Global Sustainability Spotlight

Welcome to Sage’s Global Sustainability Spotlight, a bi-weekly newsletter covering evolving trends and issues in the world of sustainable investing. This week, we’re diving into the future of US mining, examining how China’s growing control over minerals critical to the clean energy transition could complicate America's efforts to manage its own clean energy future. Will we see a resurgence in US domestic mining, or will the US lean on key allies to counter China’s dominance?

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The Future of US Mining

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In a pivotal move, the Biden Administration's newly announced electric vehicle tariffs have ignited a vigorous debate about the strategic future of the US automotive industry. The swift rise of Chinese firms in the electric vehicle and battery sectors, propelled by significant government incentives, has solidified China as a formidable player. Yet, it's in the mining of essential minerals for the clean energy transition where China may hold an even more decisive edge. A recent analysis by The Wall Street Journal exposes this side of the clean energy transition, where China dominates the global mining scene for cobalt, nickel, and lithium. Some critical insights:

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• China commands over half of the global refined supply of cobalt (75%), nickel (58%), and lithium (67%) through both local production and majority ownership of foreign mines.
• An influx of Chinese minerals has overwhelmed the market, prompting several Western mining enterprises to scale back operations.
• Leveraging extensive government support, China has strategically secured mining agreements with resource-rich nations, often including state-backed infrastructure financing.
• In effect, China has established itself as a singular powerhouse akin to a "single-member OPEC" in the realm of mineral resources.

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For the United States and its allies, the vulnerabilities are not just limited to cobalt, nickel, and lithium. China’s sphere of influence extends to:

• Graphite (crucial for battery terminals): 74% of the global supply chain and 90% of the refined product.
• Copper (vital for solar panels, wind turbines, electric motors, and power cables): 45% of refined output.
• Critical Minerals (Defined by the US Geological Survey as 50 key substances essential to US economic and national security): China accounts for 60% of global production and 85% of processing capacity.

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In the shadow of growing US-China trade tensions, China has previously made strategic maneuvers regarding minerals, such as when it placed export restrictions on graphite anodes last year. This past use and current imbalance of capabilities highlights the glaring vulnerabilities for the US within the mining sector.

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How can America respond? Ramping up domestic mining is a logical step, supported by significant federal initiatives, such as a $72 billion loan fund from the Department of Energy’s Loan Program Office. However, widespread environmental concerns, a complex regulatory framework, and debates over land use (with a general attitude of NIMBY-ism) raise questions about the feasibility of substantial growth within US borders. Fortunately, allies such as Australia and Canada are picking up the slack, bolstered by US government support. These nations are increasingly pivotal in mitigating China’s dominance in critical mining sectors. In March, Australian Strategic Materials received a debt funding package from the US Export-Import Bank for a rare earth mining project, and this month the US Department of Defense announced a joint venture with Fortune Minerals Ltd. for projects involving graphite, bismuth, and cobalt. The evolving landscape will determine what route the US takes with regard to its mining capacities, though expectations for a quick turnaround (whether domestically or through allies) should be tempered.

Company Highlight

Ticker: FCX

Headquarters: Phoenix, AZ

Credit Rating: Baa2 (Moody’s)/BBB-(S&P)

Reason to watch: The world’s largest copper producer is in a good place due to an anticipated shortage of copper needed to fuel the clean energy transition (a Cornell/Michigan Study estimated the world needs 192 large new mines by 2050 to fuel a global Net Zero future). The company recently was upgraded to investment grade territory by S&P.

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Other stories Sage is following:

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Shareholder Issues

Exxon has successfully quashed a challenge by CALPERS and others aimed at overturning its entire board. Yet, the confrontation with Arjuna Capital and the lawsuit against the company persists. One of the accepted rights of a shareholder is the ability to file a shareholder proposal, and it is up to the Securities and Exchange Commission (SEC) to shape this rule. Exxon should be going after the SEC, not Arjuna, and by doing so appears to be trying to diminish the rights of shareholders. Will Exxon experience any reputational damage?

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Anticipation is also building around Tesla’s upcoming annual meeting. Key topics include Elon Musk’s substantial $56 billion compensation package from 2018 and a proposal to relocate corporate registration to Texas. Musk has been actively campaigning, including threatening to shift significant AI and robotic capabilities unless he gains 25% control of Tesla and enticing shareholders with a factory tour for voting supporters.

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Climate Change

The European Union’s Health Commissioner recently discussed the varied health impacts of climate change in a Financial Times interview. The conditions favorable for the spread of tropical diseases like Dengue and Zika are improving, and heatwaves are expected to negatively impact health significantly.

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In the US, climate change is having a huge impact on homeowners insurance. Costs are increasing (up 11.3% in 2023) and insurers are pulling out of high-risk areas for a variety of climate-related issues, whether it is due hurricane/flooding in Florida, wildfires in California, or wind and hail damage in the Midwest. The Consumer Federation of America estimates 7.4% of homeowners are now uninsured. Reinsurance costs are a huge part of this story, and the current rounds of rate renewals in states like Florida will help shape the trajectory of this current trend (either seeing an increase in premiums or more insurers exiting high-risk areas, both of which may result in more uninsured homeowners).

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Disclosures: This is for informational purposes only and is not intended as investment advice or an offer or solicitation with respect to the purchase or sale of any security, strategy or investment product. Although the statements of fact, information, charts, analysis and data in this report have been obtained from, and are based upon, sources Sage believes to be reliable, we do not guarantee their accuracy, and the underlying information, data, figures and publicly available information has not been verified or audited for accuracy or completeness by Sage. Additionally, we do not represent that the information, data, analysis and charts are accurate or complete, and as such should not be relied upon as such. All results included in this report constitute Sage’s opinions as of the date of this report and are subject to change without notice due to various factors, such as market conditions. Investors should make their own decisions on investment strategies based on their specific investment objectives and financial circumstances. All investments contain risk and may lose value. Past performance is not a guarantee of future results.

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