[00:02:10] Clay Finck: I’ve been really excited to bring you onto the show because you’ve been discussing many of these interesting topics and talking a lot about where things are heading with regards to the energy space.

[00:02:21] Clay Finck: And you have extensive experience in the investment industry, especially in energy. And I really wanted to bring you on to get an update on where we stand today and your views on the market. So before we talk about today’s market, Arvind, how about we start by looking at the big picture and explaining how we got to where we are today to help set the stage for the discussion?

[00:02:43] Arvind Sanger: I could go back a long time, but my career spans over 30 years of analyzing and then investing for the last 22 years or so, investing in the energy space. So energy and I guess mining, but energy is the broader, longer time horizon. And I would say that energy. As we have, when I got into the business in the 86, 87 time period, oil had crashed to 10 a barrel.

[00:03:06] Arvind Sanger: There was too much supply. And for most of my career, the energy companies responded, have money, we’ll spend. So it was like money in, money out, how fast can we grow? And it was always trying to, Fight an uphill battle in many parts of America, but in many parts of the world going out for exploration risk and everything else.

[00:03:25] Arvind Sanger: And then when I got to the investment side, there were many cycles from when I got into the business, I missed the entire 70s. I wasn’t in the business. I was too young, but in the late 80s and 90s, there were many cycles. Things got good for a while and then they rolled over. And then I was really lucky in my timing.

[00:03:43] Arvind Sanger: What really happened in the 2000s is the emergence of China. And the emergence of China happened at the same time as we started worrying about peak oil. So what you had is a confluence of very strong demand growth from emerging markets led by China, which was the first major cycle that we’ve had since the 70s, where you had a sustained cycle for several years.

[00:04:04] Arvind Sanger: At the same time, we were worrying about running out of energy. And I got into metals investing kind of a couple of years after starting an energy investment portfolio. And they were similar drivers. China’s emerging markets were the drivers of this boom. So that was a great cycle that unfortunately ended more or less with the global financial crisis in 2008.

[00:04:23] Arvind Sanger: Then the decade of the 2010s hit. And in the decade of the 2010s, what you had is a cycle that, after the global financial crisis, demand recovered. Demand wasn’t quite as good as the China bull market era, but it was still very solid. But what changed is, certainly on the energy side, shale oil.

[00:04:42] Arvind Sanger: And shale oil created Too much supply with no capital discipline and China itself also, because it was a much more debt fueled rally, wasn’t quite as material heavy and the mining companies over invested. During the 2010s, you had negative returns if you invested in mining stocks or if you invested in energy stocks.

[00:05:00] Arvind Sanger: Unlike the 2000s, you had no returns in NASDAQ. From 2000, 2008, and you had great returns in energy and metals and mining. And then you had the second cycle where it was the exact opposite. You had great returns in Nasdaq and s and p was reasonably good, and you had negative returns in energy and metals and mining.

[00:05:16] Arvind Sanger: So those were two major cycles that I saw as an investor. Every cycle is different, but there are echoes of previous cycles in every cycle. And this cycle that we see emerging is clearly the dominant theme is energy transition and. How quickly that’s going to happen and what that, what effect that has on supply and demand in studying, investing.

[00:05:35] Clay Finck: One of the really interesting things you highlighted is these pendulum swings, these big swings that people can find themselves in and get caught up in. And it’s quite well known that energy is cyclical, markets overall all are cyclical as well. I think a lot of people forget that, an S and P 500 or a NASDAQ and have a great decade followed by a subpar decade.

[00:05:58] Clay Finck: And those riding the wave on these cycles, look like geniuses in a bull market before it inevitably turns the other way. I was curious if you could talk more about why energy markets in particular are so cyclical and, maybe touch more on why you believe this cycle. What are some of the most important things that make it different from previous cycles?

[00:06:21] Arvind Sanger: Oh, I would say that, what makes cyclical industries cyclical is that, both supply and demand tend to have some cyclical aspects, but I think demand cyclicality is more economical. Not very different from the rest of the economy. Supply is what really makes the cyclicality long lasting or deep.

[00:06:40] Arvind Sanger: And it is a question of how long it takes for supply to respond. And typically what happens in most cyclical industries is that, demand is going up, everybody gets excited. Supply comes on and supply comes on and supply peaks just at the time when demand is starting to come off because everybody is carrying out the demand story, growing to the sky.

[00:06:59] Arvind Sanger: And then you get a double whammy of falling demand or not much rising demand and all this oversupply which takes a long time to work off. So the cyclicality of the demand is more modest. The cyclicality of the supply takes a longer time to come on and takes a lot longer time to come off. So that’s what makes the cycles pretty, pretty extended in terms of, in terms of the energy business and on mining.

[00:07:22] Arvind Sanger: Is not that different. What made energy cycles shorter and we had very many cycles in the 2010s is shale oil came on very quickly and shale oil, on and off in 2014, 15, 16, when oil price corrected, supply came off. We had one good year and then shale came rushing back and it ended again. So what.

