The Value Perspective with Adam Rozencwajg 2.0

Welcome to the Value Perspective Podcast on Decision Making. We're a group of value investors working together on the global value team here at Schroders. As investors, we have to tackle decision making in uncertain environments every day. In this podcast series, we speak to people from other walks of life who also share the challenge of making decisions in complex and uncertain environments. We cover topics such as how to think in probabilities, tools for overcoming psychological biases, and how we can learn and improve decision making in complex environments. We hope you enjoy it. This is marketing material for financial professionals and professional clients only. The material is not intended to provide and should not be relied on for accounting, legal or tax advice or investment recommendations. Reliance should not be placed on any views or information in the material when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance, it may not be repeated. Diversification cannot ensure profits or protect against the loss of principle. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. Exchange rate changes may cause the value of investments to fall as well as rise. Investing in emerging markets and securities with limited liquidity can expose investors to greater risk. Private assets investments are only available to qualified investors who are sophisticated enough to understand the risk associated with these investments. This material may contain forward looking information such as forecast or projections. Please note that any such information is not a guarantee of any future performance and there is no assurance that any forecast or production will be realized. The views and opinions contained herein are those of the individual to whom they are attributed. It may not necessarily represent views expressed or reflected in any other shoulders, communications, strategies or funds. Any reference to regions, countries, sectors, stocks or securities is for illustration purposes only and not a recommendation to buy or sell any financial instruments or adopt a specific investment strategy. Hi everyone and welcome back to TVP. Adam Rosjenszweig, the co-founder and managing director at Göring in Rosjenszweig, returns in this episode. Adam first appeared on TVP back in 2024 for a special episode with Jango Davidson-Huan, an episode that quickly became one of the most downloaded in the show's history. This time Juan, the co-founder and manager of the Schroder's Emerging Markets Value Strategy, hosts solo for a conversation with Adam on the realities of deep value investing in the commodity space. Special thanks goes to Ilya Deva for sending over Copernick's excellent paper Why Invest in Mining Companies, a piece that helped shape this discussion. In this episode, Adam shares his views on why he runs a long-living commodity boutique instead of a hedge fund, what it means to be a deep value investor in this sector, the mental frameworks he and his team used to improve decision making, and why traditional DCF models may fall short when valuing mining companies. They also tackled the role of gold in today's economic environment. And just before I leave you in their very capable hands, I wanted to say to keep your eyes peeled for an episode coming very shortly to TVP Feed Near You, featuring Dave Iben from Copernick, who also appeared during the TVP's New York Value Conference. We had him recently in the studio and cannot wait to share that conversation. Enjoy! Adam Rosenwag, welcome back to the Value Prospective Podcast. It's a pleasure to have you here. How are you? I'm very well. So good to be back. Nice to see you again. Nice to see you for those that don't know who you are and have not listened to our previous episode. Could you please introduce yourself? Introduce Goring and Rosenwag. What has been the journey? Of course. Yeah, absolutely. So my name is Adam Rosenwag. I'm one half of the investment team here, along with my longtime partner, Lee Garing. And we run the Garing and Rosenwag Resources Funds, which are effectively a natural resource equities series of funds. They're long only. We have a USITS fund for distribution all throughout Europe and Asia. We have a UK feeder fund, so that's pound to not accommodate it. We have a mutual fund in the US. But ultimately all are the same strategy. They're just different distribution vehicles. And what we like to do is we like to be deep, deep contrarian value investors in the resources space. That's where we really think the best value is found and the best investment returns can be found. And we start everything with the top down. We try to look commodity market by commodity market. We try to look for areas that have been starved for capital. I think that's the best predictor of future commodity outperformance, an area that's had no investment in it whatsoever. And we're value investors, so we like to get good deals. We like to buy stocks that are creating at really depressed valuations at less than book value, what have you. And lucky for us, there's quite a few of those opportunities abound today. Once we find those areas, we allocate to them, we allocate to the sector first and then to the individual stocks. And it's a strategy that my partner, Lee, has been pursuing for 35 years, and I've been working with him for the last 18 years or so. Where do we find you today? You look very smart with a suit and a tie, which is a little bit kind of, is that coming back? Well, it certainly is coming back in our office. So we are maybe a little more formal than most, but no, I think judging by the looks I get on the street, it's not really coming back too much here in New York. You say that you are mainly a long only strategy across all different vehicles. And I don't know if I, I don't remember if I asked you this on our previous occasion, but how come don't you guys don't run a hedge fund? Well, you know, we were a hedge fund for a long time. We were a Chilton investment company for, in least case, he was there for 10 years. I joined a little bit after he started. So I was there for eight or nine years. And we did run an equity long short fund. And what we found was a, was a couple of things, you know, shorting is a very powerful tool. And it helps, you know, with volatility, obviously, we always ran a net long bias. We were never like a pairs trader or a quant shop or anything like that. It was basically the, the strategy that we run now in the long book. And then we tried to reverse it on the short book and find areas that were really expensive and areas that were, you know, you had huge amount of investor capital and lots of new supply coming on. And we'd short those areas against our long book. And, you know, the strategy worked, worked quite well. However, when the market turned down in 2012, you know, we realized that the true volatility in the commodity space, yes, there's weekly volatility and you can run all the statistics and standard deviations. But what people really don't like is they don't like when oil goes from a hundred bucks