VALUE: After Hours (S05 E22): Tavi Costa On Commodities And Precious Metals, Energy, China, And Value

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In their latest episode of the VALUE: After Hours Podcast, Tavi Costa, Jake Taylor, and Tobias Carlisle discuss:

  • Can AI Help Geologists Find Gold?
  • Investing Lessons From Earthquakes
  • This Is A Value Investing Market
  • AI Closes The Gap Between Large And Small Businesses
  • Emerging Market Assets Ridiculously Cheap
  • Lack Of Vision In Large Gold Mining Companies
  • Robust Market Ahead For Precious And Base Metals
  • The Future For China’s Commodity Market
  • Gold Will Become A More Defensive Asset In Portfolios
  • Why Have Commodity Prices Been Supressed For So Long?
  • Is Pertobas A Potential Pick For Value Investors?
  • Comparing This Commodities Market To The 2000’s
  • The Impact of China’s Currency Devaluation

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Full Transcript

Tobias: This meeting is being livestreamed. This is Value: After Hours. I’m Tobias Carlisle, joined as always by my cohost, Jake Taylor. Special guest today is Tavi Costa of Crescat. Are we going to talk precious metals, commodities-

Jake: Macro?

Tobias: -the economy? Macro? Yeah.

Tavi: I’ll leave it up to you guys. Good to see you. Yeah.

Tobias: Welcome to the show. Let’s talk a little bit about your background. Where are you from and how did you get into where you are now?

Tavi: Born and raised in Brazil. Let’s see. My dad always owned a small business, actually back in Brazil, and I was always involved with that. Played tennis in my teenager times, and then finally got a scholarship to play tennis in the US. Moved to the US, finish up college, and then started working with finance. I was fascinated by finance, in general. I don’t know why I fell in love with reading newspapers for some reason. I would read three, four, or five newspapers a day [laughs] about finance, and then eventually got into the world of hedge funds and money management and became a partner at Crescat Capital.

Now, we are essentially managing three different funds currently a precious metals fund, a global macro fund, and a long-short fund. We’ll be launching two other institutional funds soon. So, that’s my two minutes’ version of myself right now.

Tobias: That’s very cool. I always give a shoutout to the crowd, where everybody’s coming from. Santo Domingo, Dominican Republic, what’s up? First in the house, I think. Dubai, what’s up, Samson? Milton Kenes. Tallinn, Estonia. There’s a good one. Tallahassee. Lake Lure. Bendigo, what’s up? Cardiff, Wales, hello. New Brunswick, Canada, Moncton. Columbus, Ohio. Brussels, Belgium. Toronto. Portugal. There’s a good one. Surf Town, good for you. Minnesota. Rocklin, California. Kingston, Jamaica. There we go. Good stuff. Dublin. Jupiter, Florida. India. That’s a good spread. Makes it sound like we got a cast of thousands here. That’s probably every single person.


Jake: Yeah, you got all of them. Way to go.

Tobias: And New York. We finally got someone from NYC. We’ve cracked it big time. So, Tavi, it’s been a mixed bag for commodities over the last decade or so. We had the super cycle in the early 2000s. I remember that very well.

Jake: Remember the BRICS. Remember when that was a–

Tobias: Yeah. Tavi’s a BRICS alumnus. Alumni.

Tavi: [laughs]

Jake: Yeah.


Tavi: Tell me about it. Yeah.

Tobias: Talk to us about how do you see the world of commodities and prospects for commodity equities over the next 10 years.

Tavi: Well, I think there’s some similarities to the early 2000s, but some also key differences, and I think would probably be the longest and maybe strongest commodity bull markets that we may experience in the following years, just especially in the precious metal space, I think, and metals and mining in general. I think really all commodities look attractive, but some of them I think are a little more asymmetric than others.

The similarities with the early 2000s would be, we’ve had China back in those days entering the WTO and really building its economy to become the manufacturing plant of the global economy. And today, I would say a similar trend is happening across most of the G7 economy. So, rather than one, you’re seeing lots of major economies creating a similar setup for those commodities. And so, as they go above and beyond to reduce their dependency of authoritarian regimes like China, and Russia, and other Middle East, and so forth, I think we’re at the early stages of that. So, that is an important aspect of the demand for commodities.

You look at the industrial production in the US has gone sideways for the last two to three decades. It’s hard to believe that it will continue to go that way, if we see those trends of going onshore or bringing back manufacturing to the US over time and other developed economies as well. So, I think those are some of the similarities.

Comparing This Commodities Market To The 2000’s

Tavi: The difference with today perhaps is inflationary regime. I do believe we’re entering one which we didn’t really enter back in 2000. So, I don’t think, especially look at profits of companies’ wages and salaries were at a downward trend relative to profits at those times.

I think we’re going to see a big shift to what we started to see recently, and I think it’s going to continue to go to the upside. Those trends are usually very secular in their nature, and so it’s hard to believe we’re going to see a reversal of those movements. So, the wages and salaries issue, given the fact that we have higher cost of living is likely to be much more persistent than I think people believe. That will eat on margins and create, I think, unleash other trends that are going to be interesting as well.

The second thing, and I don’t think we saw in the early 2000s– Well, we saw, but I think to the degree that we’re seeing today, certainly not was this chronic under investments in natural resource companies and industries. I think we did see that back in those days. But when you adjust for GDP levels today globally or in the US, you’re going to see the amount of spending that we need to have those projects, producing assets of any commodity is going to be taking a while for us to see those. Knowing that geologically it’s becoming more and more challenging to find high grade and economically viable resources to become producing assets. And so, that’s the second thing.