[00:07:41] Arvind Sanger: Cause me to give up on this cycle is the dominance of shale and it’s quick on and off and that as an investor, we make money when we can play a cycle for a long period of time. And what makes this cycle different is this fear about energy transition, which, in my opinion, is keeping supply. It’s not my opinion, but everybody knows it’s keeping a lid on supply in a way that I haven’t seen before.

[00:08:04] Arvind Sanger: I’ll give you an example. When you look at it. the offshore drilling rigs needed for offshore oil production, new exploration. A new rig costs seven, eight hundred, nine hundred million it’ll take to build a new rig. It’ll take three years to build a new rig, and then it’s going to need a 20 year life cycle to pay back.

[00:08:21] Arvind Sanger: So if you’re ordering a new rig in 24, it’s going to come on in 27, and you’re going to have to look at the demand for it through 2047. And if everybody is not debating whether oil demand is going to peak in 2028 or 2030. I happen to think it’s going to be longer, but even I’m not willing to bet on 2047.

[00:08:38] Arvind Sanger: So the reality is that there’s no investment there. Now, if you look at the oil side, shale is still there. What caused oil prices to come off last year was shale surprise on the upside. But what we are seeing now as a recount has come off on that, right? Is that we may be in the eighth inning of the shale boom and the rest of the world, there are pockets of growth and yes, OPEC has surplus capacity, but structurally, nobody’s investing in a meaningful way in long dated oil.

[00:09:05] Arvind Sanger: There are a few exceptions, but overall long dated new oil exploration, not just rigs, but long dated new oil exploration, oil companies are reluctant to make. Long term bets. So even when Exxon and Chevron announced recent acquisitions, in the case of Chevron, it’s a shale play where they’re hoping for quick payback.

[00:09:22] Arvind Sanger: I’m sorry, in the case of Exxon, when they’re buying Pioneer, in the case of Chevron, they are buying into Guyana, which is a slightly longer dated pay, but the success of discoveries have already been made, and it’s more about hooking up existing wells as well as doing development drilling to get the other wells on over the next three, four, five years, and the production will last for a while, but it’s not making a long term exploration bet with a long payoff, and that’s what we’re missing is new greenfield elephant hunting, as we used to call it.

[00:09:52] Arvind Sanger: And so that’s what keeps a lid on supply and that’s what makes the cycle long. And let me not forget to mention that one of the energy sources, there are two other energy sources that people don’t include in energy, one of which is coal. It’s a four letter word. It’s terrible according to every CO2 output person, but the reality is the emerging market, 65 percent of the world’s power generation or more of India and China comes from coal.

[00:10:18] Arvind Sanger: And other poor countries in Africa, South Asia, Southeast Asia, and that coal demand is still remains the cheapest form of energy and nobody’s investing in new coal capacity except maybe the national oil company in India and maybe the Chinese and so therefore that’s going to be a tight supply market even if we want it to go away, but the reality is cheap energy for the poorest people in the world is still cheap.

[00:10:41] Arvind Sanger: Something that they aspire to, and therefore that’s going to remain. And then, there’s uranium, and we want green energy, and uranium and nuclear are a new green source. And again, there’s a long cycle for investing in that. So energy is very often narrowly looked at as oil and gas. But there are other sources of energy, one of which is terrible.

[00:10:58] Arvind Sanger: from a CO2 standpoint, and one of which is very green from a CO2 standpoint, nuclear and coal, and both are going to have challenges. One on the supply side, while the demand remains stable, supply is shrinking. And the other, it’s going to take a long time to turn the supply on. 

[00:11:12] Clay Finck: Yeah. I also find it really interesting how there’s all these moving forces where these dynamics and interplays within all these different energy markets.

[00:11:21] Clay Finck: And, I’m sure being an investor in this space is just an ever ending journey of Diving into all this data and seeing how coal is going to affect natural gas and oil and all that. And I wanted to talk more about that. You have talked a lot about how we need a sensible approach to the energy transition where we recognize the limitations of some of the cleaner energy sources.

[00:11:45] Clay Finck: Governments around the world are wanting to invest in and then also recognize that fossil fuels aren’t going away tomorrow. So talk more about what a sensible transition looks like to you. 

[00:11:57] Arvind Sanger: To me, a sensible energy transition looks at all energy sources and tries to figure out what is realistic.

[00:12:04] Arvind Sanger: How can we plan for that? And let me talk about the dumb energy transition in contrast with a sensible energy transition. The dumb energy transition is that if we stop investing in fossil fuels, We will save the environment. The reality is by stopping investing in fossil fuels, you’re not impacting demand.

[00:12:24] Arvind Sanger: You’re impacting supply. And frankly, that is the surest way to guarantee higher prices and the people who can least afford that high price. The poorest are the ones that are going to gravitate towards that. Towards policies and politicians who will then remove these restrictions and get them the cheap energy that they want.

[00:12:43] Arvind Sanger: And so therefore, I think that the sensible energy transition is recognizing that there are billions of people around the world who have very limited energy usage, a fraction of what we use in the developed world. And right now, the biggest driver of demand in the Western world, we’re not reducing our energy consumption.

