The resource sector’s volatility and cyclicality means it’s never been easy for investors to navigate.
More recently, the waters have been further muddied by the push and pull of government policies, significant supply chain disruptions, bifurcated markets and strategies derived from artificial intelligence (AI).
Given the challenging landscape, how can investors reduce risk and make the best decisions for their portfolios?
At this year’s Rule Symposium, panelists Nomi Prins of Prinsights Global; Adrian Day of Adrian Day Asset Management; Adam Taggart of Thoughtful Money; Albert Lu of Luma Financial and the Rule Classroom; and Grant Williams of Things That Make You Go Hmmm discussed how investors can manage the turbulence of today’s macroeconomic landscape.
What is the current macroeconomic environment?
Right now, the resource sector is facing conflicts within the global economic environment.
When it comes to supply and demand, copper and many critical minerals have strong tailwinds due to the energy transition, which is connected to the boom in AI and data center rollouts. The outlook is further supported by stagnating mining output, which is sending supply shocks through the sector.
Supply and demand are just one part of the equation. Geopolitics now heavily dictates how resources are extracted and secured, and increasingly how projects are funded.
Governments, particularly in the west, have been caught off guard by the east’s dominance in critical minerals supply chains. That has caused considerable consternation among leaders, who are now trying to adjust policy to stimulate domestic and allied infrastructure, and projects to support national security.
These concerns have led to greater resource nationalism in both Canada and the US, where governments have increasingly sought equity stakes in resource projects to de-risk development and secure long-term commitments.
Likewise, the last few years have opened investors’ eyes to how conflict can disrupt the flow of goods, most notably the US-led war against Iran that began this past February.
The closure of vital shipping lanes out of the Middle East sent shockwaves through energy and metals markets, further driving costs in an already persistently high inflationary environment.
Investors need to cut through the noise
Adding to a complex investment landscape is how investor strategy has shifted to more immediacy, driven by a fear of missing out. It’s easy to see headlines about a stock or sector catching fire, such as the current AI trend.
However, as Prins pointed out, relying on headlines isn’t a smart approach to building a portfolio.
“You really have to look at being an investor instead of being a short-term trader if you want to make real money,” she commented to the Rule Symposium audience. “Also, ignore the headlines and do the legwork for the underlying facts, the structural supply and demand relationships.”
Prins’ advice was to get back to the core of resource investing. Know the team, know the company, know the project and don’t be swayed by headlines or the short-term volatility behind them.
Day noted that many major news organizations rely on junior writers for their articles — not necessarily experts in the resource sector or even in the investment field — and added that most major journals are reactionary.
He suggested that by the time an organization like the Wall Street Journal gets a front-page article out, it’s because the price change has already happened, and the investment business already knows what’s going on.
This also leads to problems down the line when investors turn to AI to help cut through the noise.
Taggart relayed a story about a person he spoke with who built an AI agent that could answer questions about investing, but he questioned how much trust to place in it, noting AI’s tendency to hallucinate and its reliance on inputs.
“Look, you can flood the internet with anything you want, and the AIs just pick it up as fact,” he said.
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Hear more from Day on the global impact of the Middle East war and where he thinks gold will go next.
AI and the resource sector collide
While AI is increasingly being adopted for market research, the technology’s impact on the resource sector lies in its insatiable appetite for physical infrastructure.
Analyst models see industry CAPEX accelerating, which in turn will influence resource sector demand, but Taggart is concerned that the models they use don’t have the nuances investors should have.
“The cash will be there to build out those data centers,” he said.
“What I think they are missing right now, though, is there are a lot of real-world physical constraints that may prevent that data center buildout from happening on the same pace that the Excel spreadsheet imagines.”
Taggart brought it back to resources, permitted land, copper and the physical inputs necessary for construction, which could be a warning that’s being missed by resource sector investors.
“If the curve comes down that delta, it’s going to pull everything down with it. Just given the fact that this is such a massive percent of the market cap of the stock market at this point in time,” he said.