to 27 bucks over two years. That's what they don't want. That's what they want hedges and protections against. And it's very difficult, if not really, frankly, impossible to try to hedge that out, those big cycle moves. So instead, what we realized was that the best return profile by far was our long book taken on its own. And the fees cut down dramatically, you know, no carried interest anymore, no, no incentive fee. So when you looked at that, we said, look, this is just so clear. Yes, there's more volatility. So maybe you make the position size a little smaller, or maybe, you know, you pair it with something else in your portfolio that can give a bit of balance. But very clearly, the alpha was all coming from our long book and from our very diligence research on the long book. And we wanted to offer that to our clients and an easy to own low cost product. And basically, you know, you would have to return such an extraordinary amount on your short book to overcome effectively the incentive fee compared to just the long book with no incentive fee. We said, you know, this is what's best. And the second reason I think we were driven in that direction is that, you know, by 2016, when we started the firm, we thought we were at the bottom of a cycle. You know, oil had fallen from $100 down to $27, gold had fallen down to $1100, copper was $2, down 50% to 80% in certain cases, commodity by commodity. And so we said, if there's ever a moment where your shorts are less needed and where what you really want is efficient, you know, cost-effective access to our long strategies, it's going to be now at the bottom of a cycle. And you know, maybe we'll revisit it later in the cycle when everything has kind of gone back up to two standard deviations above the mean, but so long as it's at the 99th percentile of undervaluation, you know, clearly what's in the best interest of our clients would be a long book with low fees. That's what we did. And you have described your strategy or you guys are being very deep, deep contrarian value investors. That's music to my ears, given that I am a value investor myself and I'm part of the value franchise at your orders. What does that mean in the context of the energy and metals mining commodity space? Well, that's a great question because there's some peculiarities, I think, to value investing in the commodity space. And one of those peculiarities is that a lot of the sort of standard metrics that you might think of as value investing don't necessarily hold true. So what do I mean by that? Well, the best time to find value in a commodity market is when the commodity price has fallen dramatically. Ideally, it's fallen so far that it's unsustainable. And we obviously see that, you know, it sounds like a really outlandish thing to say. How do you know it's unsustainably low? But, you know, when you really kind of take a step back and you just think reasonably and rationally, I think it's quite clear. We've seen a lot of that, right? We've seen oil prices go negative. I mean, that's very clearly unsustainable. But even oil at 50 bucks a lot of times is unsustainable, given how much incentive price you need to bring on enough supply to offset depletion and to meet new demand growth, right? So many, many times you will get a commodity price that goes well below the incentive price to bring on new supply. And I would say at least 50% of the time, any given commodity is well below its long-term equilibrium price, meaning the price that it takes over the full cycle to kind of balance supply and demand. And if you plug in an earnings model or a DCF model, when commodity prices are low, which ironically that's the time you want to be getting involved, they might seem really expensive because the companies might have no earnings, right? And so you need to look at it, not, not dissimilar to how you'd look at a cyclicals type of a business where you don't want to necessarily look at pricing right at the bottom. So what you need to do in our mind is you need to take a long-term view of the commodity price. Where does this market settle out? Where can you bring on enough new supply to meet depletion and demand growth? What price does that take? You run that through your models and you want to look for deep discounts to intrinsic value based on, based on that long-term view of the commodity price. That's to us what it means to be a value investor in the space. This is not the podcast that is supposed to be topical, but I cannot pass on the opportunity to open up our discussion with what has been transpiring in the world over the last 30 days, because we're recording this episode in the, at the end of April. And so it's been almost a month since the declaration of liberation day. And while many changes have occurred, the overall impact on commodity markets remains mixed. What does this mean for the commodity markets? Well, I think that the concern that most investors have in the commodity markets today in relation in particular to liberation day and all the uncertainty that's come since then has been to think about demand. They said, okay, look, you know, it's possible that these tariffs, depending on how they shake out, will have a large impact on global economic activity. And obviously there's a very tight relationship between global economic activity and energy demand as well as metals demand. And so the straightforward conclusion that your economics teacher would have taught you in first year university would be to see a downward shift in the demand curve and the same amount of supply. And so all of a sudden prices would ratchet lower. And I think that's been the big concern, right, is that people's expectations for economic output is now wider than it was 30 days ago. But I think to some degree that misses the point a little bit, there's a second level thinking here. And I think ultimately that second level thinking is going to be far more important to commodity returns, natural resource equity returns going forward. And what that is is the following. Commodities go through these huge long cycles and we've written a lot about this and you can go on our website, we put all of our research out in the public domain for free. And if you look at where we are today, we're very clearly at the bottom of an extreme commodity cycle. Why do I say we're at the bottom? We've never been lower, you know, commodity markets relative to financial assets. We look at the commodity prices divided by the Dow. It's a really simple blunt instrument, but it tells you roughly where you are in the cycle. And we're at the cheapest reading we've ever seen except for 2020, right? 