[00:13:00] Arvind Sanger: We want them to use green energy, but the biggest driver of demand right now in the world for a Energy demand incrementally is going to be data centers for AI and data centers for all digital but digital centers for AI, generative AI, that’s going to double, triple, quadruple demand between now and the end of the decade from these data centers and plus we have crypto mining.

[00:13:23] Arvind Sanger: These are all rich world problems. Indulgences, if I may call it that. And so a sensible energy transition has to recognize that if we are not able to curtail our energy usage, and there is no way that data centers are only working when the wind blows or the sun shines, right? So they’re going to require 24 by 7 energy, which I jokingly say is the surest way to make fossil fuels great again is to do all these data centers and generative AI.

[00:13:50] Arvind Sanger: So then the sensible energy transition is how do we think about minimizing the effect of all the energy usage? Do we need to think about carbon capture? Do we need to think about other ways to manage? Because just banishing investment in fossil fuels makes no sense to me because all it does is make the poorest gravitate towards politicians who will remove this restriction on them getting cheap energy.

[00:14:16] Clay Finck: So let’s dive more into fossil fuels. You had a chart in one of your investor letters that showed sort of the demand for fossil fuels. So it showed liquid fuels, natural gas and coal, and the demand for all these is growing. So talk about fossil fuels and how they play into your investment approach.

[00:14:35] Arvind Sanger: Yeah. Look, fossil fuels are the cheapest source of base load power, which is power that you can turn on 24 by 7 without having to rely on any external weather related factors. Nuclear is also part of base load and so is hydro. But hydro rain doesn’t fall the same every year. Nuclear takes a long time to build nuclear power plants.

[00:15:00] Arvind Sanger: So coal plants And natural gas as energy sources and oil is more for transportation, although it is used in diesel gen sets as backups, even for data centers. But those are the demand for even electric cars today, China, 25 percent of the new cars sold in China, electric cars. And yet China’s oil consumption is still growing at 3 percent per year in the US.

[00:15:22] Arvind Sanger: We have 5, 6 percent electric cars sold. Our oil demand is still growing. So the idea that oil demand is going to end anytime soon, oil demand growth, and it’s mainly transportation, and it’s plastics, and it’s everything associated with that’s going to grow for a long time. Natural gas is the natural transition fuel from coal, and we are the Saudi Arabia of natural gas.

[00:15:46] Arvind Sanger: Unfortunately, right now, the government, the Biden administration has banned approval of new projects for petroleum. Natural gas exports, LNG exports, but Qatar and others are developing it, and if I’m a poor country in Asia or in Africa, if I want to reduce my dependence on coal, I need cheap natural gas.

[00:16:05] Arvind Sanger: And so one of the best ways we can help is to encourage more natural gas use because it’s much less CO2 produced than coal is. So I think that within fossil fuels, there’s a transition. And then the question is, wind and solar, how do we get battery technology so that we can use them here on the clock?

[00:16:24] Arvind Sanger: And they are price competitive right now. They are not. And we’re trying new battery technology, solid state and others. It’s not going to be the same battery that you use an electric car that will be used for Because electric cars need quick in and out. These ones read slower in and out from a bar storage standpoint for power generation.

[00:16:44] Arvind Sanger: But the other thing we don’t talk about is that if we move to electrification from distributed energy, you fill up your car at the gas station. If you move to distribute to centralize energy coming from the grid. You need to upgrade the grid significantly because you’re going to have all these nodes of people who are plugging into the data centers are already causing problems.

[00:17:06] Arvind Sanger: And now if I have a bunch of Teslas and other electric cars going to charge, the grid is going to not be able to handle the load. And so we’re going to need to upgrade the electric grid. We’re going to need to invest in more transmission. We’re going to need to invest in more local substations. So it’s complicated, we’re trying to change what has taken a century to develop.

[00:17:26] Arvind Sanger: And we’re imagining we can do it in 5 years. And I say that’s a pipe dream. So sensible, it’s going to require a lot of things that have to be put in place. And I think the 1 thing I would say is we need to think about it patiently and recognize that it’s a very complex energy system that has been built.

[00:17:44] Arvind Sanger: Over decades, we can’t just have government incentives and suddenly everything will get replaced. 

[00:17:49] Clay Finck: I’m glad you mentioned China there because China, like in the 2000 cycle, I’m sure it still plays just a major role in the energy market today. There’s one interesting stat I came across. With regards to electric vehicles, China has over 20 million electric vehicles.

[00:18:06] Clay Finck: And just for comparison’s sake, the U. S. has over 2 million. There’s also debates on, what’s going to be happening with China’s economy with maybe there’s some uncertainty with regards to China and, what their impact will be on the energy markets going forward. What do you think about China’s role in the energy markets today?

[00:18:26] Arvind Sanger: China was the biggest driver of energy incremental demand growth in the 2000s. The entire decade from 2000 to 2020, if I looked at it, China was probably about 40 percent of world oil demand growth. I don’t know if it was all sorts of energy. It may have been close to that for all sorts of energy.

