RI Podcast EP 60 - Oskar Lewnowski, Orion Resource Partners

Understanding the Mining and Trading Landscape

The Distinction Between Traders and Miners

• The speaker emphasizes that it is easier to transition from being a trader to a miner than vice versa, highlighting the distinct skill sets required for each role.

• Traders are associated with organizations like LME (London Metal Exchange), while miners typically engage in events such as CIM (Canadian Institute of Mining).

• There are very few successful stories of individuals merging skills from both fields, indicating a significant divide between the two professions.

Introduction to Oscar Lonkowski and Orion Resource Partners

• The podcast host introduces Oscar Lonkowski, founder and CEO of Orion Resource Partners, describing him as a "mining private equity titan."

• Orion is recognized as one of the largest mining and metals private equity funds globally, managing at least $8 billion in assets.

• This interview marks Oscar's first long-form discussion about his company and its unique investment strategies.

Overview of Orion Resource Partners

• Oscar shares insights into Orion's operations, which span various sectors within the mining vertical including technology ventures, public equities, and construction financing.

• The organization aims to provide comprehensive investment products that cover all aspects of mining—from ore production to futures trading.

Clientele and Investment Strategy

• Orion primarily serves large institutional investors such as U.S. pension plans and sovereign wealth funds rather than smaller endowments or foundations.

• This concentrated investor base allows for larger ticket investments with fewer clients.

Origins of Orion Resource Partners

• Oscar recounts the founding story of Orion, which spun out from Red Kite—a major metals trading hedge fund—about ten years ago.

• At Red Kite, they developed a mine finance product alongside their physical trading business to secure supply chains effectively.

Understanding Commodity Trading and Mining Finance

The Role of Physical Transport in Commodity Trading

• The discussion highlights the importance of owning a long position for hedging in commodity futures, emphasizing its centrality to the business since inception.

• The speaker confirms that they facilitate physical transport of goods, managing cargo from ports or mines to customers, including transshipment and rail car consignments.

Insights from "The World for Sale"

• Reference is made to the book "The World for Sale" by Bloomberg journalists, which explores the history of commodities trading with a focus on Glen Core.

• A comparison is drawn between Ivan Glasenberg's strategy of asset ownership due to margin pressures and Red Kite's similar realization about controlling supply.

Asset Ownership vs. Trading Strategies

• The speaker explains that controlling margins in physical trade often requires owning supply through long-term contracts rather than outright ownership of mines.

• Successful trading houses typically blend asset ownership with third-party services, creating a diverse trading portfolio.

Trader vs. Miner: Skill Set Differences

• A distinction is made between traders who transition into mining versus miners who develop trading operations; each path requires different skill sets.

• The speaker notes that there are few successful cases where these two worlds merge, indicating significant differences in industry events attended by traders and miners.

Transitioning to Mining Finance

• The speaker identifies as a trader at heart despite having transitioned from Red Kite to Orion, focusing on mine finance.

• An overview is provided on mine finance stages: exploration (finding ore bodies and assessing viability) and execution (constructing mines).

Understanding Project Development Phases

• Exploration involves high risk with potential financial loss if no viable resources are found; execution entails larger investments but generally lower risks.

• Execution phase accounts for approximately 80% of costs associated with developing a mine compared to 20% for exploration activities.

Financial Strategy in Mine Development

• Orion focuses on financing projects ready for construction rather than early-stage exploration ventures prevalent in junior mining markets.

• Emphasis is placed on ensuring all necessary funding is secured before commencing construction to avoid incomplete projects leading to wasted capital.

Valuation Metrics in Mining Finance

Understanding Net Asset Value and Investment Strategies in Mining

The Concept of Net Asset Value (NAV)

• NAV, or net asset value, is a calculation that reflects the underlying value of assets, particularly relevant for junior mining speculators seeking high returns.

• Investors often pursue significant returns (10x), accepting potential losses as part of their strategy.

Venture Capital Approach to Mining

• Early-stage exploration in mining resembles venture capital investments, where investors anticipate substantial gains despite inherent risks.