2020 was the absolute low and now we're up off of the 2020 lows, but we're still today absent 2020 would be the lowest that we've been in 150 years. So we haven't even hit the next low, which was 29, 69 and 99. Those are the other major lows. And we've done a lot of work and a lot of studying of these commodity cycles. And really what they reflect is the capital cycle, money coming into the commodity space and money coming out of the commodity space. And eventually when too much money comes into the commodity space, it brings on a lot of new supply and the market slips into surplus. And then prices fall and money comes rushing back out and eventually the supply side ratchets tighter and tighter because depletion from existing mines and oil fields take hold. And the market begins to just ever so slightly slip from surplus back into deficit and prices rally again. And that's the cycle. And so we're at the bottom of that cycle. We are at an extreme low in terms of investments in commodities and natural resource equities. There's lots of different measures we use to see that. And the markets are all slipping now from a surplus back into a deficit because we haven't brought on enough new supply. But the big question we get asked over and over again is what's the catalyst that will end this bear market and start a really robust bull market. And again, if you go back to the last three bear markets, they all ended in exactly the same way. And what was that way? It was a change to the global monetary regime. And it was a change in global trade policies. That was true in 1929. We abandoned the classical gold standard and we put in place the Smooty Hall US tariff system. That was true in 6970, where we ended Bretton Woods and we repealed all the tariffs that were put in place in the early thirties. And that was true in the late 1990s when we effectively ended the Asian currency peg at par with the dollar and all the Asian currencies revalued well below par to help spur their exports. And we added all the Asian countries to the WTO. So every one of these shifts that has gone from growth assets, good large cap, good tech, good resources, bad to the opposite resources, good and all those other areas struggling, they all corresponded every single shift corresponded to exactly what I just said, a change in the monetary policy monetary regime, as we call it, and a change in global trade patterns. And that's what we're seeing now, you know, Treasury Secretary Besant and the chairman of the Council of Economic Adviser Stephen Mirren has been talking about how the current system is unsustainable and all the changes they want to see, there's these so-called Mar-a-Lago Accords that are floating around that would fundamentally reshape the dollar's role in global trade. It would be a redollarization of trade, not a de-dollarization, move back towards the dollar away from these BRICS alternative settlement currencies. And on the flip side of that, if you're going to change the monetary regime, you have to change trade flow patterns. Why? Well, you know, monetary movements around the world don't exist in a vacuum. We all know from accounting 101, you need two entries in the general ledger. One is money. The other one is goods and services. So if you're going to change the money flow system, you have to change the good flow system. And that's why you've always had these trade trade changes take place pretty much around the same time as major changes in monetary systems. That's what you're seeing now. So Liberation Day was the beginning of an enactment of a fundamentally different monetary order and a fundamentally different trade order. What shape does it take? I have absolutely no idea. Do tariffs get repealed and rolled back? My gut feel is that they do. My gut feel is that what the administration is trying to do here is use tariffs to delineate between a common wealth of countries, a common wealth of allies that can enjoy free trade, security guarantees and lots of federal liquidity, or you're on the outside and you have to deal with really high tariffs. And this is sort of the wall that's going up. And if you think about Trump, if there's two things that Trump likes, it's walls and tariffs. And so this has both of those, if you will. I don't know what shape it's going to end up taking. I don't know what factions within the administration are driving the bus on a day to day basis. To some extent, from my little perch, looking just at commodity markets, I don't know that I care because the catalyst has not been tariffs on or tariffs off. The catalyst has not been more gold or less gold in the monetary system. It's just been a change. A change to trade and a change to monetary systems is what has been the catalyst to reinvigorate real assets. And you know what? I think it's happening as we speak because on a year to date basis, even though the numbers aren't superb on an absolute basis, on a relative basis, resource equities are actually outperforming the market. And given how uncertain everyone is about economic growth, that's not something you should expect. There's periods of time in the cycle where risk to economic activity would mean that commodity stocks would lead the market lower. And the fact that they're actually outperforming, and in our case, we're actually up on the air, I think is a sign that perhaps what we're seeing now is a little bit different. What we're seeing now is a big, big, big rotation out of what's worked for the last really 25 years, which has been high growth, been momentum. It's been large cap over small cap, growth over value, passive overactive, compression of yields all to effectively grow, whether it's sovereigns, corporates, high yields or earnings yields, they've all been converging. I think that we're seeing an end to that regime and people need to protect themselves here going forward. So I think this is going to be values day. I think it's going to be active's day. And I think it's really going to be natural resources time to shine. It was a lot of pressure in the markets in the days after the announcement of tariffs. And we're always very interested in the mental models and behavioral traits of the investors coming on this podcast and the way they manage decision making under uncertainty. Could you please share with us how were you and the team making decisions in the days after the tariff announcement when there was a significant amount of pressure in the markets? Sure. So I think the first mental model that we like to use. So again, let me start at the beginning, I suppose. The first mental model that we're using through this entire period is that a major change in monetary and trade regimes is actually potentially to be a positive catalyst in real assets. That was our working hypothesis as early as 2019, actually. Now, we weren't saying that a change was imminent. We were saying, keep your antennas up and look out for these changes because historically, all the way back in 2019, commodities were really cheap relative to financial assets. So we said, you know, the catalyst to end this and go into a new, strong bull market is going to be, if history is a guide, these changes in monetary plumbing and monetary systems, watch out for that. As recently as 2022, we thought that might be the BRICS countries that were trying to start this new alternative currency to trade outside the dollar. Now, I think it's the US itself that's driving that change. But that's the first mental model that we've been looking at. Commodities are cheap. They're unsustainably cheap. We're not