10 Questions on 25 Years of Natural Resource Investing

Launched in November 1994, the VanEck Global Hard Assets Fund recently celebrated its 25th anniversary. To acknowledge this milestone, we sat down with some members of the investment team to discuss the launch, what has changed over this period and where we may be headed during the next 25 years.

1. What do you remember about the launch and the Fund’s early days?

• Greg Krenzer (GK) – Head of Trading, joined VanEck in 1994: After good performance in the early-80s, gold was under pressure over the next decade. At the time I started, there was a focus on diversifying the firm’s asset base out of gold more broadly, but still staying with what we knew [natural resources]. The firm hired Ibbotson to develop a white paper on Tobin's Q – a ratio made popular by Nobel Laureate James Tobin that measures a physical asset's market value to its replacement value – and a lot of the initial marketing was based off the diversification benefits of hard assets and building off the experience we had on the gold side with having geologists on staff.
• Charlie Cameron (CC) – Deputy Portfolio Manager, joined VanEck in 1995: Derek van Eck (former Chief Investment Officer who passed away in 2010) was the driving force. There were long-term structural arguments that the world was going to be more natural resource oriented because emerging market growth was going to overtake developed market growth. It was the “30,000 ft.” “big picture” approach and I think most of the assumptions Derek made were accurate.
• Joe Foster (JF) – Senior Analyst, Precious Metals, joined VanEck in 1996: I recall Derek's passion and commitment to the space. Seeing specialists in oil and gas, base metals and all of these other sub sectors too—just the degree of dedication and effort to cover this asset class was impressive.

2. How has the makeup of natural resources changed over 25 years?

• Shawn Reynolds (SR) – Portfolio Manager, joined VanEck in 2005: Both the agriculture and mining industries have consolidated quite a bit from a public investment perspective. On the energy side, it has gone the other way. You used to have the supermajors (BP, Chevron, ExxonMobil, and Royal Dutch Shell) and a collection of some very, very large independent international E&P companies. Growth in independent exploration has blossomed with the advent of advanced drilling technologies. A lot of people left those larger companies to fertilize a whole other junior/independent energy sector.

3. How have the companies in the space changed over the last 25 years?

• SR: The companies we cover have become much more professional. More than just the shift in their financial model from “growth” to “value”. There’s been a change to a holistic professional management approach. For example, bringing in “big data” and utilizing advanced technologies in their operating models alongside their new financial models.
• Charl Malan (CM) – Senior Analyst, Base & Industrial Metals, joined VanEck in 2003: From 2001 to 2010, the management of these companies, the CEOs and CFOs, were all positioning to deliver product into the demand that China created—the more they could produce, and the quicker they could produce it, the better. Then weaker commodity prices hit and the whole complex got over-levered. Now you are in a very different phase. For the first time in a long time, you are slowly starting to see supply decrease, assets being shut, and management turning from operators to financial stewards of capital. The mantra of “growth at any cost” has shifted to “profitability over growth”.

4. How has your method of evaluating companies changed over the last 25 years?

• SR: The two largest factors still come down to management or business model and the quality of assets—that part has not changed at all. These are key.
• CM: The fundamental, bottom-up research process has not changed. Nor has company modeling or our belief that a “boots on the ground” approach is important. What has changed is the potential “value unlocking” drivers. Prior to around 2010, analysis of companies had a lot more to do with geology…“How much can you extract out of this piece of land? How quickly, efficiently and at what cost? How much am I paying for these tonnes in the ground?” Now we look at more financial means of analysis, such as cash flow multiples, EBITDA multiples, etc. The most important thing I look at now is free cash flow valuations.

5. Over the last 25 years, what industry trends have had the most impact?

• CM: [Within base and industrial metals]…the advent of iPhones, flat screen TVs, electric vehicles, etc. Back in early 2000, we didn’t talk about these things. Over the last several decades, though, metals have become smarter and our understanding of the metals that we mine has become much greater.
• SR: [Within energy]…shale oil. Horizontal drilling and hydraulic fracturing were well known, but to be able to do it at the scale, concentration, and intensity that they do now basically turned the industry upside down…or 90 degrees, I guess.

6. How similar is the current environment in natural resources to any other periods during the last 25 years?

• JF: The period 1996 to 2001, in particular, felt similar to what we’re seeing now. We know, also, that gold appears to have bottomed, in this most current cycle, in 2015. Sentiment-wise, the stretch leading down to the bottom, until just recently, felt a lot like that previous bear market.
• GK: It’s like the late-90s. The dot-com boom was just starting. The argument was “old economy vs. new economy.” So it felt a lot like it does now, actually. It was all about what you could do with the internet and less to do with “brick and mortar” investments, like big industrial plants or land. After the dot com boom in 2000/2001, emerging market growth really came on. People didn’t realize it, but we weren’t capable of supplying the demand that was going to come out of countries like China. The “old economy” companies hadn’t invested in new growth for the last decade. So a lot of capital was forced back into the space to find new sources of crude and new mines.