• The speaker notes a lack of institutional interest in high-risk ventures, preferring more stable investment strategies focused on consistent returns.

Unique Investment Strategy

• The approach taken by the speaker's organization addresses specific client needs rather than merely following popular investment trends.

• Many private equity funds mimic retail investor strategies but often lead to concentrated positions with limited flexibility.

Challenges Faced by Private Equity Funds

• PE funds can become trapped due to their large ownership stakes and inability to sell shares without impacting market prices negatively.

• This overhang creates pressure on share prices and complicates financing efforts for further development.

Avoiding Common Traps in Mining Investments

• To avoid pitfalls, the speaker emphasizes steering clear of early-stage exploration plays that typically lead to financial traps.

• The "Lan curve" illustrates the cycle of low initial value during exploration followed by hype and eventual realization of funding needs for construction.

Strategic Financing Approaches

• The goal is to invest at the lowest point on the Lan curve and exit upon commercial production commencement.

• A combination of debt, royalties, off-takes, and equity is utilized strategically rather than relying solely on one type of financing.

Tailored Financial Solutions

• Each mine requires a bespoke financing package tailored to its unique cash flow profile; flexibility in structuring options is crucial.

Understanding Milestones in Mining Projects

Importance of Proper Milestone Management

• Emphasizes the necessity of managing milestones effectively in mining projects, highlighting that simply providing a large budget without structured oversight can lead to poor outcomes.

• Discusses a staged financing approach where funds are released based on meeting specific milestones, ensuring accountability and progress tracking.

Compensation and Performance in Mining

• The speaker expresses disagreement with the notion that mining managers are overcompensated, suggesting instead that compensation structures could be better aligned with project success.

• Notes that only about 20% of mining projects are completed on time and within budget, indicating systemic issues within the industry.

Challenges Facing the Mining Industry

• Highlights significant challenges such as capital return inadequacies due to cost overruns and delays, which can deter investment interest in mining.

• Mentions existing literature on value destruction in mining and stresses the need for innovative approaches to improve project execution.

Strategies for Improvement

• Advocates for balancing debt facilities with production-linked financing to enhance financial stability and leverage for companies.

• Stresses the importance of early intervention when problems arise during projects to prevent minor issues from escalating into major setbacks.

Personal Journey into Mining Finance

Transition from Finance to Mining

• The speaker reflects on their initial fascination with finance before transitioning into the mining sector through opportunities presented during their career.

• Shares experiences working in post-Soviet countries like Kazakhstan and Azerbaijan, focusing on restructuring efforts within the mining industry.

Love-Hate Relationship with Mining

• Describes a complex emotional connection many have with mining—while it can be frustrating at times, it also offers unique opportunities and challenges that keep professionals engaged.

Future Opportunities in Mining

Decarbonization and Renewable Energy Needs

Understanding the Demand for Copper and Its Implications

The Growing Need for Copper

• The importance of copper in the transition to renewable energy is becoming widely recognized, with a focus on securing upstream supply for downstream assets like geothermal fields, solar panels, and wind farms.

• Governments, particularly in the US and EU, are initiating programs to secure critical materials necessary for energy transitions, highlighting a significant increase in demand.

Incremental Sources of Metal Demand

• Military conflicts are consuming vast amounts of metals, contributing to increased demand that must be addressed.

• Urbanization has surpassed 50% globally; cities require more metals due to a shift from wood construction to cement and steel.

• New energy requirements from data centers and AI technologies are emerging as additional sources of incremental metal demand.

Historical Context and Future Projections

• A statistic suggests that over the next 25 years, more copper will need to be mined than in all of human history combined.

• To meet urbanization needs, military demands, and energy transition requirements, production must increase significantly—from about 25 million pounds today to closer to 50 million pounds.

Industry Response and Supply Challenges

• Major mining companies like Anglo American and BHP are taking steps to secure existing supplies but face challenges in increasing overall production capacity.