investing enough to replace depletion. What ends that? Historically, a big shift in the superstructure, in the macro superstructure, watch out. So that's the first mental model that I think we've been using all year, and certainly since the tariffs were announced. The second mental model, you know, going maybe a little bit more specific to the days following the trade tariff announcements, is that we generally try, you know, our best long-term returns have come from being cool, common, collected under pressure. We try to do a lot of work on the names that we own and a lot of work on the commodity sectors, so that when you get these big market dislocations, you don't end up annexing into them. That's number one, right? And certainly what we saw in the days after tariffs were announced was a forced liquidation. You know, it was an unwind, a levered unwind of positions across the board. There's no two ways about it. You saw the baby being thrown out with the bathwater, things that didn't necessarily make sense, and it's because people were being forced, either for margin calls or just for their risk models, they were taking risk off of their books. So you certainly cannot be a seller into that, because that could end up, you know, realizing a loss right at the bottom. And in the immediate days after the tariffs, you also don't necessarily want to be buying huge amounts of things, even though there can be some value that appears in different parts of the dislocated market. However, you know, the truth is that when you're in those really choppy waters, more often than not, the best thing to do is to let things settle out a little bit and then see where the board is or how the board looks and move accordingly from there. So that's a mental model that I think we've often used, and that's basically what we used this time as well. We were happy with how we were positioned going in. We had a lot of gold mining equities, which provided nice ballast in the portfolio. Then we saw how things shook out, and then we looked to make some adjustments across the board once we had this kind of new, new state of the world in play. And what does that look like? I mean, look, obviously the big move this year has been gold much, much higher and energy has been fairly weak. And so I think if you're a value investor, you need to be looking in that dynamic. And it's not time I don't think I don't think it's time at all to get out of your gold stocks by any means, so don't get me wrong. But energy is representing a really attractive relative value here. And so, you know, if there's something to be done, it's probably in that, in that department, which literally to which leads me very nicely to my next question, which is whether you can give us some insights and explain to us why, in your opinion, oil prices have been under so much pressure, and what does it look like into the future? I would say, I mean, you will correct me if I'm wrong, but that's the one commodity that has been significantly under pressure over the course of the last. It's not even the last 30 days, probably year to date. Yeah, look, I mean, I think that the bright spot has obviously been gold, and I think the weak spot has been, let's say crude oil. So right before the tariffs were announced, you know, on a year to date basis, oil started the year kind of 72 or so, it got as high as 80 bucks in April, sorry, not April, in mid January of this year. And then it fell all the way back down to 65, rallied back to 70. And then the tariffs came in and immediately oil sold down into the high 50s, and today we're at $61 as we speak this morning. It's the 29th of April today. So that's definitely been under pressure, definitely from the high points in mid January, 80 to 60 is a 25% move. I think there's been a couple reasons for it. I think, obviously, certainly compared to gold, gold tends to benefit in periods of financial dislocation and periods of concern over the status quo, and periods of uncertainty. Gold tends to be a good performer. If the US dollar comes under pressure the way it has been, then gold is going to be a doubly good performer. So I think that is why gold has done quite well. On the oil side, other than worries about economic activity, the other event that took place, and it actually took place exactly the same day as the Trump tariffs were announced, was that Saudi Arabia and Russia decided that they would increase oil production from the OPEC plus group by 400,000 barrels a day in May. That was earlier than had been anticipated, and that was a bit of a surprise to the market. And there's no getting around that. That was a surprise to the market. So why did they do that? And what does it mean to the balances going forward? So I think there's lots of different conspiracy theories and rumors as to why they might have done that. Difficult to say for certain do only will only know in retrospect. One of the rumors is that perhaps they're doing it in anticipation of increased US hostility or US Israeli hostility in Iran, which could take Iranian crude off the market, and they want to make sure the markets are amply supplied going into that. That's possible. I don't know. I mean, you have to be, I think, pretty inside the fold to know whether that's true or not. Another common argument or line of thinking says that Trump really wanted lower oil prices to help with inflation, particularly in the months leading up to when the campaigning for the midterms are really going to start, which is later this year, and particularly in the event of dislocations from trade issues. It might be nice to have consumer disposable income higher because energy costs are lower. So in the case of Saudi Arabia, they've been getting quite a bit of favorable treatment from the Trump administration. We don't need to get into all kinds of foreign policy, but in a very broad stroke, the Democrats have been more keen to be amenable to Iran and the idea that if we're nice to the people in Iran that perhaps will get a groundswell of support from the streets that's more pro-western, the Republican attitude has been more that the rulers in Iran are antithetical to US interests and that the best course of action is to have a strong Saudi Arabia, a Sunni majority of Saudi Arabia, to counteract Iran in the region. So MBS much prefers dealing with the Republicans and prefers dealing with Trump than he does with Biden and the Democrats, and Trump needed low oil prices, and so MBS delivered that to him. Russia, the rumor goes that in order to try to provide a counter bid to Ukraine's mineral deal that was put forward by Zelensky and Trump, that Russia said, "Look, I'll help orchestrate a rise in oil production from OPEC Plus, and I'll help influence Saudi to do that to help bring down." I can't offer minerals necessarily, but I'll offer crude through the OPEC Plus group. Whatever the case was, that announcement occurred the same day as Liberation Day, and both of those things together really resulted in quite a sharp sell-off in crude. I do think that the sell-off in crude is overdone here because the number one important