The third is irresponsible fiscal spending. Believe it or not, in early 2000s, deficits were not a problem as much as they are today. Deficits today, if you just think about where we are at 7.3%, not even including where a trade balance is to calculate the current account problem. But just looking at the government deficit today, our fiscal deficit is way larger than any other time we saw back in the 1970s, for instance, and not even comparable to what we saw back in the early 2000s. So, reckless amount of fiscal spending, I think it’s going to fit into this inflationary problem.

Fourth one is deglobalization. I would argue that 2015, 2016 is maybe where we started to see some conflicts between US and China, and that spread it to other issues that we see in the global economy. Now with Russia and Ukraine, you got the Middle East having issues with other economies as well. And so, we’re in a very different world than we were back in the early 2000s in terms of that. And so, the deglobalization trend is certainly inflationary at its core. So, all those things, I think, are the differences from the early 2000s, which makes me believe that having tangible assets really cheap relative to financial assets in a day like today, I think we’re going to see very much of a long-term, and probably a lot stronger and more robust trend where commodities will outperform financial assets in a big way in the following year. So, I’m really focused on that trend because I think there’s a lot of ways to capitalize on that.

Tobias: [crosstalk] Sorry, JT.

Lack Of Vision In Large Gold Mining Companies

Jake: I was just going to say, I’ve owned gold miners at various points over the years. One of the things that’s always drove me a little nuts is that, it seems like when the revenue side of things is starting to work better, the cost side goes up just as much, and I never get this operational leverage that I’m anticipating like, [Tobias laughs] “What the hell is going on there? Why does that keep happening?”

Tavi: Well, it’s a good question. I think it has to do with a lack of vision of a lot of the major companies. While we own in our large cap strategy some of those names, because we’d rather own that than not have any position in metals and mining in our funds, we avoid the major companies. The reason for that, it has to do with the lack of vision. If you look at their assets in general are all deteriorating in quality in a large way. And on top of that, what you find is– well, they haven’t really focused at all on growth and production growth whatsoever.

And so, majority of those, if you looked at the average grade of most of their resources has been in a secular decline as well.

I think it’s a reflection of what we had over the last years in terms of the period of capital bleeding that we’ve had in this industry that caused a lot of investors to become more demanding of a conservatism type of approach. I think we went too much on that side. Now we’re seeing Capex being at very depressed levels at a time when gold prices are near all-time highs today. And so, this is creating a lack of MNA activity, which recently has started to occur, but really among the majors mostly, not really between majors and smaller businesses. So, at some point, it is our belief that we’re going to see the majors having to be or being forced to acquire some of the high-quality assets in early stages of this industry.

I think the entire industry will do fine, but I also believe that there are some fundamental issues happening with most of the major companies. When you think about from a macro perspective looking at this and you know that most of the companies in the space, you look at Barrick’s production of gold and Newmont’s production of gold, the majority of them are also in multi-year declines when it comes to the amount of ounces they’ve been producing. You look at the average grade, again, those are also deteriorating over time. [crosstalk]

Jake: I’ve got a stat on that actually, that like 1990, a truck carrying 100 tons of dirt and rock would have about 20 ounces of gold mixed in gold ore, and then by 2015, that same load might have only 5 ounces.

Tavi: Yeah. Look, in a way, yes, gold is maybe less of a use, industrially speaking, just because of the price. Not because of its properties. But if you looked at in the same nature with base metals and others like silver that have a larger industrial demand, it’s a little scary in that sense. When was the last time some of the majors really started a new project that became a new mind, and that will continue for decades in terms of generating cash flow for those businesses? We haven’t seen any of that in a long time. And I’m talking in a large scale, not smaller scale.

So, look, I think this is all part of the issue. A lot of investors institutionally speaking like to initially focus in the large companies. It’s the easy path. When you get into this industry, you look at the major companies, and maybe you buy some of them. All of us like to do is looking at value metrics. Some of them look more attractive, especially relative throughout history. But having companies return more cash to shareholders through dividends and buybacks relative to what they spend on their businesses knowing that they have aging assets with deteriorating quality, it’s not what I would like to be demanding as an investor.

I think there’s a problem within the board of directors of those companies. We, as investors, need to start demanding that. We, as investors, need to start demanding growth and production and so forth. There’s a reason why the miners are really lagging relative to gold. Now do I think the same should be occurring with some of the smaller businesses that own high-quality gold ounces in the ground that could potentially become major mines and also trading at very low? There’s a reason as well why they are trading at those levels. The majority of that, it has to do with inefficiency of the market and just lack of geologists. How many geologists do you guys know that are really good at finding exploration assets? It’s really difficult to find. It’s a very niche side of the market.

I think it’s very clear to see those price distortions that we’re seeing in terms relative to what they have, especially throughout history. So, for us, it’s an opportunity. I think there’s going to be a lot of ramifications of this excessive conservatism that we’re seeing in this overall industry.

Can AI Help Geologists Find Gold?

Tobias: Is the lack of the lower grades and just the reduced supply? Is that we’re just getting to the end of what we can find? Because I think that technology is so much better now for finding deposits. It doesn’t seem to be yielding much more. What’s going on there?

Jake: Coders and not geologists.

Tobias: Yeah.

Jake: No, I’m just kidding.

Tavi: AI has helped in some senses, actually. Especially, I’ve seen some companies that have tried to apply that. I know some other businesses actually provide a service for that. It certainly helps, but I don’t think we’re yet in a place where the exploration endeavor is as easy as it may sound. It’s extremely difficult. When I hear people talking about bringing gold and other things from Mars, and I’m like, “We can’t even get it stuff out of Idaho, how are we going to get stuff out of Mars?” And so, maybe it will happen in the future. I’m not saying it won’t, but I think it will require a lot of understanding.

