Jon Hykawy, CEO, Stormcrow Capital shares how he likes to be pitched by miners
Jon is a 14-year veteran of Bay Street, spending his time there exclusively on the sell side. Originally, he trained as a physicist, and worked as a post-doc at the Chalk River Nucleat Laboratories of AECL and with the Sudbury Neutrino Observatory. Jon completed his MBA at Queen’s University with an emphasis in marketing. He worked in the areas of critical materials with Byron Capital Markets in Toronto from 2009 to 2013, and has become a recognized expert in such areas as lithium, the rare earths, fluorspar and tin. Jon has been an invited speaker internationally on all of these topics, and more. His technical background includes work on rechargeable batteries, fuel cells and both wind and solar power . Basically, Jon is a research scientist who enjoys grappling with and pulling maximum value out of imperfect information. And if he can help it, this is the only time you will see him wear a tie.
“Don’t try to blow smoke in all directions”
Join Doug at Mines and Money New York this May, where he will be taking part in a Panel Discussion: Are you too late for lithium?
Mines and Money: What do you think the mining industry needs to do to improve its reputation?
JH: I’m involved in it, and I don’t have a very high opinion of the mining industry. Maybe that speaks to my self-loathing nature or something, I’m not sure. But I do think there are a few things that need to be fixed. Whether they CAN be fixed is a very different question. The first improvement we can make is perhaps further limiting the ability of junior mining companies to make grandiose claims about their projects without evidence. One friend summarized this as “Just don’t lie!”. Getting their hands on one grab sample that shows an ungodly high grade of an interesting metal, especially when geologists and others are looking specifically for those anomalous and unusual mineral samples, and then trumpeting the find is not a statistically meaningful way of valuing the entire deposit.
Professionals can evaluate these claims in the correct context, but retail investors seem to fixate on the headline numbers themselves. For some companies, and they and we know who they are, their entire purpose seems to be to move from one breathless press release about the potential of their deposit to the next $200,000 retail financing that will be used to continue paying the management team, repeating as often as necessary.
This is the sort of slimy behavior that could be reduced or eliminated, but it isn’t likely that this will occur as an organic movement originating within the junior mining community, it is likely something that must be imposed by regulators. Whether that means the securities regulators or the exchanges depends on the solutions considered. Either way, I won’t hold my breath waiting for this to happen. As one example in my area of interest, if you publish a JORC or 43-101 economic study on an opaquely-traded commodity, then you should not only be required to show your projected market prices for the commodity of interest, but you should also be required to publish the market price behaviour and sales volumes of that commodity for the last five or ten years.
If a gold company publishes a study that says that, at prices of US$3,000 a Troy ounce, they could make a lot of money, then most of us would laugh. But when a company publishes that their assumption for, say, scandium oxide is US$2,500 per kg, very few people know whether this is crazy or not. The second improvement would be to convince the average person that the industry takes its social responsibilities seriously. Resource extraction and its positive impact on economies is almost always incorrectly devalued versus its negative environmental impacts. This mistake is easy to make and further ingrained when you have, say, a tailings dam collapse in Brazil that kills 150 people, and nothing serious happens to the companies involved. It isn’t going to be enough to put out glitzy advertising with smiling workers enjoying the fruits of their labours as they pull iron out of the ground, we’ve done that and continue to do it. What people need to see is the mining industry pushing for regulation that holds the bad operators out there accountable.
When companies and their executives do things that are incorrect or illegal, or both, then action should be visibly taken against them, up to and including egregious, completely-out-of-proportion punishment of industry executives. We can’t make mining perfectly clean, but we also don’t need to do slipshod design that kills workers or nearby citizens. And if this became common, then I would hope that government would relax some of the regulation that slows down the construction of new mines, all of which essentially tries to force the mining companies to build something to a reasonable standard rather than relying on executives who would know that they would be severely punished for negligence to do it right without the same level of oversight. I’m not holding my breath on either the possibility of toothier regulation or eventual cutting of red tape, but I can dream, I guess.
Mines and Money: How should mining projects best pitch you?
JH: Stick to the economics, please, and don’t try to blow smoke in all directions with grandiose projections about growth in some demand sector. This is happening to a ridiculous degree with electric vehicles, obviously, but the problem can largely be eliminated with some application of common sense. Understand that when you are at the point of building a mine and raising hundreds of millions of dollars from very sophisticated mining investors, arm waving and trumpet blowing isn’t enough, isn’t necessary and is probably counter-productive. Your reasonable price deck and cost estimates will have to carry the day.
The other thing I would appreciate is that if new technology is involved, please don’t ask investors at any single stage of financing to assume both the technology AND the mining/market risks. Instead, look at the potential for deploying a commercial demonstration plant to show, at reasonable scale, that the technology works, then follow that up with the actual construction financing. Doing this in stages may seem like it will slow everything down, but if the options are doing it right versus not getting the project built, then doing it in stages seems a small price to pay for getting the project completed. There are enough things to stumble over regarding both technology and building a mine that coupling the two and then hoping that no serious problems show up is just too risky.
Mines and Money: Where are we in the battery metals space now?
