Pala sets up new tech metals fund

Over the last decade, Pala Investments has invested across a range of metals, including cobalt, lithium, rare earths, tin, nickel and copper. More recent investments include the $200-million public offering in June of Cobalt 27 Capital (TSXV: KBLT), a cobalt-streaming company Pala helped set up and in which Pala now owns a 19% stake; a US$110-million debt financing of Altura Mining (ASX: AJM), an Australian mining company developing the Pilangoora lithium mine in Western Australia; and a portfolio of equities and bonds related to new energy.

In August the investment firm set up a US$150-million fund — Pala New Energy Metals — dedicated to investing in projects and businesses that capitalize on the shift in the global energy mix, and advances in battery technologies and their industrial applications.

Stephen Gill, a managing partner at Pala in Zug, Switzerland, spoke to The Northern Miner about the new fund and Pala’s investment philosophy and enthusiasm for battery metals, and other minerals critical to renewable and energy-efficient technologies.

The Northern Miner: Since joining Pala in 2008, you have been involved in many of the firm’s investments across a range of commodities and mining services. Transactions include: investments in mineral sands company Sierra Rutile (LON: SRX); Kasbah Resources (ASX: KAS), which owns the Achmmach tin mine in Morocco; and Nevada Copper (TSX: NCU), which owns the Pumpkin Hollow copper project in the United States. How would you characterize Pala’s investment philosophy, and the metals it is drawn to?

Stephen Gill: We focus on finding the right type of exposure. Ideally, you need a long-term focus, evergreen structure and should be a bit nimble. In a cyclical industry, it is a major benefit to invest across debt, equity, passive equities or physical commodities, so we keep those skills in-house.

TNM: What are your thoughts on Pala’s newest fund and its focus on energy metals?

SG: We’ve been focused on that space for a number of years. Over the last 10 years there was always a hockey stick-shaped chart of electric vehicle penetration, and the inflection point would move out every year. Two years ago, it stopped slipping and you could look out of your window and see a Tesla parked down the street. The team really started to focus on the space a couple of years ago, building our network and trying to understand renewables, battery chemistry and so on. We have made decent-sized investments in this space over the last 18 months. The dedicated fund helps us communicate to corporates and the market our focus on the space, and develop a capital pool with other like-minded investors with the potential to grow.

It is worth clarifying what we define as ‘new energy metals.’ You have a realization of climate change and air-quality impacts in a broader sense, which have triggered significant policy shifts. You also have a number of technological advances in the battery space, renewables and automation on an industrial scale. Recently, the underlying technologies have reached the point where they can facilitate a pick-up in these industries. The tipping point of mass adoption and the economies of scale that come with it are driving the surge in battery demand growth, and it’s spilling over into three industrial themes that we believe will see a period of change.

TNM: What are the industrial themes you see impacted by this?

SG: The first is the electrification of global transportation, and the related shift to automation and build-out of infrastructure. There are major implications for lithium-ion batteries, you’ve heard statistics regarding the kilograms of lithium or how many kilograms of cobalt are required in electric vehicles, and subsequently ratios, such as four times the copper intensity in an electric vehicle versus a combustion engine. However, there are many other implications — look at the dramatic pick-up in the intensity of semiconductor use in electric vehicles, and what sits behind that.

The second is electricity generation itself, which has changed significantly could continue to change dramatically going forward. It is already cheaper to build new renewables capacity than coal. We see more electricity generation coming from renewables than from fossil fuels in the future, and there is a web of implications from that.

Third is energy efficiency in manufacturing, including smart and additive manufacturing and automation. One example is China. For China to meet its carbon emission targets, one of the biggest levers available is the cleanup of its steel industry. There are also broader economic drivers for transitioning to higher quality steel. As a result, we already see a widening discount between high-grade and low-grade iron ore, and you’ve seen vanadium move dramatically, accelerated by the type of clean-up of domestic supply.