dynamic in global oil markets today, OPEC Plus might be garnering the headlines and demand might be the big concern that people have, but really, I think the driver that's the most important that people need to be paying attention to is the fact that non-OPEC oil supply, which had been driven entirely, all that growth had been driven entirely by the U.S. shales and had grown very robustly for many, many years, has now stopped growing, and it's actually about to roll over. In fact, I think on a monthly basis, it's probably already has rolled over, and that's something that we've been predicting would happen again for four or five years, and when I say that, we haven't been predicting every month that it would happen for four or five years. For four or five years, we predicted that in 2024, production would roll over, and it looks like it has. The roll over, as of right now, is not super pronounced. It's just bouncing around the top, but these production profiles tend to follow almost like a bell-shaped curve, and so they do have a plateau at the top before they roll over, but it's no longer growing. That's the most important thing. We used to be growing in the U.S. a million and a half barrels a day. That's like one and a half percent. That's more than global oil demand was growing every year. The rest of the world was declining, let's say, and the U.S. was growing and meeting on a net basis 110% of global demand growth. That's now gone, and that's a huge, huge, huge issue, because as non-OPEC oil supply grows slows and even turns negative, OPEC gains market share, and they gain pricing power, and they tend to use it. People are worried in the next 60, 90 days about this 400,000 barrel. I get that, but I think it's ultimately giving a good buying opportunity here because the medium and long-term fundamentals are extremely positive, extremely positive. I'm sorry. Let's move on to mining. That's really interesting and very important, and actually, you did answer the end of my question, which was where to from here on the oil markets. I want to change the text a little bit here, and I want to base my next few questions on a very good paper written by the Kuprknik team on mining back in October last year. The name of the paper is "Why Invest in Mining Companies?" The paper makes the point that the default methodology for valuing companies, the DCF model, is flawed when it comes to commodity-derived companies, and it's because flaw, they argue, is the time value of money assumption in the DCF calculation where the cash flows after a number of years carry almost no value in present terms, but, they argue, many mines will operate for decades to come, even a century. Would you agree with that statement, and if the DCF is not the best way to think about the value of a mining company, then what should it be in your opinion, and I think that at the beginning of the conversation, you did mention the importance of incorporating... You guys do run different models to actually understand what the value of the different commodity place that you are investing in are, so how does that work? Sure. I'll say a few things. I have not read the paper that you're referring to, but I do know Dave Ibbin and his team at Copernick decently well have traveled with some of them and met mining companies and stuff like that, and I like the work that they do. I think they're good diligence value investors. They're generalists, but they've had a big focus in the resources space because that's been the biggest source of value, I think, in the market for the last couple of times, and they haven't shied away from that. They've appreciated that and leaned into it, and I like those guys. I've not read the paper, so I don't know all the things that it says, but I do know this argument, and there's a mining executive named Robert Friedland who goes around and he's very charismatic, and he's been responsible for some of the biggest mining discoveries and more accurate to say mining projects in the last 100 years. Yeah, go ahead. So he's the main character of the big score? Yes, he's the main character, exactly, the main character of the big score. So the book about... That's right. I thought you were saying the big short, and I said, "No, I don't think he's in the big short." The big score, yes. He's absolutely... He's the focus character in the big score. Which is the very big or the largest discovery of Nico Richard from Canada. So Robert has been responsible for a few major projects over his career in just spanned decades in an industry where 95% of geologists, and he's not a geologist, he's a mining executive, but he's a very technical mining executive. Let's say 95% of mining executives will go their entire career without being responsible for a world-class discovery, I guess by definition, right? They happen very seldom. You could make a very cogent case that he's responsible for three, and before his career is done, it might be four or five, that's basically unheard of in the mining industry. He's had a very, very prolific career, and he's a very charismatic presenter and advocate for the mining industry. A number of years ago, and so he was responsible for Voizys Bay, which is a huge nickel deposit up in Canada. He was responsible for Oyutogoy, which is a huge copper deposit in Mongolia. Most recently, and probably most famous of all, has been Kamoa Kokula, which has made the DRC the copper powerhouse that it is today. His asset, particularly Kamoa Kokula, is very, very long-lived. When he presents at mining conferences and stuff, he said something very similar to this, which is that a DCF doesn't fully capture the long-term strategic value of that asset, because as you said, after year 20 or so, the value of the discounted cash flows is so small that everyone knows it's going to produce more than 20 years, and yet the contribution to the total value is really, really small. Do I agree with that? How do we look at things? We look at things on a DCF basis. I think a DCF basis is financially a sound way to look at the quality of an asset, because the truth of the matter, no one's saying that the mine won't produce after 20 years. All they're saying is that the value of a cash flow in 20 years is not the same as the value of a cash flow today, and that's based upon a discount rate. To discount your cash flows in year 25 or 30 or 35 at a reasonable rate and say they're not worth very much today, is that incorrect? No, I think that fundamentally is correct, but I do agree with the intuition that it doesn't properly capture the full strategic value of the asset, and here's why. This is what people miss, and I think that it can result in really attractive opportunities in some world-class assets. This is what they miss at the bottom of cycles, and this is also what they miss with really long-lived assets. A mine can be thought of as a series of cash flows if you assume a given commodity price. You assume a commodity price, you say this is what it's going to be, that determines cash flows, and then you discount those back. But a mine is also a little bit