A great example of this is lithium, for instance. Lithium is incredibly difficult to extract. There is this new understanding of or lack of understanding really of, I think, it became a popular view. It’s a question we get the most from institutional investors. We love what you’re doing, why you’re not investing heavily on lithium?

To me, it’s attractive in a sense. But the valuation of the same deposit that has nickel, cobalt, and other things that will be just as useful as lithium are trading peanuts relative to lithium projects. And so, as a value investor, those are things that are interesting. To me, it was very difficult to start really investing in the space, because I also like cash flow, I also like bottom line improvements and so forth.

When you buy in an exploration business, you get nothing of that. Essentially buying a business or investing in a company that is going to be continuing to dilute themselves over the years, that capital is used in the ground. The beauty of it is that it’s very different than the energy space. It requires $5 million, $10 million. You can create a very, I would say, a very successful, potentially drill program for a season relative to energy where you have to spend $150 million just to try to work on something. This is really because of how deep you have to go for energy projects usually relative to metals and mining as a whole, where I think it became more, I guess, a lot easier to understand the space was how takeout prices happen in the space.

Tavi: We did whole research on this recently looking at different parts of bull markets, neutral markets, and bear markets to see how do takeout of exploration businesses really happen. Usually, what you find is that, basically the mind cycle of a company or the life cycle of a company tends to be, they acquire a property, they start drilling. If they find something, you create this speculative period.

That’s where most of the billionaires in the industry made their money. It’s not in producing, not in development side. It’s really on finding new discoveries. Well, Pierre Lassonde made his money. That’s how Tom Kaplan made his money. The list is very long. Ross Beaty made his money on that. So, it’s really interesting how they make money first there, and then they move towards the development side and the producing side after creating their wealth.

Essentially, in that speculative mode that you see as they define those resources, what you tend to see is that the valuation of the company tends to be taken out at about 20% of the value of minerals in the ground. Obviously, that needs to vary because it varies on the grade, it varies on how much capital will be required to get that mineral out of the ground, and so forth. We try to apply a lot of those metrics to understand financially what is it going to take to get those minerals out of the ground. However, that will also depend on where you are in the cycle. We’ve seen in bull markets, projects be taken out at 30%, 40% of the value of the middle in the ground. That is an incredible price, if you’re able to get that.

And also, seen even sub 5% in very brutal bear markets. Hope you guys are understanding what I’m referring to, but that’s really the price of the acquisition relative to how much minerals are in the ground, and what’s the value of that in the ground exactly. So, as you define those resources, the value of that company will trade according to that. And so, you get to that 20% level is a good target in average throughout history, regardless of what market you were in.

The Future For China’s Commodity Market

Tobias: It seems like a lot of the trends that you were discussing at the start, and certainly that was the case for the early 2000s. 2000s, it was China is going to be consuming all of these commodities. It’s a China bull market. That’s where the super cycle comes from. It still seems to me that it’s dependent a little bit on– A lot of the things that you mentioned before, de-dollarization and so on was largely driven by China. There was this talk for a while that China was going to come out of the COVID lockdowns, and there was going to be this big China reopening. Has that happened? Is it going to happen? Has it fallen over? Is it not going to happen? What’s the story there? What’s China’s role in all of this?

Tavi: I think from most of the commodity bulls, I have actually very different view from most of those folks. I don’t think China really has the upper hand in this. Instead, I think it’s all the way around. If the bullish thesis is that China is going to be reopening their economy and other things, it could potentially be a case in the short-term. I’ll certainly not be buying exploration stocks with a five-year, seven-year mentality of owning those projects over time, if that’s really the overall thesis behind it. I think we’re talking about BRICS at the beginning of the conversation, I think more than any other time in the last 20 years or so, I think BRICS are very divided. You have commodity led economies like Brazil, geopolitically neutral and so forth.

I know Brazil lived there, and know how politically corrupt it could be, and it is, and it’s always going to be, I think. However, everything has a price. I think Brazilian assets are incredibly cheap. And then you have China in a completely different setup. It’s authoritarian regime. It’s a commodity importer. If you believe of a world that I think we’ll see, which is, where tangible assets actually appreciating in value significantly relative to financial assets. I don’t think this happens every time. Often when I talk about gold, people like to say, “Well, but what did gold do to you 20 years ago?” It’s really not the point. The whole point is the fact that it hasn’t really performed as well as other assets in terms of inflating value that we’ve had over the last two to three decades.

I think China is going to be in a difficult situation. We’re actually firm believers of the Chinese yuan devaluation thesis as well. We’ve always been in that camp. I think it’s a good hedge relative to owning a big book of commodities as well, because that could potentially be a short-term shock for commodities. If we see the Chinese one trading call it an eight, nine handle, which I think it’s unthinkable for a lot of people, but I certainly think it’s possible understanding how emerging markets work and seeing how much leverage is in China, and also understanding the potential for social unrest and other things. I think there’s definitely a significant risk of a major devaluation of the currency still. So, I have a hard time being a China bull overall.

The Impact of China’s Currency Devaluation

Tobias: What happens when we get that devaluation? How does that impact commodity pricing and so on?

Tavi: Well, look, first of all, I’m not claiming it will happen. I’m just thinking the probability in FX markets, it certainly doesn’t reflect. Something will happen. I think that’s an interesting risk reward idea, especially for a portfolio like ours that runs a large percentage of it on exposed to commodities. I think would be, on a net basis, negative for most cyclical commodities. I don’t think it would be as negative for precious metals, especially gold. I do think I know this is a gold bug. When I got into this industry really, I wanted to refresh the whole thesis. I think this gold bug mentality has been bashed around for so many years, and it needed to be updated in terms of a thesis, and requires, I think, more critical thinking in terms of what’s happening in the macro environment to understand that.