• Recent investments by entities such as the UAE Sovereign Wealth Fund into major mines indicate movement towards consolidation but highlight ongoing supply shortages.

Strategies for Meeting Demand

• Three key strategies are essential: improving recycling processes for copper usage efficiency; maximizing substitution or thrifting by finding alternatives; and developing new primary supply through mine construction.

Incentives Needed for Mining Development

• There is a pressing need for incentives—such as rising metal prices or regulatory changes—to encourage miners in North America and Western Europe to explore new mining opportunities aggressively.

The Existential Question for Western Economies

Bipartisan Support and Legislative Initiatives

The Role of Legislation in Economic Strategy

• Discussion on the various agendas that influence political decisions, highlighting President Biden's support for the Inflation Reduction Act (IRA) as a significant legislative move.

• Noted that Donald Trump may view bipartisan cooperation on certain issues, such as infrastructure and resource management, as beneficial.

Competing with Global Initiatives

• Emphasis on the need for Western powers to innovate rapidly to catch up with China's Belt and Road Initiative, which has provided China a competitive edge.

• Importance of establishing incentive prices for production to attract private capital investment in mining and natural resources.

Investment Challenges in Resource Development

• Highlighted the current low returns from green projects compared to upstream investments, indicating a shift in where money is being allocated.

• Discussed the critical need for certainty in permitting processes to avoid financial losses after substantial investments have been made.

Investment Strategies and Market Opportunities

Resource Insider Overview

• Introduction of Resource Insider as a members-only service focused on identifying lucrative investments within the mining sector.

• Description of investment strategies including early-stage venture capital opportunities and stable cash-flowing businesses like oil and gas wells.

Commitment to Members

• Assurance that all investment opportunities covered are personally vetted by the speaker, emphasizing transparency about buying and selling decisions.

Competing Against Chinese Dominance

The Challenge of Competing Economies

• Exploration of how North American mining industries can compete against Chinese state-owned enterprises (SOEs), which often operate without profit motives due to their geopolitical backing.

Potential Solutions for Competitive Edge

• Proposal of public-private partnerships as a means for governments to secure essential resources while balancing national interests.

• Suggestion that large tech companies might be better positioned financially to invest heavily in securing mineral supplies without immediate profit concerns.

Economic Competition and Geopolitical Strategies

The West's Economic Challenges

• Discussion on the willingness to incur upfront losses for securing supply chains, particularly in rare earth elements, highlighting an uneven playing field between Western economies and non-rational economic actors like China.

Long-term Implications of Non-Rational Investments

• Emphasis on the risks associated with making economically irrational decisions, citing failed Chinese investments in Africa under the Belt and Road Initiative as examples of potential long-term consequences.

Sustainability of Economic Models

• Analysis of how even large economies like China cannot sustain prolonged negative returns, referencing empty railways and unused airports as indicators of over-investment without demand.

Competitive Pricing Mechanisms

• Proposal for a balanced price mechanism in the West that ensures a floor price for mining outputs, preventing non-economic actors from underbidding legitimate investments.

Market Dynamics in Cobalt Production

• Examination of China's rapid increase in cobalt production leading to market saturation, which undermines Western producers' profitability and operational viability.

Securing Supply Chains: Future Directions

Potential Solutions for Supply Security

• Hypothetical discussion about guaranteeing a portion of production at stable prices to protect against aggressive pricing strategies from competitors like China.

Onshoring Resources: A Strategic Shift?

• Exploration of onshoring initiatives focusing on securing critical materials (lithium, nickel, cobalt) within friendly countries in North America while addressing regulatory challenges.

Political Will and Regulatory Changes

• Insight into the necessity for political will to reform regulations that hinder domestic mining industries; concerns about whether proactive measures will be taken before crises arise.

The Role of Workforce Development

Addressing Skills Gaps in Mining Industry

Talent Gap in the Mining Industry

Current State of Mining Expertise

• The U.S. mining industry faces a significant talent gap, with many experienced professionals (metallurgists, geologists, process engineers) nearing retirement age.