different, because it's like a string of call options. Let's say that you produce gold at $1,000 an ounce, $1,500 an ounce, what have you, and you have a long-lived asset, which in gold mining is almost impossible to do, but let's just say for the sake of this conversation you do. Well then, in year 20, if you have a strike price of $1,500 on a call option, and then the gold price is the gold price, and the number of call options is equivalent to how much production you're going to have there, that's effectively what your year 20 production is. If gold prices were to fall below the strike price, you wouldn't produce that asset. If it goes above, you get the difference between the cash cost, the strike price in this option example, and the spot price on that given year. You can think of any mining asset as a series of call options. When you think of it that way, and you have a very, very long-lived asset, those option values on the long-dated options are worth quite a bit of money, because all that needs to happen, if you have a five or 10-year life of mine, that on a DCF will give you a certain value. If you don't get the commodity price right in those five or 10 years, it's very possible. Every year that you're wrong on the commodity price, and it doesn't do as well as you had hoped, you give up 10% of that asset in terms of the reserves, you give up 10% at some substandard margin. It could very well happen that on the 11th year, commodity prices rally, but you have nothing left. You're not able to realize any value, or if you do, you have so little left in your reserves that you get the benefit only for what remains, which is not very much. If you have a long 100-year asset, like BHP, or Rio does, or Friedland does in the Congo and in Mongolia, then the likelihood that you get a commodity supercycle somewhere in the middle, you get a massive rally in copper prices that will allow, particularly as an equity investor, the chance to realize the gains and get out of that name in a spike and generate a super, super above average return is really high, and there's value to that. There's value to that, and that value does not get reflected on a DCF because you're absolutely right. If you plug in a static commodity price in year 25, and you discount it back, it's not going to add a lot to the DCF, but if you think about it as that option value saying, "Look, I'm giving myself a generation, and all I need is one massive commodity spike within that generation, and I'll be able to realize a huge profit on this asset," that becomes really, really attractive. We try to look at things on a DCF basis, and we try to look at it using our long-term view of the commodity price, which oftentimes is a lot higher than the spot price, and that's how we try to balance for that. At periods of market extremes, though, I think actually running a valuation method where you actually value each year's cash flows as a string of call options can be really illustrative, particularly that shows a big difference at market bottoms, which like we did when we tried to look at how cheap gold stocks were, and we were comparing where they are today versus where they are in 1999. If you did a DCF in 1999 using 275 gold, which was the spot price at that time, no company had any enterprise value. Most of them had negative margins, so does that mean they weren't worth anything? No, they were the best investment, they went up 30-fold over the next decade, but if you valued them as call options at 275, and you looked at the distribution of potential returns around that, but call options with a 275 strike price or 285 strike price, which was their cash costs back then, then all of a sudden they were worth quite a bit of money in 1999, and the stocks were really cheap relative to that intrinsic value. So I think at times, in certain cases, the two valuation methods can deviate, and when they do, I think thinking of them as options is very, very helpful, and I think that's what the saying that a DCF for long-lived assets doesn't work, I think, is ultimately getting at that intuition. That is a fascinating answer to the question, and it ties very well to my question on probability thinking that we discussed on our previous conversation where you explained the call option incorporation into the way that you guys value different assets. Oh, no, did I talk about that last time also? Yeah, but it's perfect, because it ties perfectly, but I didn't, I asked a question about probabilistic thinking, and you used the call option methodology to explain how probabilities were incorporated into your process, and today's question was a little bit about what valuation or how to think about valuation of long-standing commodity assets, which leads me to my next question and is the fact that following the same line of argument from the paper, they argue that gold is an excellent store of value. A gold coin today is highly likely to maintain its purchasing power in 10, 15, or 100 years, whereas the DCF model will imply that gold and other commodities will lose value relative to dollars. Goring and Rosenweig have been very bullish on gold for a very long time, but to think about gold in the context of the current investment environment and what might come next in the next four years. So I have to read their paper to understand why DCF would suggest that gold prices would fall over time, that that's not immediately intuitive to me, but it's entirely possible that after I read their paper, I'd understand what they mean by that. Look, I think that people have criticized gold over time by saying that it doesn't generate cash flows and that's been Buffett's argument against gold. He says the only thing that gold grows is dust if you leave it in the safe or whatever. And there's a lot of truth to that. An operating company will be able to, if you pick it well, deliver a positive margin that can be reinvested into the business and generate ultimately a return on equity that exceeds the cost of capital and growth. And as again, Buffett says, compounding is a wonder of the world and it really is. It doesn't take a lot of compounded growth to over time have a massive, massive result and you're not going to get compounding growth with gold. It will, one ounce will be an ounce a year from now and a hundred years from now and a thousand years from now that the weight will not suddenly change. But to say that that means it doesn't have value because it doesn't have cash flows, I don't think is appropriate, cash, fiat currencies don't generate cash flows. You say, oh, well, of course they do, you know, you get a yield on your cash, well, treasury bills generate cash flows, but dollar bills do not. And that doesn't mean that a dollar bill has no value. It just means that you have to think about its value a little differently. And I think the way that a lot of people think about the value of a dollar bill is in relation to how many dollar bills are being printed, which could be thought of as how many gold ounces are being mined, how many gold dollar bills are being demanded, which, which again, you can look at demand