JH: I believe we are somewhere in the middle of turning the battery metals space into a predictable, evolving industry. To steal from Churchill, which is never a bad thing to do, we are definitely not at the end, and maybe we are not even at the beginning of the end, but safe to say we are at least at the end of the beginning.
We’ve had our price runs in lithium and cobalt, fed by growth and speculation, and a few people have gotten their fingers burned as prices dived. So now we can settle into a longer game, as a few knowledgeable investors start to put money to work over a time frame of the next five years, because there is every reason to believe that vehicle electrification is an unavoidable and unstoppable long-term phenomenon (as we’ve been saying since about 2010).
And while that eventual vehicle electrification might not look like fleets of Tesla battery electric vehicles autonomously cruising the byways, we do already have the technology to provide cheaper, much more efficient vehicles to buyers that do not demand sacrifices regarding “refuelling” time and operating life and all the rest.
Mines and Money: A few years ago people said that solid state batteries were still years away from being a commercial reality. Is that still the case?
JH: When we talked about solid-state batteries (SSBs) being “years” away not that long ago, “years” was short-hand for “who knows how many years”. Now, I think we can safely say that the early 2020’s will see commercialization. How successful this will be remains to be seen, but there are some interesting thoughts that come out of the potential deployment of SSBs. SSBs are likely going to be much safer and more robust than conventional lithium batteries, which is good, but we are all likely more excited by some of the physical effects of this technology.
SSBs have cells that could be much thinner than conventional lithium batteries, so if we build cells with the same loading of chemicals on the electrodes, then the effective energy density of an SSB could be much higher than for a conventional lithium battery using the same cathode chemical (more so if anodes using lithium metal foil are compatible with the solid-state electrolyte in question).
For some applications, having much higher energy density would be a great opportunity to deploy a battery with higher energy storage capacity. Personally, I wouldn’t say no to a cell phone battery that I only needed to recharge every few days, as opposed to every day or even a couple of times a day. But I do not believe that the makers of battery electric vehicles would use this technology as an opportunity to build a battery the same physical size as the one currently used in their vehicles but that could carry their vehicles twice as far, for example.
The ability to provide 1,000 km range in a battery electric vehicle will likely come at an even higher purchase price, and the consumer desire for this feature is not established by our present automotive experience. It would be relatively cheap and easy to provide a gasoline tank in an internal combustion vehicle that could let the vehicle travel for 1,000 km between refuelling stops, but we don’t bother doing so. Very few are clamouring for that level of range, it simply has little marketing value. What the SSB might allow, though, is the use of cheaper and perhaps better cathode chemicals.
As an example, let’s say a vehicle is currently sold with a conventional lithium battery using lithium nickel manganese cobalt oxide (NMC) on one of its electrodes. A SSB might double that energy density, at the price of using much more NMC and the like. But we could also use a cathode chemical like lithium iron phosphate (LFP) in the SSB, in place of NMC. The effective energy density of LFP in a SSB would be much lower than NMC used in an SSB, but it may well be higher than the energy density of NMC in a conventional battery. So we might be in the position of being able to deploy a vehicle with a battery that is slightly physically smaller than the NMC conventional battery, but provide the same range with improved safety and dramatically better operating life.
And from the point of view of booming demand for critical battery metals like cobalt and nickel, a battery that relies only on supplies of cheap and plentiful metals like iron would be a good thing. By the way, this would not mean we no longer need cobalt or nickel.
Everyone always wants to leap to extremes, but we will still need huge numbers of batteries with the highest energy densities that we can build, and that is likely to continue to require cobalt and nickel. There will even be performance vehicles sold that benefit from smaller and lighter SSB packs containing cathode chemicals like NMC. If we end up selling large numbers of mainstream electrified vehicles that use SSBs containing LFP, as an example, then it might mean that we need to be less concerned about supplies of materials like cobalt in the medium term. Of course, we need to achieve commercial deployment of SSBs, first.
Mines and Money: What is your outlook in vanadium? Is it still the hottest commodity in the battery metals space or has a new commodity surpassed it?
JH: I’m not clear what logic saw vanadium anointed as a present battery metal. The number of vanadium redox batteries (VRBs) that have been built and installed rounds, essentially, to zero. Years ago, I believed that VRBs had the potential to eventually become, through continued development, as cheap as pumped hydro or compressed air energy storage systems at storing meaningfully large amounts of electrical energy.
I still believe that to be true, but I am also aware that a new generation of electrically-rechargeable zinc-air batteries has the near-term potential to be substantially less expensive than VRBs, pumped hydro or compressed air energy storage systems. If these types of zinc-air batteries pass their early tests, then there will be little need for VRBs that use rare and expensive vanadium when we can build perfectly good, cheaper zinc-air batteries that use relatively cheap and reasonably plentiful zinc to do the same things. Looking at a chart of the price of vanadium pentoxide flake in warehouses in Europe, we had prices of about US$8/kg back near the end of 2017, but prices shot up to US$28/kg in calendar 2018. Now, prices are falling hard, at a rate of about 2x the rate of increases through 2018.
That sort of ratio always tends to suggest that physical speculation played a significant role in price increases, given our past experience with a few thinly-traded commodities that experienced rapid price appreciation followed by price depreciation.