• Younger generations are predominantly pursuing careers in fields like chemical engineering and computer science, rather than mining-related disciplines.

• A substantial portion of specialized mining equipment is now manufactured in China, leading to a reliance on foreign production for advanced mining technology.

Orion's Approach to Talent Acquisition

• Orion is actively seeking solutions to bridge the talent gap as they aim for long-term sustainability; they recognize the challenge of attracting skilled workers.

• The technical team at Orion is primarily composed of older professionals, with recruitment efforts often focusing on international candidates from countries like Canada, Australia, Chile, and Peru.

• Challenges include language barriers, educational differences, and visa issues that complicate hiring foreign talent.

Strategies for Addressing Talent Shortages

• Orion considers establishing satellite offices in regions with abundant talent pools (e.g., Middle East), reflecting their proactive approach to recruitment.

• Attracting young engineers remains difficult due to competitive salaries offered by tech companies compared to traditional mining roles.

Evaluating Teams vs. Assets in Investments

• The discussion highlights the importance of both management teams and assets; a strong team can enhance asset value while poor management can undermine it.

• Good assets tend to attract competent teams; thus evaluating management quality is crucial when assessing potential investments.

Correlation Between Management Quality and Asset Value

• Experienced investors believe that effective management correlates with valuable assets; good teams typically avoid challenging projects unless necessary.

• Long-standing industry connections allow investors to identify capable teams easily; successful investments often involve both high-quality assets and proficient management.

Winning Strategies in Mining Investments

Balancing Known and Unknown Teams

• The ideal investment strategy combines both well-known names in the industry, like Frank Jua and Re Aaron, with lesser-known teams. This balance is crucial for attracting decent valuations while managing risk.

• Smaller, less recognized teams may not attract high-end valuations but can offer higher potential returns. However, investing in them carries more risk regarding their ability to achieve expected outcomes.

The Reputation Premium

• There is a prevalent ethos in junior mining that encourages investing in successful entrepreneurs (e.g., Ross Beaty). However, by the time investors get involved, these reputations are often already priced into the investment.

• Successful individuals deserve recognition for their achievements; however, this premium can limit opportunities for new investors seeking value.

Opportunities Beyond Established Names

• Significant investment successes often come from relatively unknown groups rather than established names due to more reasonable purchase prices and valuations.

• Investors should look for individuals with technical expertise who are transitioning into leadership roles within their own companies. This transition can lead to better success rates.

Transitioning from Exploration to Management

• A major challenge arises when entrepreneurial explorers must shift from an exploration mindset to managing large-scale operations effectively.

• Founders of small exploration companies may struggle with the complexities of running a larger operation that requires diverse management skills and hiring practices.

Importance of Management Structure

• As mining companies evolve from exploration to production phases, it’s essential to rotate management teams and boards to bring in specialized expertise necessary for growth.

• Most average investors lack sufficient shares to influence board changes directly; thus, understanding how management transitions occur is vital for assessing company health.

Evaluating Management Decisions

• Investors should assess milestones related to hiring key personnel (e.g., mine manager or procurement manager), as these choices reflect on the CEO's vision and capability.

Understanding Management and Problem-Solving in Mining

The Importance of Collaboration and Acknowledging Limitations

• Effective management involves collaboration; leaders should be open to advice, fostering a partnership that enhances comfort and decision-making.

• Recognizing one's limitations as a CEO is crucial; it reflects a commitment to the best interests of shareholders rather than an ego-driven approach.

Addressing Setbacks in Investments

• In mining, setbacks are common; they can be categorized into unforeseeable problems (e.g., natural disasters) and foreseeable issues that require proactive management.

• Unforeseeable problems necessitate emergency responses, while foreseeable problems indicate a need for systematic review and improvement.

Learning from Mistakes

• Recurring foreseeable problems signal deeper systemic issues within management practices that must be addressed to prevent repetition.

• Organizations are allowed to learn from mistakes but must not repeat them; patterns of error indicate the need for change in strategy or operations.