for gold coming from different sources and the price elasticity of that. And then you look at, you know, certain ratios, you say, well, you know, how many dollars does it take to buy a basket of goods, you know, and you can begin to look at inflation in real dollars to see to what extent the dollar, the value of the dollar has been improving or declining. You could do all the same things with gold, you know, you can look at how much does one ounce of gold buy you of the Dow, you know, and divide one by the other, you could say how many US dollars are backed by the US holdings of gold, or you could say the same thing for that matter of China as somebody recently did in the latest issue of grants. They said, you know, how much gold would China need to buy to get to a 5% backing? You could do the opposite here and you could say how much of the dollar is backed by gold. We don't change the amount of gold the US holds, but the price changes. So how much of the dollar is backed by gold turns out it's extremely low as low as it's ever been. You could look at the total value of all the world's financial assets relative to the total value of all the world's gold holdings, which is actually easy to calculate because I think 98, 99% of all the gold that's ever been mined is still readily available. And when you look at any of those things, you begin to get a bit of a picture as to where you are in the gold cycle. Is gold cheap, is it expensive, and where do you go from here? And by every measure, given how much money and debt we've printed in the world, gold is extremely cheap, as almost as cheap as it's ever been. Yeah. If you look, for instance, over the 20th century, the US Federal Reserve has held gold. It's actually the gold is held at the Treasury, but it's the Fed's gold. And the Fed has also printed dollar bills. And you can look at how much the gold holdings is worth versus the dollar bills, how much of every dollar has been backed by gold. And what's amazing to me is that I would think that if you did that chart out and you had a breakpoint, which is when the US went off of gold as a gold standard, it would no longer backed by gold, that that would represent a fundamental shift in that chart, that you would be able to just point, anyone would be able to point and be like, well, that's obviously where they went off gold, that it would be a shock and a different regime after than before. And in fact, you can't see any difference in the chart at all. It moves in these big, long cycles, but you can't point out where we were on gold and where we were off gold. So what happened before we went off gold was that the price of gold was fixed, but the amount of gold that was in the Federal Reserve's holdings flowed in and out, depending on whether people brought gold to the US and said, give me dollar bills in exchange for gold, in which case the gold holdings went up, or did they say, here's my dollars, I want my gold back, like the French did throughout the 1960s. And if you look at that, you know, we had periods of time in the United States went from having a dollar that was backed seven, was it seven percent, seven cents on the dollar by gold, 25 was where we were really supposed to keep it, and that's where it was for most of Bretton Woods. And in two periods, we actually had so much gold, or the price of gold was so high that every dollar in the United States was backed by $1.70 worth of gold. That's amazing. It's a gold standard on steroids. Britain ran a gold standard with 20% coverage, or as low as 5% coverage at times, 20% coverage on average. Right before World War II, everyone brought their gold to the United States. And the Fed said, look, we don't want to print all these dollars because we're going to have a huge inflationary boom in the US. So they didn't print the dollars, but they took the gold. Every dollar is backed $1.70 of gold is incredible. Then we fixed the gold holdings in 1971. We said the dollar is no longer convertible. Since that day, we've had 8,800 tons of gold static since then, but the price was allowed to float. And by 1980, when gold hit 800 bucks, based on how many dollars we have printed, the dollar was again backed, again, exactly the same, $1.70 worth of gold. Amazing. So now we're back down to the lowest level we've seen, with a 7% backed, double check that number. It was quite, quite extremely low, basically as low as it was in '99, which was a great buying opportunity. So the amount of paper that's in the world has grown much faster, much faster than the value of the gold stock in the world. And that means the gold's getting cheaper relative to financial assets. And that means it should do well, even though it doesn't generate cash flows. Although I should point out, and this is a little bit cynical, but I think Barron's wrote an article to this effect this past weekend, that over the last 25 years, gold has been the best performing asset class. So it's beat stocks. So even though there's been all this wonderful miracles of compounding and the businesses have been growing and you've had good economic activity, gold, which has grown only dust, has outperformed all of that. So go figure. There you go. I'm going to change tags again, and I'm going to talk about or ask you about my favorite commodity, which is uranium and can pass me the opportunity to ask you about the state of the nuclear power market and its implications for this specific commodity. After all the noise and excitement, uranium prices have come down over the course of the last 12 months. You guys, correct me if I'm wrong, you have been quite bullish about uranium in the past. What has happened and how do you read this specific market environment for that point? So we remain very bullish on uranium. We were one of the very earliest investors in this uranium trade back when uranium was less than $20 a pound. It got as high as 107 on the spot basis this cycle. If you want to talk uranium, there's two things we can talk about. There's the fundamentals and then there's what's been happening in the price and they're about as different as they can be. On a fundamental basis, everything looks really, really good in uranium. There's been a lot of supply disruptions, both Kazakhstan, Canada. There hasn't been any major positive news on the supply front. It's been bullish, meaning there's been supply disappointments. Demand meanwhile has been really, really strong. We've seen last year was the year that all the tech companies pledged their support for nuclear power that realistically won't be a story until the 2030s. But we saw life extensions of existing reactors. We saw new reactors being built in China and Korea. Just recently, we saw a huge new pledge for new Chinese reactors going forward. The demand side of the equation is really good. The supply side is really bad and inventories are quite low. As a result of that, the term contract market, which is where 90% of uranium gets transacted, has moved up and up and up and up steadily. I think it's off a dollar from its high. It's just gone up and to the right. It's kind of consolidating