But one thing that comes from the gold bug mentality that I agree with, and it’s certainly the case happening is what’s happening in terms of the purchases of gold by central banks. They’re not buying bitcoin, they’re not buying silver, they’re not buying copper, they’re buying gold. This is a very interesting proposition, because it’s been the case over the last 20 years to 30 years that in order to enhance your central bank balance sheet, we’ve seen most of those institutions acquiring or accumulating US Treasuries. And so, this is an important reversal on the trend where gold is likely to become a larger percentage of their balance sheets over time. So, I think that trend is unlikely to be reversed anytime soon either.

I don’t think gold would be really hurt in this environment where China could be devalued. I think copper could have issues. Oil could have some issues. Would I think that’s the end of the trade? No, I think it would be a great opportunity to be buyers of those assets given the fact that we understand for a fact that the supply side is incredibly constrained right now and it’s likely to be the case for many years.

Why Have Commodity Prices Been Supressed For So Long?

Tobias: Why do you feel commodities have been so suppressed for so long? I’m not saying suppressed in the sense that there’s somebody actively pushing them down. I just mean in the sense that it’s been– [crosstalk]

Jake: Underinvested.

Tobias: Yeah, underinvested. Like, no price performance, no price action. There’s nothing to attract anybody in. Whereas we’ve had all of these other– The story was always for gold and for commodities that you get inflation running hot, and that then shows up in commodity prices. Inflation has been as hot as I’ve seen it in my career over the last few years. We haven’t seen anything in– It hasn’t filtered through to commodities. Has crypto stolen all of the–? [crosstalk]

Jake: Pressure.

Tavi: I think it’s a combination of things. I’ll try to answer that question. Very good question. One thing I always thought was interesting is people love to say that China is a major buyer of commodities, and has the upper hand on things and so forth. What you’re referring to, of a period of where prices of commodities have been essentially suppressed over the last, you can call it more than a couple of years. It really is a decade, depending on the commodity. This movement in commodities, on the upside, we’ve seen is really for the last two to three years. But if you go back further, obviously, we’ve had a secular decline in most commodities. At a time when supposedly China was growing at a substantial amount every year, and also supposedly buying a lot of commodities.

I don’t understand if that case was so true. The demand certainly wasn’t necessarily driving prices over time as well. But I think the overall issue with commodities is, number one, I’m not a commodity bug in general. I don’t think you want to own commodities every time throughout history. I think those are very particular, unique periods that you want to be owning that. Usually those are inflationary regimes. I think we’re entering one here. So, we just haven’t had that over the years. I think that’s certainly played a role.

Number two, I think also just the construction of portfolios has really avoided or almost not allowed large institutions and capital allocators to own tangible assets. We’ve had a declining interest rate environment for over the last 30 years that really helped to inflate the value of most of equity markets, as you guys know very well. So, technology sucked most of the capital flows from the commodity space, and rightly so at those times. But I think we’ve had enough of that now, and it would be natural to see that trend reversing here in the medium-term and long-term as well.

I think this is similar to what we saw in the 1910s, the 1940s, and 1970s. Some people like to look at analog a little closer than others. I like to look at all of them. One thing that you can find in common with all those, regardless of what happened, some of them you had higher debt, some others you had higher inflation, some others you had more sporadic inflation, others you had the three waves building up on themselves and becoming larger over time, gradually accelerating, which was the 1970s.

One of the things that you see in researching those periods is that tangible assets did outperform financial assets. The only big difference with today is financial assets back in those periods was not nowhere as expensive as they are currently. It’s hard to make a case looking at CAPE ratio where they are for US equities approaching 30 or so, if not higher, depending on the sector you’re looking at. So, I think it’s just hard to be very looking at this as a compelling manner to be deploying capital in this part of the market. I think knowing that bottom line improvement and fundamentals may start finally begin to matter again.

I think some of those natural resource industries that are finally becoming more profitable over time are probably going to benefiting from this in a big way. A growth to value transition you guys talk a lot about as well. All those things I think are involved and why commodities have been so suppressed over the years.

Tobias: I’ve been talking about it for a long time.


Tavi: Yeah. [laughs]

Tavi: I just gave your speech, I guess.


Investing Lessons From Earthquakes

Tobias: JT, you want to do your veggies?

Jake: Yes, sir. So, this week’s veggies, we’re going to call this like the big one for fun.

Tobias: Value growth finally happened. The big way.

Jake: No. Inspired by this, actually, a book recommendation from Todd Combs which is called Ubiquity by Mark Buchanan. And so, I’ll set the scene here. It’s November 1990 in St. Louis, Missouri. It’s just a month before Christmas. You’d expect the shops to be crammed with people buying gifts, getting their Christmas decorations. And yet, all the stores are barren, the streets are empty. Where is everybody? It turns out that they’re all at the supermarket, and the hardware store, and they’re cleaning out every shelf preparing for Armageddon. Why is that? So, to understand, we have to rewind the clock a little bit back 179 years actually.

On December 16th, 1811, the strongest earthquake ever recorded east of the Rockies hit about 150 miles southeast of St. Louis in a town called New Madrid. It was upwards of an 8.2 in magnitude quake. This quake was felt all the way up to Canada. It rang church bells 1000 miles away in Boston. It caused the Mississippi River to run backwards for a while, [Tobias laughs] which is pretty freaking incredible. And then there was an aftershock later that day of 7.4 magnitude, and two additional quakes of a similar magnitude early in 1812, so like a month later. Reelfoot Lake in Tennessee didn’t exist in 1810. It was a result of these earthquakes. It created an entire lake.