Creativity in Mining Finance

Innovative Approaches to Investment Strategies

• Despite finance being perceived as dull, creativity thrives in mining investments through diverse strategies like private equity, venture capital, and royalty funds.

• The speaker emphasizes their unique position within the industry due to this creative approach, which contrasts with traditional methods.

Continuous Improvement Mindset

• The drive for continuous improvement led the organization from hedge fund origins to developing physical businesses and innovative financing solutions.

• By recognizing opportunities for enhancement within existing frameworks (like royalties), they created more engaging financial products tailored for mining needs.

Sustainability Considerations

• As demand for mining increases sustainably over the next 25 years, integrating technology into operations becomes essential for future success.

Industry Inspiration and Competitive Landscape

Learning from Other Industries

• While there may not be direct competitors in mining that inspire them, insights are drawn from innovative practices observed in the oil and gas sector.

Embracing Industry Evolution

Insights on Mining and Investment Strategies

Flexibility in Royalty Structures

• The speaker discusses the flexibility of VVP (Value-Added Production) structures in oil and gas compared to streaming models in mining, indicating a potential for innovation by borrowing ideas from other sectors.

Technology and Capital Deployment

• There is an exploration of technology investment strategies influenced by successful VC firms like Breakthrough Energy, highlighting the importance of adaptable capital deployment methods.

Diversification into Infrastructure

• The speaker suggests that if Orion were to diversify its investments, it would likely focus on infrastructure related to commodities rather than directly entering energy or agriculture markets.

Importance of Key Choke Points

• The discussion emphasizes the significance of controlling key choke points in the supply chain, such as terminals and storage facilities, drawing parallels with historical figures like Rockefeller who controlled oil through railways.

Strategic Thinking in Mining Companies

• A critique is made regarding mining companies being predominantly run by individuals focused on engineering rather than strategic business thinking, which limits their ability to control critical supply chain elements.

Vertical Integration Trends

• The conversation touches upon historical trends where companies vertically integrated their operations (e.g., Ford Motor Company), suggesting a possible future shift where end-users may move upstream into mining areas for better resource control.

Cost of Capital and Competition

• There's speculation about how low-cost capital could enable companies like Tesla to acquire lithium mines directly, potentially outcompeting traditional mining companies for resources.

Investment Preferences: Tin as a Commodity

Interest in Tin Streaming Investments

• When asked about investing $100 million in one commodity as a streamer or royalty, the speaker expresses interest in tin due to its critical role in electronics and other technologies.

Significance of Tin

• Tin is highlighted as an essential yet often overlooked commodity that has largely replaced lead as a soldering agent and plays a vital role across various industries including armaments and glass production.

Global Supply Sources for Tin

• Major sources of tin are identified as Indonesia, Bolivia, and the Democratic Republic of Congo (DRC), noting that there are no significant tin mines within or near the United States.

Personal Insights: Living Choices and Future Opportunities

Reluctance to Move from New York City

• The speaker humorously explains their decision not to relocate to Florida like many finance professionals post-COVID due to family commitments while children are still in school.

Attracting Investors

Investment Opportunities in Orion

Eligibility for Investment

• The investment opportunities in Orion are exclusively available to institutions, not individuals. This clarification is crucial for potential investors who may have been considering personal investments.

Requirements for Mining Entrepreneurs

• Mining entrepreneurs seeking funding must prepare a pre-feasibility or feasibility study. This foundational document is essential for demonstrating the viability of their projects.

• A techno-economic model accompanying the feasibility study is necessary to provide a comprehensive analysis of the project's financial and operational aspects.

• Applicants need to present a permit application plan and grant access to geological data related to their mining discoveries, which includes processing and mining plans.

Assessment Criteria

• While having all documentation fully developed is not mandatory, applicants should demonstrate thoughtful planning and readiness to address any outstanding issues with an appropriate budget.

• There are instances where Orion has acquired mining companies outright, indicating that they are open to direct investment opportunities if the project shows promise.

Conclusion