, so it got smacked. And it happens to be a spin off, and it was the stuff that nobody wanted. So got smacked there. So right now you’ve got I would say Siemens energy. You know, conventional generation renewables, you’ve got demand growth for energy, decarbonisation digitization, decentralization, any of those big themes. They cover that, and it’s, you know, deeply discounted. I do think that Siemens, though, could be something you want to buy and hold longer term, right, that type of business can be viewed is not not so much a project business, right? It’s a going concern business, right. So there is a potential for compounding over the long term.


Matt Cochrane  49:33

So I don’t want to we’re running up on time and I don’t want to like keep you so I was, again, just looking to like the paper you have made publicly available on your website. There’s a lot of them for people to check out. But one that caught my eye was Centaurus metals. So this is an Australian listed mining exploration company, which is doing a nickel project in Brazil. And so this is is the kind of thing I find fascinating, fascinating. Because it’s like, how do you even find something like this? So if you could maybe just like kind of one, how do you find something like this? And then to like, maybe just walk us through the investment case for centaurs? Metals real quick, because I think listeners will find it like, as fascinating as I do.


Will Thomson  50:22

So centaurs, how do we find it? I’m got any idea how we found it? But in general, we find these sleepy out of the way, well, not necessarily sleep, but but out of the way companies, mostly because I mean, it’s the universe we focus on, right? So look, our universe is, if you do it at the biggest level, it’s like 5000, companies, with market caps greater than 200 million of that, I don’t know, 1000 of them or something are mining firms. And then we focus on a very specific sort of mostly focused on a very specific segment of mining firms, which is to say, mining firms that have a deposit that they are in the process of building. Okay, well, we all you know, we’re not geologists, so we don’t invest in a company that say, just as a geologist, and is looking for a deposit. Okay, deposit, it’s got to be there, there’s got to be technical docs that we can assess operational dock. And, you know, we have to have an expectation that they’re turning on the mine and say, the next five years, so So sort of make a cut that way. And the number of companies that are in that window, if you will, it’s volatile, it changes every year, but you reduce the number of companies quite quickly, and then you can cycle through some pretty easily looking at, say, the commodity price upon which they’ve articulated their investment case. And a lot of times, what we see is companies that have articulated their investment case, on a commodity price that is quite high, basically, the way to put it, and you know, maybe the commodity, whatever it has, is has been there recently, but it isn’t necessarily you know, it’s like a 10 year high, right? So you’re like, Hey, guys, I you know, what is your commodity case look like at the 10 year low? or No? Sure. We can get rid of a lot of companies out when we follow a lot of companies in mining space, and most of them are just not followed by anyone. So but I think that, you know, in the case of centers metals, they have, as you noted a what’s called a nickel sulphide project in Brazil. And the nickel sulphide market is interesting, because nickel sulphide is there sort of where there’s two classes of nickel, there’s class one nickel and class two nickel class two nickel, usually using steel. Class one nickel is what they need for batteries. So if there’s an argument to be made that EVs are going to grow, and battery demand is going to grow, which seems to be the case, we need more nickel sulfide. And so some tourists has one of the sort of highest grade best nickel sulphide deposits in the world. And so that’s sort of how we we came to it. And part of what we think is so interesting about this project. They’re a couple years away from production. So they sort of are in that orphan period where they’re being ignored. Nobody’s looking at them. They’ve got a decent management team that appears very capable of turning on this asset. With any of these projects or focus companies, you’ve got to be laser focused on whether you think management is capable of executing the plan. They say they’re going to because that’s the bet you’re making. It’s not a nickel bet, it’s a bet on their ability to execute. And we have sort of high conviction that they can do that.


Matt Cochrane  54:18

Right? Well, where can where can listeners find out more about you Massif Capital if they’re interested? ,


Will Thomson  54:25

So our website is We produce a lot of research, all of which mostly all of which is public, some of which we retain for our investors, but most of it is freely distributed. We got a mailing list. I’m on Twitter, although my participation goes sort of back and forth. Sometimes I’m active sometimes or not. But those are those are a couple of places you can find us.


Matt Cochrane  54:53

All right. Will, thank you so much for joining us today. I’m Matthew Cochrane, a lead advisor at 7investing It’s our mission to empower you to invest in your future if you enjoyed this podcast or if you watched it on YouTube feel free to subscribe or leave us a review Have a great day everyone.

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