[00:18:43] Arvind Sanger: China is doing a very rapid build out of nuclear capacity. They’re doing a much faster build out of, as you mentioned, electrification of cars, because if China has a weak point strategically, it’s that they are deficient in oil and gas, and they get oil through this to the Middle East trade of Hormuz, which if there’s ever a conflict for the U.

[00:19:02] Arvind Sanger: S., it’s very easy for us to choke off their supply. Natural gas comes from Australia from, Middle East from the U. S. And again, there are ways to control that. So they’re trying to they’re cold. They have surplus resources off. So there’s a new element that’s entered, which we don’t talk about. Which is a strategic dynamic going on right now in the world, where Russia, China, Iran, maybe one block, and the Western world, Japan, Australia, Europe, U.

[00:19:27] Arvind Sanger: S. are arrayed on either side, and so everybody’s thinking about the strategic location of high energy resources. And China has taken an early lead, such that today, 70 percent plus of the world’s solar modules come from China. Over 70 percent of the lithium. Processing that is required for electric cars.

[00:19:45] Arvind Sanger: So China sells more than half the world’s electric cars, but it also sells us a lot of the materials to make the batteries, the lithium and other items. And so it has a chokehold, if you will, on a lot of the green technologies. So one of the big challenges today is do we want to go from where the U. S.

[00:20:04] Arvind Sanger: and Europe, U. S. certainly is surplus conventional fossil fuel energy, U. S. is deficient in buying batteries from China, Europe is getting flooded with electric cars from China because they have the cheapest electric cars in the world, because like you mentioned, they have the much larger install base, so they’re much early in that.

[00:20:20] Arvind Sanger: So there’s a strategic element that is coming into this whole energy transition discussion, where China is the dominant player. In wind, solar, and electric cars, they have 60 to 70 percent market share for some key technologies there, and we don’t. And so I think the China demand story from an energy demand standpoint is clearly slowing down.

[00:20:42] Arvind Sanger: China’s economy is not growing as fast. China is probably growing the demand for energy at 2-3 percent a year. So that’s definitely turned the corner. It’s not the engine anymore. India is more important going forward. Southeast Asia. Middle East, Africa, more important, but from a supply standpoint, suddenly turned it on its head in the 22, 000.

[00:21:02] Arvind Sanger: China was our demand source and everybody was looking where the supply was going to come from. If you go to green energy, China is a supply source. Are we ready for that? Do we want that? And I think that’s part of the energy transition part that is also becoming very important. 

[00:21:18] Clay Finck: When you’re looking at oil companies, for example, to invest in one interesting thing you mentioned on a previous appearance was that, a lot of these companies are going to be reinvesting in new supply.

[00:21:29] Clay Finck: Their stock prices are going to be going down. And when they announce a dividend increase or buyback, Then their stock price goes up and it leads me to think, are there these management teams that sort of take a stand and just say, Hey, we’re going to invest in new production. And maybe that leads to lower share prices and maybe makes buybacks even more opportunistic at some points in time.

[00:21:51] Clay Finck: What do you think about this when you’re investing in this space? 

[00:21:55] Arvind Sanger: I don’t believe that this cycle is going to see the same supply response that prior cycles saw. I gave you the example of offshore rigs. We’ve seen it even in a much lower cost barrier to entry offshore supply boats, which is a very niche market.

[00:22:12] Arvind Sanger: But nobody wants to invest in a new 20 year asset. On the oil supply side, the easiest place to invest with a quick payback was shale. And that would still be happening. Yes, they’ve been disciplined for a while, but if they were to break discipline right now, here’s the problem that they’re running into.

[00:22:27] Arvind Sanger: No tree ever grows to the sky, and neither does any oil producing region, right? So we’ve had West Texas, where some of the earliest oil exploration in the U. S. happened. We’ve been through two major cycles. This is the third major cycle. And the shale tree has grown much further than any of us foresaw 5, 6, 7, 8, 10 years ago, it has gone much further.

[00:22:47] Arvind Sanger: But what we are now seeing is that companies are saying I have a 10 year or 12 year or 15 year inventory remaining of shale trees. At my current pace of my life of my current fields and it’s not like I have more to find and if I keep drilling these acreage, I’ll run out of drilling in 1215 years once a company gets below 10 years of remaining inventory, it’s multiple goes down so I can increase my cash flow.

[00:23:15] Arvind Sanger: But I can reduce mine, I can drill more, I will drill my remaining acreage faster, but then I’ll have less number of years of drilling inventory left. Which means my multiple goes up for higher cash flow short term, but my multiple comes down for a shorter kind of reserve life. So we are nitride running into this problem that shale is running out of.

[00:23:36] Arvind Sanger: New fields to find. I can keep drilling on my existing acres. I’ve got thousands of acres. I can keep drilling, but beyond that, there are no new discoveries taking place that, oh, I found a new Permian. I found something new. So that’s why I believe between not wanting to invest in new long term projects and shields running out of massive new finds, we are in a supply constraint cycle.