So, let’s go back to 1990. Dr. Iben Browning is a PhD, business consultant, author, self-proclaimed climatologist, whatever that means, he predicted that there would be a massive quake in the New Madrid zone between December 1st and December 5th of 1990. His theory was like the Sun and the Earth and the Moon in this rare alignment that would create these tidal forces which would stress the rocks in the New Madrid zone past their limits and cause an earthquake. The entire southeastern US sat on a hair trigger, and this planetary gravity was about to unleash hell. So, perhaps because of the PhD after his name, and never mind the fact that his doctorate was in zoology, but the media ran with Browning’s prediction, and they caused this mass hysteria. All across the Mideast US, schools were closed, emergency crews stood on high alert, catastrophe plans were hatched, extra insurance coverage was purchased. And of course, as we all know, there was no earthquake. So, what happened?

Now, the process that drives earthquakes is no mystery. It’s basically, imagine, if the Earth was this big ball of mud, and the outside of it had dried and it was a crust, and it had this dried and cracked crust around it, and these cracks run all over. Some are large, some are microscopic and they’re all connected to each other. And inside this ball remains liquid, which as you know the Earth is liquid inside, and it’s constantly agitating the surface causing these pieces to move around and collide with each other. The frictions build up, and release, and the rocks are smashed together or torn apart. Everything that’s going on in the ground is fully deterministic and predictable in principle. It’s not much more than just rocks pressing against other rocks, right? And yet, we’re unlikely to ever be able to accurately predict a large earthquake.

There have been more than 4,000 earthquakes reported in the New Madrid seismic zone since 1974, and none of them have been newsworthy. There have been 19 earthquakes of above a 1.0 magnitude in California in the last 24 hours. [Tobias laughs] So, earthquakes are happening– The Earth’s surface is constantly moving. We can never tell which of these first tiny little slipping of rocks will cascade into a bigger catastrophe. There’s no way to know. There’s hundreds of millions of places in the Earth’s crust where these slipping events are just about maybe to happen, and cause rocks to be pushed past their limits, and push that stress then to another fault that then cascades, and it gives way, releasing energy into the next.

So, if you think that rocks slipping past each other in a very deterministic manner is difficult to predict. Imagine if those rocks had feelings about the pressures that they were under. Imagine if there was contagion amongst the rocks when it comes to fear and greed driving their behavior. That’s what we face when we’re trying to make predictions about the economy and markets. The sheer number of people with all their own individual ideas, and tastes, and utility curves, and hopes, and apprehensions, and all the companies with their own individual goals and strategies and foibles, and all the well-intentioned officials who are tweaking all the knobs, it’s no wonder that it’s impossible to predict these things.

I believe it’s possible to predict the what of potential financial catastrophes, excessive debt, high valuations, like, mean reverting data series that are pushed at historical extremes. But I think predicting the catalyst and the win of any of these meltdowns is really not that much different than trying to predict the next big earthquake. As Buffett has observed, all of that stuff is important, but it’s unknowable. And so, he doesn’t spend any of his time or brain power trying to really predict the win. He just prepares for it. I think that’s really good advice for all of us. So, there’s your earthquake analogy to financial markets.

Tobias: The Signal and the Noise, in Nate Silver’s book that came out after he got that first election right. He got one election right in a row and got the book out, which is the way to do it.

Jake: Genius.

Tobias: He said that as much as they’re not predictable, if you have a certain level of seismic activity in an area, then it’s more predictive of the next level. So, if you have a lot of 3 on the Richter scale, then 4 becomes more likely. If you have a 4 on the Richter scale, then 5 and so on.

Jake: Yeah.

Tobias: They used that to analyze the Bay of Japan, and they said there’s so much activity there, there should be these 8 or 9 gigantic earthquakes there, and there hadn’t been one. And so, they said is it because the floor of the Bay of Japan is sandy, and all these other things. And then, of course, Fukushima– the earthquake that caused the Fukushima meltdown came along and they said, “Oh, no, it just turns out you need a long enough period of time.” They didn’t have enough time to capture the possibility of that outcome. So, now it happened and now it’s in the history books.

Jake: 1970s Japan, they were incredibly worried about earthquakes, because they had a long history, obviously, of devastating quakes throughout their history. Like, 1970s, there was a huge push to be ready for the next big one. And then, of course, it just took quite a bit longer to happen. I think you let your guard down eventually. Everything seems like it’s hunky dory and an entire generation, nothing happens, which geologic scale is a blink of an eye.

Tobias: You guys are permabears.

Jake: Yeah, exactly. You’re a permabear if you’re worried-

Tobias: No earthquake.

Jake: -about the 1970s earthquake.

Tobias: I had a friend who told me this story, but he said that when he was in high school, there was some space junk that was expected to crash into Australia somewhere. And so, he sold this insurance policy where he had this dunce cap essentially, that you had to wear that advertised his insurance policy. If you were struck by space junk while you were wearing this dunce cap that he made, he would pay a million dollars out to anybody. And of course, everybody wanted to wear one, because they saw them being advertised and the chance of winning a million dollars. So, that’s a pretty entrepreneurial kid.

Jake: Wow, what a play.

Tobias: Pretty smart.

Jake: Yeah.

Tobias: It didn’t happen.

Jake: [laughs] How much money do you make from that?

Tobias: I don’t know.

Jake: What premium did he charge?

Tobias: Much money. Anything really, it’s all good.