While AI grabs headlines, nuance is often missed, and it’s important for investors to dig deeper. While the drive for AI is surging, knowing what’s attached to those investments is also important.
Investors need to know more than just the assets
There’s a certain criticality to knowing what can support or hinder capital expenditures in the resource sector.
Although AI might be overshadowing resources right now in terms of the press it gets, many commodities, like copper, have seen the market balance shift in recent years and are now building toward a structural deficit.
It can take decades to take an asset from discovery to a productive mine, and the ones that get there are just a small fraction. A lot of the success or failure can go beyond the resource.
More recently, governments have been looking at ways to ease regulations and help major projects cut through red tape, but these policy shifts come after decades of hindering projects.
These changes to policy have seen countries like Canada move to create tax credit programs for investors who invest in the resource sector. The government has also formed a Major Projects Office that looks for infrastructure and resource projects that are in the national interest.
It’s still too early to tell how much of an impact these programs are having on the industry.
“Government moves much more slowly, strategically than capital can move, but at the same time, it can make the wrong decisions or make the late decisions based on what’s in front of it,” Prins said.
The US has created similar programs to fast track significant projects, particularly for critical minerals. The FAST-41 program is one of the initiatives. However, Prins was pragmatic about how projects are approved for these programs, noting that it often comes down to individual senators and their re-election bids.
“When I was in banking, you’d have a whole team of people going into the (Department of Defense) or some senator’s office, touting the thing that they care about most, and it’s not even necessarily the thing that’s most important at that moment. But it will gain priority because ultimately it’s the squeaky wheel of capital that’s most important,” she said.
The US has also seen a shift of another kind, where the Trump administration is increasingly becoming involved to help certain industries that it feels are most important to national security.
Taggart told of a mining CEO he knows who was offered a loan from the government toward the development of the company’s antimony asset. “It’s totally changed the focus of his business. He didn’t even see it coming a year ago. So there’s a lot of factors like that where I think you just want to be asking yourself, ‘What role is the government playing here, and what is the government likely to do?’” he told the conference audience.
It’s an important question, especially when the US government has taken stakes in companies like Trilogy Metals (TSX:TMQ,NYSEAMERICAN:TMQ), Lithium Americas (TSX:LAC,NYSE:LAC) and MP Materials (NYSE:MP).
And it’s a development that concerns Day.
“Now, the government speeding up permitting, that is wonderful, but the government taking direct equity stakes in private companies in order to help you out, I think this is just unbelievably appalling. Not just on a theoretical basis, but it’s going to come back to bite those companies,” Day said.
What should investors do?
Among the panelists’ top advice was for investors to expand their knowledge base so they can get to know the resources and what’s driving them. Knowing company management is also key.
“There’s a really important thing that comes from not knowing what you’re investing in well enough, and that is you really don’t know how to react to developments at the company that are negative, or to stock price moves,” Day said.
For her part, Prins suggested that resource sector investors should diversify their portfolios.
“If you are in the middle of junior mining companies, it behooves you to learn more about the junior explorers and basically go down the curve in terms of commodity development, and also just to not think that you’re only able to invest in gold and silver, or even copper or uranium, but to move into antimony or to move into tungsten,” she said.
The overall guiding principle from the panel was that there are many complexities in the mining sector. It’s sensitive to cost inputs, regulations and policy. It’s also rooted in supply and demand and the movement of goods. A disruption at any of those points can have effects on individual companies or across the industry.
As such, investment decisions shouldn’t be made based on headlines or in the hopes that AI can make the right decisions. Investors should carry out their own due diligence, get to know the companies, their assets, the commodities and all the macroeconomic inputs that can affect them.
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Securities Disclosure: I, Dean Belder, hold no direct investment interest in any company mentioned in this article.
Editorial Disclosure: The Investing News Network does not guarantee the accuracy or thoroughness of the information reported in the interviews it conducts. The opinions expressed in these interviews do not reflect the opinions of the Investing News Network and do not constituteinvestment advice All readers are encouraged to perform their own due diligence.
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