This new energy metals theme is decades in the making, and, in our minds, as pervasive as the 2003–2013 supercycle that was driven by a billion people in China moving from rural areas into cities. This cycle was bulks and commodity-driven, and quite simplistic. The nature of this next cycle is not as obvious for commodities, but we think it’s as pervasive. The opportunity should evolve over time as technologies and commodities change, and become less related to bulks and more to minor metals and non-exchange-traded minerals that are less understood, or considered less investible.

What we’re trying to do with this new fund is use the same multi-strategy investment approach that we’ve used more at Pala, which has been successful, so that we will look for the right exposures at the right point of time.

TNM: Pala’s latest investments have been in cobalt and lithium.

SG: Yes. Cobalt screams of an attractive supply-demand case. Whilst the investment case was obvious, there were no equities and no credit, so we thought: ‘Well, let’s invest directly in the metal.’ That was the genesis, and then we became involved in a cobalt streaming company.

TNM: And your investment a couple of weeks ago in lithium via Altura Mining?

SG: There were a lot of equity vehicles and the big ones have done well, and some of the smaller ones, less so. The industry is growing, but traditional bank debt was closed to lithium developers, as most banks are not willing to manage the marketing aspect of a non-exchange-traded commodity with Chinese offtake.

The Altura opportunity offered the opportunity to work with a great management team, a well-advanced project and a strong consortium of financiers to provide a solution that fulfills its purpose of providing Altura with the best financing outcome for the company on a weighted average cost of capital basis. The only alternative is all equity financing, which is horribly dilutive for shareholders.

TNM: How did Pala narrow it down to Cobalt 27 and Altura?

SG: There are tons of things that come through in a month. However, the key is leveraging our network and our own research to find really good management teams or opportunities. Our internal technical team also adds depth, in terms of identifying less obvious opportunities and understanding technical risk.

For something like Altura, it’s not that we went looking for an investment in a lithium company specifically. We are active in the sector and working to support companies in advancing projects, and we were fortunate to work with that team as a result of our network.

TNM: Pala was one of the founding shareholders of Cobalt 27, before which there were no cobalt companies of any scale.

SG: We were an early investor in the space. The feedback came from a number of funds: ‘We see the same compelling fundamentals and the cobalt story makes complete sense, but we can’t invest, as there are no equity vehicles of sufficient size.’

The Cobalt 27 management did a great job to bring together investors in the metal and blue-chip investment funds to create an equity platform from which to pursue the pipeline of streams they have been focused on. We are glad to be a part of that platform alongside a strong shareholder base.

For Altura, there are a number of listed lithium companies, but we found the right counterparty where the opportunities were differentiated.

Across other commodities like vanadium, we spent a lot of time on research. The vanadium universe is small and in many ways not investible for most funds. We’ve had to create our own investment opportunities, in many ways, for some of these less understood or non-exchange-traded metals. It’s a slightly convoluted answer.

A large part of what’s interesting about this cycle, or thematic, is the less obvious commodities, and they require a slightly different approach than you would use to invest in bulk or base metals.

TNM: Pala launched the new fund with initial capital of US$150 million. Why now?

SG: We like to take a patient and staged approach to everything we do. It’s a good starting point for a dedicated platform to invest in a sector that, as you say, we see has a lot for us to do. It’s a great starting point. We also believe this is the start of a prolonged mega-trend that will present a number of opportunities, as thematics and related industries develop over time.

TNM: Has the new fund invested in anything? If not, when do you think you will make the first investment?

SG: We have more holdings now, and an interesting pipeline of opportunities across a range of commodities and the value chain.

TNM: What is your view of mining and metals today, and the appetite for mining investments?

SG: Pala is active across the mining space with our other investment strategies — not just new energy metals. We are in an interesting period to invest, but it is important to be flexible and invest in different ways, which reflects in our team structure.

At some points in the cycle there are fantastic private equity opportunities, but there are long periods where asset valuations don’t lend themselves to private equity. It is a dangerous game to feel rushed to deploy capital into PE-like structures at those times, and it is a major benefit to generate a return in other ways during those periods.

If you look at statistics on fund returns — being purely focused on short-term — highly liquid investment styles have not performed so well over the last couple of years.