Jake: That kid grew up to be a [unintelligible [00:39:10]. [laughs]

Tobias: That guy has a law degree, a medical degree. He’s got a PhD in something as well. He’s a smart guy. Anyway, now we just got to segue on from that.

Robust Market Ahead For Precious And Base Metals

Tobias: Let’s talk macro, Tavi. Let’s hear your views on global macro. What are the opportunities and what are the threats? Easy one.

Jake: Layup.

Tavi: Well, I try to think about on more of a thematic approach to this. I think on the long side, I think there’s a lot of things that you could be looking at. I think their energy shortage is really interesting one, as far as oil prices, and particularly energy companies, and valuation of those businesses being so cheap with– Almost feels like the terminal rate being priced in the markets for those companies is three to five years, because some of them are trading at ridiculous free cash flow yields. And so, I think that that’s one way to deploy capital. Second– [crosstalk]

Tobias: Just before you move on from energy, we saw a little run in energy and then it softened up for at least the last 12 months, would you say?

Tavi: Yeah.

Jake: Is that recession concerns that drives that?

Tavi: I think so. Look, energy just had two of its best years in the last 30 years in terms of annual performance in 2021, 2022. So, you can say that maybe we were due for a little bit of a shakeout before we go higher again. But has the thesis really changed? I don’t think so. Gas certainly has reacted in a way that I wasn’t expecting gas to be as cheap as it is right now.

Certainly, it wasn’t in the camp as well of the end of the world and other things either. But from a probability perspective, again, I wasn’t expecting that gas to be as cheap as it is currently. I don’t think that thesis has really changed as far as production profile as a whole has been pretty much flat over the last months. You look at operating rigs has been starting to contract on a three-to-five-month basis, first time since 2020 or so.

Yeah, it doesn’t surprise me much that. I think when you have a commodity cycle, usually it starts with a few commodities and then spreads to others. And so, we had the energy part first and then now I would say, most of it has been driven more towards gold in the last months.

I am a strong believer that metals and mining is probably one of the cheapest parts of the commodity space, especially given the even longer period that it requires to be adjusting or to be increasing supply over time. It takes over an average 10 to 15 years to go from exploration to production. That is not even a good step, because majority of the companies that you’re looking at, you’re not really including– It’s really survivorship bias, because majority, there’s a bunch of companies that didn’t even become a mine for all the reasons. I just find it hard to believe. We’re not going to see that translating to a real robust market for precious and base metals over the next 5 to 10 years.

Now, I remain very focused on that part. I think agricultural commodities also had a big run mostly in beginning of 2022 and maybe late mid part of 2021. We’ve seen that market also go sideways recently. But if you look at the prices of commodities, especially the equal weighted commodity index, we had a 50% increase in prices and then we went sideways recently. So, since those periods, yeah, there was some volatility given the fact of the war and so forth. But still, if you looked at prices, they’ve been going sideways for a year or so. I think it’s quite bullish actually. Nothing has really changed from a supply perspective, and the demand thesis I think remains very strong. So, I think this is quite attractive.

Gold Will Become A More Defensive Asset In Portfolios

Tavi: So, going back to your question then, unleashing a lot of thematic ideas, metals and mining would be one. Electrification metals being part of that global fee of the basement is a large one, where gold is likely to become more of a defensive asset in most 60/40 portfolios. I think that will create a large appreciation in gold prices that can certainly not reflected in a lot of exploration stocks today. You can even make money in exploration stocks that are not related to gold prices at all, just because most of those companies being priced for failure today. So, basically, stock picking and being activists in that side of the market, I think can pay off tremendously and one way to unlock a lot of value. So, this is one part of where we have been spending most of our time.

I think separately, I said Brazil is another one. But more separately in the sense of more perhaps, I would say even biotechnology industries look quite attractive as well. A lot of those companies’ trade below cash today. I think we have recently hired actually a scientist to help us to advise in different parts of the industry. We’ve been messing mostly with developers. So, comparing with the mining space, you have explorers, developers, and producers. We’ve been investing most of our capital in businesses that are at later stages of a drug development, and very close to bring that into the market, and are trading a very attractive multiples relative to history. So, I think that there are a lot of opportunities there, especially with AI and other things that are likely to be helping a lot of those businesses.

AI Closes The Gap Between Large And Small Businesses

Tavi: From an AI perspective, I think it surprises me to see a little bit of this mega cap rally relative to other things. Main reason for that is because I think AI is an enabler of capacity in general for smaller businesses to close the gap between small and big businesses. When I think about what I use for AI on my daily basis, it’s almost like a perfect assistant. It almost feels like I’m working with hundred people helping me to come up with the best formula, the best variable, the best way to write something. It’s really interesting how it helps me to become a better version of myself. That is essentially why you hire people, right? To guide you and help you.

Tobias: Yeah, and help yourself.

Tavi: So, think about back in the days. Before the internet, you’re starting a business, essentially you needed to acquire or rent a place or buy a place and start your business, whatever it’s a service or a good that you’re selling. With the internet, it allowed us to essentially not have that physical location. Perhaps, you’re just able to start a business online. That was, in some cases, a much easier way of lowering that barrier to begin a business. Some people make their lives with a YouTube channel. How many people do you really need, depending on the type of channel you’re running? It’s something that was unthinkable 20 years, 30 years ago. There’s a lot of people that make a lot of money just doing that.