[00:24:02] Arvind Sanger: And unless something comes along that shocks us meaningfully. I think this cycle is going to be one where demand continues to grow slowly and supply remains constrained for both ESG and in the case of shale, geological factors, if I may call it that. 

[00:24:19] Clay Finck: You also touched on AI and the data centers and their impacts on energy demands.

[00:24:24] Clay Finck: Sam Alton recently commented that he believes that a lot of people are underestimating the energy demands of these technologies. How big of an impact is this on the energy thesis overall? And maybe talk about how significant this increasing demand Is going to be 

[00:24:40] Arvind Sanger: Well, today data centers plus crypto mining, which is, I guess you could call it a data center.

[00:24:47] Arvind Sanger: It’s all computers in a location doing mining for crypto currencies. If you take those combined, I think they’re about 2 percent of world electricity demand today. There are international energy agencies and others have estimated double to 4 percent of the world’s energy demand by 2026. And again, double from there by 2030 to 8 percent of the world.

[00:25:09] Arvind Sanger: Electricity demand. So it’s quadrupling the rest of the electricity demand is not growing. Now, if you go on top of that through electrification of cars, it really does put an unprecedented demand for electricity. Electricity demand historically around the world, in 2019, the International Energy Agency estimated that energy demand with electrification was going to grow at 1.

[00:25:33] Arvind Sanger: 9%. If you look back the prior decade, global electricity demand was growing at one and a half to 2%. And suddenly, we have these new sources which are driving three, three and a half percent. That may seem like not much, but at the margin, it’s a lot. And I think that data centers and our insatiable need for everything digital. We want virtual headsets, we want AI, we want generative AI, a Google search versus going to generative AI, chat GPT to do the same search.

[00:26:00] Arvind Sanger: Google search is 1 9th to 1 10th as much data intensive, compute power intensive as using, and now today, a few of us have discovered generative AI and we do it without thinking and more people are going to adopt it and more users are going to come up and it’s just going to, so far the demand estimates That people have made have proved to be too low.

[00:26:23] Arvind Sanger: Let’s see if these demand estimates prove to be too high. I doubt it. I think there’s a lot coming in AI and if all the dreams come to be true, then energy demand is going to be one of the main constraints. I think more and more people are recognizing that energy demand could be one of the biggest constraints.

[00:26:38] Arvind Sanger: yes, let me add that NVIDIA and others are trying to improve. Chip efficiency for power consumption, about 40 percent of a data center’s demand goes for cooling air conditioners. They’re trying to come up with new ways to cool and whatever. So these estimates that I just told you of IEAs are assuming efficiencies take place.

[00:26:59] Arvind Sanger: So it’s a constant battle. The actual demand is much higher, but with efficiency, the energy demand hopefully only grows by 25 percent a year and not more than that. 

[00:27:09] Clay Finck: I think it’s also interesting how you mentioned China played a major role in the decade of the 2000s and then now that you look at India, one of the biggest countries in the world, one of the fastest growing economies in the world, and you’d imagine that, the energy demands over the next decade from India is just going to be massive as well.

[00:27:28] Clay Finck: I was curious if you could speak more to that. 

[00:27:31] Arvind Sanger: Absolutely. What we’ve been looking at in India is that steel demand is starting to grow at double digits. So the infrastructure build out is happening. If you look at what happened in China 20 years ago, beginning of the 2000s, you start to see steel demand is growing at double digits.

[00:27:45] Arvind Sanger: Cement demand is growing at high single digits. And along with that energy demand is right now only growing at maybe five or 5%, but my sense is that, if the other, as the infrastructure build out happens. You’re going to see other parts of the cycle, trucking, autos, everything that will start to also accelerate and as you move up the, per capita GDP curve, all of these things, as we saw in China, tend to have an accelerant effect as you build out infrastructure, more people, already, I think demand from air travel is growing also at double digits levels.

[00:28:23] Arvind Sanger: So there’s a lot of elements of demand where India will never be as energy hungry as China. China overbuilt its real estate, overbuilt its infrastructure. India will always be two steps behind the curve, but it’s still on a path where I think that for the rest of this decade, it’s going to be the biggest factor in terms of incremental demand for a lot of free energy and related resources.

[00:28:49] Clay Finck: A lot of people, when I think about the energy space, a lot of people like to think about oil and gas due to the under investment issues that you’ve highlighted, but you’re also looking to capitalize on the underlying metals that are needed for the transition to sustainable energy. Maybe you could speak more to that, what the primary metals that are needed in this transition, what metals you think show a lot of promise from an investment perspective.

[00:29:16] Arvind Sanger: I have a chart that I use, which is, borrowed from a McKinsey report, which talks about which metals are needed across the entire energy transition. And if you start with wind towers, and you look at solar, and you look at hydrogen plants, and you look at Biofuels and you look at all of these, the number one metal needed across all of them is steel.

