Filo Mining Stock: Drilling The Best Copper Intercepts (FLMMF, FIL)

The next phase was excerpted from this fund letter.

I used to be lately stopped at a crimson gentle, and I observed there have been electrical autos on all sides of me. I then realized there isn’t any turning again from the motion to a carbon free atmosphere. Of all of the commodities required to construct EVs, photo voltaic farms, windmills, photo voltaic panels, and all issues electrical, there isn’t any mineral extra important than copper.

We now have been writing for years about how the push to scrub vitality will improve demand for a lot of key metals and supplies as governments world wide design insurance policies and spend cash to usher in a low-carbon future. One of many foremost methods to realize that is the widespread shift to electrification, which can vastly improve the necessity to generate, transmit, retailer and use electrical energy. Lots of the applied sciences proposed rely on uncooked supplies which might be both in brief provide or managed by a restricted variety of gamers and there may be in all probability no metallic extra integral to electrification than copper, the first means to conduct electrical energy.

Renewable vitality era, largely photo voltaic and wind energy, and electrification of the worldwide automobile fleet are two of the main initiatives driving this variation. Each require huge quantities of copper, rather more than is utilized in fossil gas era and inner combustion engine autos. Transferring this electrical energy to the place it’s wanted can even require an growth and modernization of the electrical grid, itself a big client of copper. Demand for copper is anticipated to double over the subsequent 10-15 years pushed largely by these clear vitality initiatives. Assembly this demand will probably be extraordinarily tough.

The provision challenges are quite a few. Present mines face useful resource depletion and much fewer significant discoveries are being made. Common copper grades have been declining for years making mines much less productive and requiring extra value to provide the identical quantity of metallic. A few of the largest producing nations have seen political shifts towards elevated taxes and rules which have hampered funding in new provide. Mining corporations have additionally turn into extra conservative after the final cycle preferring to return money to shareholders through dividends and buybacks relatively than pursue progress, and there’s a scarcity of expert labor within the trade as most of the youthful era have pursued careers in finance and tech. Political will and public help also can current a problem. Anti-mining sentiment is usually seen on account of environmental considerations regardless that many local weather targets can’t be met with out further mining to offer these vital metals.

In a world the place common copper grades are declining and new discoveries are uncommon, a big high-grade discovery naturally caught our consideration. That is what we noticed final yr when Filo Mining, a Canadian-listed developer with operations in South America, drilled among the best copper intercepts the trade had seen in years. With our deal with individuals we in fact regarded to see who was concerned and had been happy to see the Lundin household personal roughly a 3rd of the corporate. Adolf Lundin was a Swedish entrepreneur who constructed an oil and mining empire within the Seventies that has grown underneath the stewardship of his sons and grandsons. The Lundin Group made a reputation for themselves working in far-flung areas of the world with unbelievable success. In an trade the place many early-stage tasks are run by cash-strapped promoters, being backed by a seasoned group of mining executives with deep pockets may be very distinctive.

The household has a protracted historical past of working within the area, the place roughly 40% of the world’s copper is produced. Three generations of Lundins have labored carefully with a succession of presidents and different excessive degree nation ministers. They acquired the Bajo de la Alumbrera deposit within the early Nineties which turned one of many largest copper and gold producing mines of its time. The identical native crew found the Veladero deposit, which is now a producing mine for Barrick Gold (GOLD). They then picked up a big swath of land in between the area’s two well-known copper and gold belts, figuring out three early-stage exploration prospects which in 2009 had been put into an organization referred to as NGEx Sources. Because the exploration work yielded discoveries, they ultimately determined to spin the person tasks into their very own corporations. The primary was Filo Mining in 2016 which held the Filo del Sol deposit in Argentina. The Filo property was what initially attracted them to the land package deal, with turquoise-colored rocks seen from house hinting at potential copper mineralization.

Filo was in a position to delineate a improvement challenge by 2019 and launched a pre-feasibility research on the reserves that had been outlined as much as that time. They’d additionally been doing exploratory drilling beneath the envisioned pit define and some months later introduced the invention of over 1,000 meters of copper mineralization. This recommended a a lot bigger mineralized system lay beneath the challenge and opened up a pathway for future exploration. Comply with-up drilling yielded further kilometer-scale intercepts and in 2021 they launched what many think about to be a generational discovery. Along with excessive grade copper, the drill outcomes indicated distinctive grades of gold and silver. Having ample portions of byproduct metals can provide corporations extra flexibility in finally financing a challenge, because it opens up the potential for promoting the byproduct income stream for an upfront capital contribution.

The mix of dimension and grade places the asset in a uncommon class among the many giants of historical past. The footprint is really large, with a strike size upwards of 5 kilometers, and the mineralization extends to such nice depth that the corporate has needed to order particular drilling rigs to try to discover the underside of it. The corporate famously overlays the define of their challenge with maps of huge cities like New York and London to indicate its true scale. Their geologists now consider they’ve recognized a wholly new mining district that may help the event of a number of tasks.

As early entrants to the realm, the Lundin Group controls a lot of the land and lately consolidated that management with the acquisition of Josemaria Sources (one other of the sooner spinouts) by Lundin Mining (OTCPK:LUNMF, LUN:CA).

Lots of the megaprojects within the area require billions of {dollars} of capital expenditures and are usually operated by three way partnership between among the largest mining corporations on the earth. Maybe to that finish the corporate welcomed BHP as a big investor earlier this yr. BHP invested C$100 million for five% of the challenge and agreed to kind an advisory committee to assist information its improvement. Often early-stage corporations should provide a major low cost to draw giant traders, however this transaction was notable in that it was achieved at a premium to the prevailing share worth. It additionally offered the money to broaden their drill program, concentrating on a mixture of infill drilling to raised perceive the excessive grade core of the deposit and step-out drilling to show its extent. Given what they’ve found up to now, we consider it might turn into one of many largest copper mines on the earth.

The primary quarter of this yr noticed copper costs hit decade-highs amid considerations about future provide. The final two quarters have seen an abrupt shift in worth and sentiment as focus has shifted virtually completely to demand. Buyers anxious about rising rates of interest and recession dangers have been promoting commodity-related shares at the same time as their long run prospects have improved. Lead instances for brand spanking new mines are measured in years, and investments to repair future provide deficits have to be made effectively upfront. Within the present market atmosphere, the place costs are depressed on account of brief time period fears, these investments are much less prone to be made, additional exacerbating the inevitable provide crunch.

In our view copper costs will probably need to at the least double from right here and keep elevated to provide the right sign for added funding in new provide. We consider structural provide deficits in lots of commodities will result in sharply greater costs within the coming years, even when present market situations counsel in any other case. This disconnect between brief time period considerations and long run fundamentals presents a compelling alternative for traders, and we now have been actively elevating capital to deploy into these areas.