So, now you think about today with the AI changes, it’s just leveraging that up. It’s not only easy now for you to open a business, now you have an assistant that is for free, essentially, to help you and guide you to accomplish what you’re trying to accomplish as a business. And so, to me, it’s an enabler of a lot of skills. In that sense, I would think that it should close the gap of a lot of things. It should close the gap. If you extrapolate that thesis, it should close the gap between mega companies and smaller businesses, number one. So, I think for stock pickers in a small space, like, we are trying to do with metals and mining, I think you could do that in other industries. I just don’t have the time to do it all. But I think there’s great opportunities in that side.

Jake: That’s an interesting observation, because it feels like the market is completely going the other way right now with dumping anything small and–

Tobias: Yeah.

Tavi: I would agree. And also, think about emerging markets. Should we have that large of a gap between the two? If you’re using AI and allowing you to also close the gap between business capability in the US versus a business capability in the place like Brazil or Europe or I don’t know. Those are very important questions. I think valuations are not reflecting that yet. We might see that over time and that will create a lot of opportunities too.

Jake: If we use electricity as the analog for the physical world and maybe AI is the electricity of the digital world. I’d be curious, as a thought experiment, did electricity flatten the world more or did it make it more have and have nots? You know what I mean? Is there any reason why, let’s say, there’s a first mover advantage for, let’s say, like a US company as opposed to an emerging market company that has access to AI.

Is Pertobas A Potential Pick For Value Investors?

Tavi: Well, I think there are still clear advantages of being in the US versus other places from a lot of different ways, a rule of law bases, and other things that I think allow you. And also, I think the level of quality of labor is certainly different than a place like Brazil, for instance. However, if you look at the valuation spread between US companies, same business. In the energy space, look at the energy space, for instance, even, which I think is really cheap even in the US relative to Brazil or industrial businesses.

Tobias: Petrobras– [crosstalk]

Tavi: Yeah.

Tobias: What do you think about Petrobras? Because at one point, it was planning to pay out more in dividends than– It’s like three years, you get your capital back in dividends.

Tavi: We own a little bit.

Tobias: [crosstalk] You think there’s some political risk there, massive political risk?

Tavi: I wouldn’t call it massive political risk, but there’s definitely a very large relative to a normal energy business. I think what you get that not a lot of people appreciate on Petrobras, because Petrobras usually comes through a lot of value metrics. If you run any most of value metrics, I think you’re going to see that Petrobras certainly scores very high in those ways to analyze businesses. But I think one thing that perhaps is understated is also the quality of their acreage. I think it’s from my understanding is one of the best assets that most businesses own across the globe. And so, it is not operationally efficient relative to other places. So, you compare to Shell, Exxon, and some others, certainly, they’re not nowhere close to being as efficient, but the quality of their assets is perhaps even better.

So, there’s some political risk indeed, and I think it could be problematic. It’s interesting that you can find some businesses in Brazil that are actually acquiring some of their assets. They’ve been divesting some of their high-quality assets, believe it or not. Some of the private companies that are not obviously state-owned businesses are starting to pick those up, and those can become very interesting businesses. We’ve been focusing some of those as well. I think there are some of that will be interesting.

Petrobras, I’m not sure I would own it necessarily just because of the dividend, although it’s very attractive. I think there’s other private businesses like [unintelligible [00:52:33] for instance, that also pay high dividends, but are privately owned, first of all, also privately meaning, it’s a public company, but-

Jake: Not state owned.

Tobias: -not state-owned company. Sorry, in Brazil, we call it private in that sense. I think it’s a much more attractive company than Petrobras, but anyways. I forgot where we were talking. We were talking about AI, I guess, but anyways.


Tobias: A lot of this is predicated on some sort of run inflation. I saw that truflation had a print today that said that, “Inflation was approaching 2% year on year.”

Tavi: Yeah.

Tobias: We’re clearly not shrinking back to where we were. But what’s your view on inflation from here?

Tavi: My view on inflation is, a lot of things surprised me. I’m not trying to say nothing surprised me. A lot of things have surprised me recently. But I don’t think the deceleration of inflation rate growth has been surprising. I think we were supposed to see some of that base effects, and some other things, especially commodities shouldn’t have just an ongoing run up. We should see some pauses. We had two years of energy, prices going up. It would be normal to see a sideways market for a while, and then resume the upward trajectory. The same goes for agricultural commodities and others. But when you look at the reasons of why we’ve had inflation, some of that was sporadic, perhaps related to the supply issues we had with COVID, certainly the policies we’ve had.


Tavi: However, some of those forces, I don’t think they’ve been fixed. If anything, in terms of the natural resource industry, the fact that we’re raising rates and tightening monetary conditions, if anything, has just made access for capital very difficult. Now we know that for a fact, it’s been very difficult to raise money for most of those companies to put projects into production and it’s become very expensive now. In terms of even cost of debt, obviously, it’s been a major shift in that direction. So, I’m not sure. I think the demand risk has played a role here, and it could play more of a role in the near future as far as potential for the recession and other things. However, I think that the foundation of thesis, you’re saying that the difficulty of predicting things, I couldn’t agree more. It’s very difficult.

This Is A Value Investing Market

Tavi: If you looked at the commodity space in terms of the chronic under investments in natural resources, and looking at aggregate Capex, things I was looking at back in 2018, it’s pretty obvious. We would have a bull market on commodities. The question was, what was the trigger? The same way, it seems to me obvious that it’s going to be difficult to maintain the returns in equity markets for the next 5 to 10 years given where valuations are. Now, what’s the trigger? I don’t know. Would I, as an investor, raising money today, be deploying capital in equity markets in a heavy way, particularly in overall markets like the S&P 500 index and other things like NASDAQ? I don’t think so. I think this is obviously always going to be a stock picking market, but today, more than any other time perhaps, and starting to see finally again, the value investing principles being rewarded here.