a bit here, but it has not broken down at all. The spot price, on the other hand, which is 10% of the market, has been very volatile. It has gone far in excess of the term price on the upside in 2023. It was 30% higher than the term price. That's a gap that we've really never seen in uranium before. Normally, they track very closely. Now, it's about 10 bucks below the spot price. Again, one of the widest discounts to the term price, rather, that we've ever seen. From peak to trough, that's been one hell of a difference. From peak to trough, spot uranium is down like 35% at the same time as the term contract over the same period is up like 10% or 20%, massive, massive difference. What's going on? The short answer is that the hedge funds got super involved in the uranium trade in 2023 and they got out in 2024. Now by every indication, they're pretty short in at least April of 2025 to the point that a lot of the Australian junior uranium companies have 30% short interests and it was going to take 25 days to cover. They've really become very, very, very short. As I said, the spot price is below the term price, which I think reflects all of that speculative negative energy. The same way is when the spot price was well in excess of the term price. It was an indication that the hedge funds were piling in on the long side. Why were they so long and why are they so short? I think that one of the games that they were playing on the long side was that they would buy small junior names and then they would go to the Sprott Physical Uranium Trust and buy that. They would bid it up to the point that it went above NAV. When it got above NAV, the Sprott Physical Uranium Trust was allowed to issue shares at the market and use that proceed to buy more uranium. Since the spot market was getting tighter and tighter and tighter, every time they did that, the spot market would pop higher. In turn, a higher spot market meant that the companies would respond. You complete the cycle. You buy the junior speculative guys, you pull up the Sprott Physical, the Sprott Physical buy a spot material, the spot material price goes up, and that drives the stocks higher. In a lot of times, because they were smaller and more speculative, the beta that you would get in them was really high. You would get more of a bang for your buck out of the stocks than you had to put in bullying up the Sprott Physical. That went on until it couldn't anymore, and now that trade has been largely taken off. In fact, it's gone the other way. What they are doing now, and this is all rumors amongst the traders and chatter and stuff like that, is that they're accumulating positions in the Sprott Physical. When it gets near NAV, they're dumping those shares on the market to keep it below NAV, keep the Sprott Physical out of the spot market. It's not allowed to raise new equity. There's a concern that perhaps if they do that for long enough, maybe Sprott will run out of money to be able to pay the storage bill on its uranium, and they'll have to sell uranium into the market to pay the storage bills. All of a sudden, there's this concern that the 60 million pounds that Sprott's accumulated is no longer immobilized, but it could come back on the market. I think that's a very dangerous game that they're playing, particularly by expressing it in these very small illiquid Australian juniors. More power to them. They obviously sleep much more soundly than I do because if that were me, I would be up all night with a different time zone to boot watching the tape, but so be it. I think that now they've gone totally short. You can see it in the short interest in a lot of the stocks. Why the hedge funds are so enamored with an industry that has a total market capitalization of $20 billion or $30 billion across the whole industry. I don't know, but having worked at a hedge fund for a long time, this is definitely the type of market they like. It's a little bit obscure. It's a little bit whatever. They feel that they can really get inside it and understand it, but I think like with most of them, it will probably end in tears, I suspect. Meaning prices will move much higher again. On the supply to man fundamentals, if I took your Bloomberg away and we just talked uranium based on the data, it's incredibly, incredibly positive. Then you look at the charts and you say, "Oh, this is a bubble that's already burst." I think it's far from that and the next leg in uranium is going to go much, much higher. Interesting. We're coming to an end of our session and I just want to ask if there is any commodity that we haven't discussed that is worth highlighting in today's environment. Last time that we talked, we mentioned towards the end of PGMs. Is there anything else? Yeah. Look, I think the PGMs are really, really exciting. I continue to think that we've built our positions in PGMs. We have about 6%, 7% of the portfolio in PGMs. I think that's a market that's been so misunderstood. Everyone thought that effectively PGM demand would go to zero because we're going to move away from internal combustion engines to EVs, so no one's bothered to invest in a new PGM mine in quite some time. They're all in South Africa, which presents risks to itself and it's trading at the widest discount to gold, I think on record, so they're all very, very, very bullish. There's now a view that hybrid cars are going to be probably the solution as opposed to full electric vehicles. That makes a lot of sense to us. We have been very critical on EVs because they require so much energy to manufacture that huge battery pack and then you have to lug it around. It's very heavy. It's like 60% of the weight of the car and you have to carry that around and obviously spend energy to move that around so that you can have a range of 300 miles and go on your long trip, except that when you go on a long trip, you become so anxious on your range anxiety that you usually take your second car, which is your internal combustion car. It's like, why do it? A hybrid makes a lot more sense. You can enjoy some of the benefits of an electric motor, better torque and starting off the line and energy efficiency and stuff like that. If you're in town, you might never use the gasoline or diesel engine, but you don't carry around this huge battery. You don't have to manufacture it, which is very humanitarily expensive and energy expensive and you don't have to move it with you on your back all the time. I like that. We've always liked hybrids and hybrids are very PGM intensive, actually more than internal combustion engines. As the world starts to wake up to that, I think that that's becoming a much more interesting proposition and the stocks are just so cheap. They're just so, so, so cheap and the price of the commodity is really cheap. Altogether, it's likely to be a very strong bull market there over the cycle. When exactly it happens, they're actually up performing now. When exactly it happens. I'm not sure. Adam Rosenberg, thank you very much for your time and coming on the value perspective podcast again. Thank you. It was wonderful to talk to you again.