[00:29:39] Arvind Sanger: steel is an intermediate material for steel. We need metallurgical coal, which again is a 4 letter word. But if it needs more energy, that’s going to require more metallurgical coal and there’s not enough drilling happening. enough exploration happening for metallurgical coal. But the second most important metal, which is needed in everything, electrification, if you need to carry electricity from point A to point B in your car inside a wind, from wind project or from a solar panels requires a lot of copper or batteries of any sort that copper and again, the amount of copper we’ve, that people have estimated for energy transition over the next 20 years, we need is more copper than we found in human history.

[00:30:18] Arvind Sanger: And yet, if you look at copper grades, they’re falling. And then if you want a green baseload power source, the only green baseload power source is nuclear. And people are talking about building small modular reactors, which will be quicker, cheaper. Initial ones will take six, seven years, but once we get them built, then we can build them in factories, bring them on site and put them together much quicker.

[00:30:40] Arvind Sanger: And SMRs is not a revolutionary new technology. There are hundreds of small modular reactors on nuclear submarines. On some aircraft carriers that already exist. Those are small modular reactors, and they’ve never had a nuclear meltdown in a submarine or aircraft carrier. using that technology.

[00:30:57] Arvind Sanger: Again, that’ll take a while, but nuclear China’s building out in a big way. India is a slightly smaller way, but I think the West is starting to recognize that. In fact, at COP 28 last December, U. S., Europe, and Japan announced that they’re going to triple their nuclear capacity by 2040 to meet the green energy targets.

[00:31:18] Arvind Sanger: Nobody talked about where the uranium is going to come from, so it’s going to require a lot of exploration for uranium. These are things that we look at. And we look at all the energy sources, whether it’s cobbled coal or it’s metallurgical coal for making steel, which is needed for energy transition, or it’s copper, without which, many of these transition technology don’t happen, or it is going to be anything related to, a nuclear and I think that all of those great opportunities.

[00:31:42] Arvind Sanger: And again, we think of energy as a continuum that doesn’t stop just at oil and gas. And that’s where I think a lot of people just limit themselves to that. We think of this energy transition as having all these interconnectedness. And therefore that creates opportunities. 

[00:31:57] Clay Finck: I find nuclear quite interesting because, you only have a certain number of options when it comes to the baseload power source because when it comes to solar and wind, the wind isn’t always blowing and the sun isn’t always out and, demand fluctuates throughout the day.

[00:32:12] Clay Finck: So maybe you could speak more to nuclear power and why you believe it makes so much sense for these governments to invest in it due to these reasons related to the baseload. 

[00:32:21] Arvind Sanger: The first thing I should say is if we are interested in Green energy. The lowest generation of CO2 per unit of power produced lower than wind, lower than solar is nuclear.

[00:32:34] Arvind Sanger: And yes, we have nuclear waste that we have to deal with, but the nuclear waste is a small amount. it’s not that large, but that’s the big, there are two big concerns about nuclear. What is the waste? What will we do with it? And the second is safety. If you have a meltdown. So these SMRs are actually.

[00:32:50] Arvind Sanger: there’s technologies where we would make them safe in terms of safe, much safer in terms of not having the meltdown, kind of risk and the nuclear waste is something that we’ll have to come up with a solution, but burying it deep underground or, putting it into space or in the bottom of an ocean, there are many solutions, but there is no Pareto efficient frontier where we can go to green technologies and, there’s going to be all these batteries to dispose off after these electric cars have run their course.

[00:33:17] Arvind Sanger: There’s going to be all this. All solar modules to dispose of, all these wind, all wind turbines to dispose of. There is no, we just stand in the sun and the energy comes to us. There is no pure green. So each one has its own side effects, if you will. And nuclear has its own, but I think those are very manageable.

[00:33:37] Arvind Sanger: And nuclear remains a green energy source. And I believe with these small modular reactors, we have a real room for it. The holy grail, to be clear, people talk about it, and I’ve done some work looking at it, is nuclear fusion. Nuclear fusion, there’s no waste and it’s perennial energy. People keep talking about nuclear fusion, as yet, we haven’t yet solved the technical problems.

[00:34:00] Arvind Sanger: But if you ever got it, which could be by 2035, 2040, then all of our problems would go where we could have perennial energy from nuclear fusion. But, but that, I’m not holding my breath on that in my investment time horizon. keep an eye on it for the. Future of humanity. It could be the panacea, but it’s a long time away 

[00:34:20] Clay Finck: in uranium.

[00:34:21] Clay Finck: The uranium prices had a pretty good run up in 2023. Yet one of the bigger producers announced that it’s looking like they were going to fall short on production. And then. Your letter also highlighted a bill that passed in the house that would effectively ban uranium imports from Russia beginning in 2028.

[00:34:40] Clay Finck: How do you see the market developing from here in light of that recent run up? 

[00:34:46] Arvind Sanger: I think, there’s a lot of political challenges, 40 percent of the world’s uranium comes from Kazakhstan. Much of that transits through Russia. Russia processes about 25, after you produce the nuclear, the uranium, you take it to a processing facility where it’s processed so that it can be then converted into a material that can be then used in a, to build the rods that go into nuclear reactors.