There’s a thing that I calculated here recently that is interesting in the energy space, because it’s the first market to really develop in the commodity side that I think it requires closer attention to, what we were the companies that really performed very well in that camp. I suggest you guys do that research as well, because I know you guys are really into the value side as well. But what I found is that majority of the companies that did better in the energy space realm were really the companies that were aggressively doing Capex, aggressively increasing production. In other words, not being conservative. That is almost the opposite of what I see in the major companies in the gold space.

I also noted that, if you look at the companies doing lots of buybacks and dividends, they’ve been performing much less than the companies are being aggressive. You may say, “Well, that’s maybe market cap related. No, larger companies maybe returning more capital to shareholders, smaller businesses may be more aggressive.” I thought that too and it wasn’t the case. It’s not really market cap related. So, I think that will translate into the mining space. If you look at the mining industry today and you look at the top 50 companies and take the top 10 versus the bottom 40 again in the top 50 businesses, you’re going to see a drastic difference picture.

Capex for the top 10 is historically depressed. Those companies are doing buybacks, which we haven’t seen through all history really. Dividends to magnitude as well that is almost unprecedented. When you look at the bottom 40, it’s complete opposite. Capex aggregate is back to 2011 levels, back to prior highs. They are being aggressive. You look at the performance, medium performance between the bottom 40, top 10, they are not being penalized by being aggressive. What does that mean, knowing what happened with the energy space? That means you want to be buying companies that have a vision that are trying to do something aggressive and really capitalize in this, what we believe to be a gold in commodity cycle.

Jake: There is a game theory aspect to it of like, “Who’s going to stand up on their tippy toes at the parade first and get the best view?” But once everyone does, then of course, it’s neutralized. [laughs] I’m actually a little bit surprised that there hasn’t been more defection in some of the bigger commodity companies in redeploying capital again in inside of their own businesses as opposed to shareholder returns.

Tavi: I would agree with that. I think it’s– [crosstalk]

Tobias: ESG?

Jake: Maybe.

Tavi: Oh, I think it’s so many things. Yeah, ESG plays a role. Have you tried talking to most of the board members of those companies? It’s like, those guys have nothing but cut cost, return capital to shareholders. That’s their mentality right now. It’s just, in a way, try to attract capital by perhaps not being excessively investing in different businesses. Look, we certainly saw that in 2010, 2011, in most commodity markets where we saw excessive spending in general, and overinvestments, and people overpaying for projects, and so forth.

Jake: Yeah.

Tavi: Just to give you a sense in that measurement, I was talking about takeouts. Some of the takeouts you saw in 2011, at the peak of the market were about 60% of the value in the ground in average, as I said, is about 20%. So, people were way overpaying for those things.

Jake: So, they’re panic buying their small competitors to try to get production, basically, that they didn’t pay for already.

Tavi: That’s right. And so, it’s really interesting. Yes, if it is a high-quality project, it usually gets taken out about 20%. It’s really high grade, good jurisdiction, rare. You’re going to see that being taken out below 20%. Very rare. If it’s a bull market, it’s going to be taken out 30%, 35%, 40% or so. And that’s huge. Now, in 2011, average projects being taken out of 60%, 50%. To me, [chuckles] that’s the opposite we’re seeing right now.

Jake: Can we call that Tavi’s Q, like, Tobin’s Q?


Jake: Kind of buy versus build?

Tavi: [laughs] Yeah. Man, I don’t know what it is. I think ESG certainly is playing a role here in a way, I think the government is starting to ease up a little bit on things. We’ve had a few projects that have recently got permits that we thought was going to be very difficult to do that. South America is playing a very important role here, because it’s clear to me that Brazil is– Well, first of all, Brazil is completely neutral. It sells to China, sells to Russia, and sells to the US, and couldn’t care less where you come from in terms of that. By no means, that’s just because you’re smart, anything like that, it’s just because, if you look at the history of Brazil in terms of getting involved with wars and things like that, it’s very neutral. Didn’t get involved in the World War II. It is what it is. It’s been that way for many decades, and I don’t think it’s going to change.

So, thinking about why we acquire an asset in Bolivia and other places, obviously, there’s risk. Obviously, there’s political risk. But when you think about an unexplored area and countries looking to create new partnerships, it’s almost like Africa a decade or so ago when China came in. But the difference is not only going to be China, it will be a lot of different developed economies trying to create partnerships of those countries. And so, I don’t think we’re at the time when those businesses will become state-owned companies instead. I think we go through phases on that. We went through a phase of Venezuela being a bad example and some other places like Argentina being on the cusp of becoming Venezuela and other things.

Emerging Market Assets Ridiculously Cheap

Tavi: As we see Brazil becoming more successful in other, I guess, positive outcomes happening as an example, setting the example and setting the stage for other countries to do the same, I think there’s a big potential for large shifts that are not valued accordingly today in most of those companies. When we acquired this asset in Bolivia, we acquired it almost for onetime cash flow today, our free cash flow, actually. It was ridiculous how cheap it was. It’s hard to not be excited about that, and knowing there’s a major discovery right by it as well. To me, that seems like it’s hard to find that in even developed economies today.

Tobias: Tavi, we’ve just come up on time, so we’re going to have to end it there. But thanks very much for joining us today. It’s Tavi Costa from Crescat. If folks want to get in contact with you, how do they go about doing that or follow along with what you’re doing?

Tavi: Well, thanks for having me again, guys. You can find my work on Twitter @tavicosta or a website at But thanks again for having me. Great questions and nice discussions, and thanks for the opportunity.

Tobias: Thanks, guys. We’ll be back here–

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