7. Over your time with VanEck, are there any events that stand out?

• JF: The biggest surprise since I've been at VanEck was the financial crisis. It really goes back to the things that John van Eck would talk about. For the first five years I was at VanEck, I was fortunate to work with John and be mentored under him. John was an Austrian school economist and talked about the debt cycle, monetary policies, investor behavior and all the things that Austrian economics looks at. And we could see problems on the horizon with debt levels, trade deficit and with Fed policy. To see all that play out in a financial crisis… It was like everything that we had been anticipating, or worrying about for 10 years prior to that, all coming true. It was amazing to watch it play out after expecting to see some sort of calamity like that for many years.
• SR: In energy, one thing was the OPEC move of November 2014. They neither understood, nor appreciated, shale technology. Or our world and what it needed. We could not sustain $100 a barrel oil. By trying to kill the shale industry (by ramping up production/output), they thought they could control it. They created, instead, an amazing amount of unwanted volatility that, probably to this day, has not settled down. Moreover, they revealed their own vulnerability. It probably has not been recognized yet by the broader markets, even if OPEC have recognized it themselves. It was a huge mistake.

8. Over the course of 25 years, what have been some of the biggest challenges?

• CC: What’s interesting is how the growth vs. value debate has changed. But resource demand over the last 25 years has historically been steadily going up. But, despite this steady backdrop, there have been shifts in how the asset class is treated by the market … sometimes the market gets excited by this and sometimes it doesn’t.
• GK: Being specialized in some of the more volatile sectors out there—energy and mining! We are more cyclical and, at times, it has been tougher to get a steady tailwind at our back. Realizing that, though, and managing to it, has been one of the keys for us.
• JF: Mining is perpetually difficult and somewhat risky. There’s only so much you can know about the properties of the earth where you are digging. Recoveries can be lower than expected, mining conditions can be more costly than expected, and ground conditions can disrupt operations. But, that's also the nature of the space and our job as analysts and managers is to mitigate that risk as much as possible.

9. What has been the impact of the growth and prominence of alternatives?

• Veronica Zhang (VZ) – Analyst, Alternative Energy & Industrials, joined VanEck in 2013: It’s finally starting to make an impact on a bigger scale. Take solar power. It was prohibitively expensive 10 years ago (vs coal), and now is competitive, if not cheaper in some regions. You add a battery and can remove yourself from the aging grid infrastructure – of which a vast majority of transmission lines in the US are over 30 years old. At the end of the day, cheaper, cleaner electricity, with steady consumer adoption and favorable economics produces a business model that we believe is finally investable – and not reliant on the subsidy and funding policies that supported the industry in the past.

10. In 2044, 25 years from now, what will natural resources investing look like?

• SR: From the beginning of history, humans have been consuming natural resources in one way or another. What’s being consumed may be different, but I believe natural resources will continue to be in demand. It is truly spectacular and profound what technology has done in energy and agriculture. It has brought costs down and productivity up. In my view, that trend will never change. Technology may continue to impact supply profoundly. Technology may also continue to subsidize the global economy in a profound way for the next 25 years. As long as the global population continues to increase, consumption of commodities and natural resources will continue to increase. Indeed, only at times of severe stress or recession does it fall.
• CC: In my view, technology will makes things easier and cleaner, and there may be substitution and replacement of course, but I believe there will still be a need for the basic materials.
• JF: I believe gold mining, and probably natural resource production in general, may be more streamlined than it is now. I think technology is going to help mitigate a lot of the risks in mining.
• CM: Fundamentally, I don’t think it is going to be different. The one thing that is going to be substantially different is the way we can invest in them. The ability to invest in the “new/smart metals” over the next 25 years is the area that I believe is going to change the most. Currently they are underappreciated and under-invested/under-investable.
• VZ: I think there is going to be vastly more technology. The game changer is going to be how you deploy resources to minimize wastage – from extraction to building a more efficient supply chain, to end user usage. Machine learning will play a big role in this, as we learn to craft more efficient processes around our environment and habits.
• GK: Personally, I think it’s going to change. Technology has changed so much since we started and I think that’s going to continue. There’s going to be technology that we can’t even fathom now, but the key is to keep an open mind.