[00:35:11] Arvind Sanger: So there are multiple stages, about 25 percent of the West’s processed uranium is in Russia. And so we’re trying to reduce our reliance on Russian oil, Russian gas, Russian, the. Metals, we just came out with a rule a couple of weeks ago that they can’t, that they can’t supply their metals into COMEX or into LME.

[00:35:34] Arvind Sanger: And so the one remaining area where Russia is still supplying the West is a significant portion of our uranium process supply. And I think that the big challenge for everybody is how do we wean ourselves off the Russian supply? And it’s a dirty little secret that Washington doesn’t want to touch it with a barge pole, but there are moves afoot now to give some time till 28.

[00:35:59] Arvind Sanger: 4% Western development of processing capability and more mine capability to reduce, find routes from Kazakhstan via a different route than through Russia. There are challenges, but we’re trying to, I think the government is, or the politicians are trying to give time to adapt to that. But that remains a risk.

[00:36:17] Arvind Sanger: I’ll give you one example. Percent of the world’s uranium supply comes from a tiny little country in West Africa called Niger. N I G E R, Niger as it’s pronounced and they just kicked out the French, they’re telling the U. S. to remove its base and the Russians are taking over and the Russians are now in charge and so mine is no longer supplying, it’s probably going to be redirected to supply to China, whatever, it’s going to create challenges for the West.

[00:36:47] Arvind Sanger: So there are challenges around the world in nuclear supply, in uranium supply, we want green energy, but we have to find, more, friendly sources. And that’s a big challenge. 

[00:37:00] Clay Finck: I was also curious, I know some investors to get exposure to uranium, a lot of them, I think just purchased Sprott uranium.

[00:37:08] Clay Finck: Trust that just holds the uranium itself. And, I’m sure others, invest in miners. What do you think about getting an allocation to that sector? 

[00:37:19] Arvind Sanger: I think that investors are getting exposure through either, like you said, Sprott, but Sprott, used to trade parity or slightly above now it trades at, five to 10.

[00:37:31] Arvind Sanger: 11 percent premium. There’s another one, Yellowcake listed in London, which trades at a 10 to 15 percent premium. So those have lost their luster a little bit. And what people are now finding is more interest in, buying some of the miners, especially some of the development miners. So one of the ones in Paladin Australia has a mine in Namibia that had been shut down for seven or eight years.

[00:37:52] Arvind Sanger: The company had gone through bankruptcy. It was produced, earlier, seven, eight years ago. And now it’s restarting and it’s just restarted. And they just put out a release that they’ve started to first production just, going through the process through the mill. And, And that’s been a great performer, but there are other companies, Cameco is a big one in Canada that produces uranium, Kazatomprom, which is the one that is, that produces 40 percent of the world’s uranium that comes from Kazakhstan is there’s a lot of political risk involved with that.

[00:38:20] Arvind Sanger: There are other smaller development companies in Canada and the US. And so we look at a basket of all of these, and these have all benefited from this in addition to Sprott. And I’m not recommending any one name because these are all small liquid names, but I’m just pointing out that, in uranium, other than Cameco, which is a large cap liquid company.

[00:38:45] Arvind Sanger: You have to dig deep to understand what are the other options, and none of those options are particularly large or liquid, but each one has some characteristics of. Minds that are under development or most of them are development stories, not currently producing because the big two producers right now are chemical and gas.

[00:39:02] Arvind Sanger: I don’t promise. There are not many other public options available. 

[00:39:05] Clay Finck: I mentioned earlier, I found it so interesting how you have investments in all these different types of sectors. I was curious to get your take on if there’s any sector or area that really just shines relative to the others in terms of conviction and the opportunities you’re seeing.

[00:39:23] Clay Finck: Are there one or two sectors where you think there’s just really good opportunities there? Or you just think, overall a diversified approach and just investing with these broader themes is the way you’re thinking about it. 

[00:39:35] Arvind Sanger: I’m not putting all my eggs in one basket. I love uranium, but I have a portion there.

[00:39:39] Arvind Sanger: I love offshore related companies. everything from a supply boat company to offshore drillers to one company that does offshore construction support services, equipment and services. I like the idea that this is a sector where if there’s majors that are spending money, that’s where most of the opportunities that they’re seeing for, meaningful difference is.

[00:40:04] Arvind Sanger: And there is no new supply coming on. I have high conviction that the supply side is structurally constrained because nobody’s going to build new assets. So I love areas where I can stop worrying about supply and cyclical industries. You almost never get that here. I can almost stop worrying about supply and I just have to worry about the demand and the demand as long as it’s even moderately growing.

[00:40:27] Arvind Sanger: Things are going to be in great shape. And so that’s an area that I love for the fact that there is no supply growth in uranium. I like the fact that it’s going to take 4, 5, 6 years to develop new uranium mines if the demand is there. you again, we talked about at the beginning about cyclical industries.

[00:40:43] Arvind Sanger: I want to understand what the demand is doing. And how quickly can supply screw it up. And when I see sectors where supply can’t screw it up. And metallurgical coal is an area where India is going to need more steel. Southeast Asia is going to need more steel. And we can’t do our green stuff without steel.

[00:40:59] Arvind Sanger: And most of these developing markets don’t have a large amount of scrap steel to run electric arc furnaces like we can. So they have to use iron ore and coal. And yet coal is a four letter word. Nobody’s investing. And so we think of metallurgical coal as another area that’s interesting. So these are some of the areas where I see supply either.

[00:41:16] Arvind Sanger: Not happening or going to take a long time to happen and demand has a good trajectory where I don’t see how we suddenly stop using steel or we don’t go down the nuclear path or, the offshore drilling suddenly dries up. These are areas that I find great opportunities, but again, I’m not putting my eggs all in one basket tomorrow if another Fukushima happens, right?

[00:41:37] Arvind Sanger: I hope not, but that’s a risk. So let’s put the risks on the table. If Fukushima happens, something happens. I don’t think there’s a, the steel bridge collapsing in Baltimore means more demand for steel. So I’m not worried about the steel side. India is not going to suddenly say, let’s go back to living in huts.

[00:41:54] Arvind Sanger: We don’t need that infrastructure. That’s not going to happen. In nuclear, you do have a risk. In the rest of it, you don’t have that risk. 

[00:42:02] Clay Finck: coal is typically thought of as a very dirty energy source, and you mentioned coal there. I was curious if you could just describe what coal is and how it plays into your thesis here.

[00:42:16] Arvind Sanger: coal comes when you drink coal from the ground. You don’t know before you take what type of coal you’ll get. you have the calorific value and the ash content and the sulfur content of coal. All different calls from different coal mines differ and the lowest grade, coal is used in power plants.

[00:42:36] Arvind Sanger: And, you have very low grade coal. Then you have high ash content coal that comes from Indonesia, India, other places that is also used for power generation. And then you have the highest grade coal, which is called metallurgical or coking coal, and that is put in a coke furnace to produce coke, and that coke is then put in a blast furnace.

[00:42:56] Arvind Sanger: Along with iron ore, and that coke provides the heat and the sealing properties and the, to be able to take that iron ore and melt it and produce, steel slag. that metallurgical coal is the highest quality, if you like, I might call it that, calorific value coal, and that is found in rare places.

[00:43:17] Arvind Sanger: It’s found in parts of the U. S., some of the coal mines, it’s found in Australia. It’s found in Mongolia and very few other places do you find smatterings of that high quality coal and, the largest producer of coal in the world, BHP, has been running down its production of Western metallurgical coal, the second highest produced, largest producer sir.

[00:43:39] Arvind Sanger: Tech out of Canada is selling its Metcold mine to, it’s getting out to be, to get more green. It’s selling its Metcold mines to Glencore. And the third large Western producer, Anglo American, is also running down its Metcold mines. So yes, Mongolia has grown its Metcold production, but the U. S. and Australia, the rest of it is not growing.

[00:43:59] Arvind Sanger: There is one new coal mine coming on in Alabama, which I visited a few weeks ago, and it was very good. Interesting to see that because the world is not doing that luckily, but that one will be golden because it’s the only new one coming on in the next few years. And they’re going to. I think, be very well positioned, but the reality is that this is a key commodity without which steel, you make steel two major ways.

[00:44:22] Arvind Sanger: You make steel in an electric arc furnace where you use electric arc with cheap electricity and you use scrap steel. And we have a lot of scrap steel because we have been a developed economy for a long time. We have a lot of scrap. In a developing economy where you have small infrastructure built and you’re building out much more, You don’t have enough scrap steel to be able to provide enough steel for your growth.

[00:44:43] Arvind Sanger: So you go for the blast furnace route. And that’s what we’re seeing in India, Southeast Asia, and probably in the future in Africa. So that’s why I like Metco. 

[00:44:54] Clay Finck: So in light of all this talk on the energy transition, I’m curious to get, what are some of the most important or most interesting data points you’re going to be watching over the next year that are really going to move the needle on What you’re invested in?

[00:45:11] Arvind Sanger: I think the data points come at us, every week, every month, every year, and then with greater, the one interesting data point that’s been coming at us recently, in addition to the data centers is the move away from electric cars to hybrids. It’s a very interesting point that Even in China, which has been a very fast adopter of electric cars, you’re now seeing more hybrid growth than you’re seeing what we call BEV, battery electric vehicles, pure electric, and Elon Musk was complaining about it, but the reality is that consumers prefer the fuel efficiency of a hybrid, but the range anxiety Removal of also of a hybrid.

[00:45:50] Arvind Sanger: So that’s why I think that again from a, oil demands for those who were writing the epitaph oil demand. That’s a very interesting data point that is coming to 4. The other interesting data point is China has been a major headwind on metals demand and looking at China. We’re trying to see the housing market.

[00:46:10] Arvind Sanger: It was the mother of all bubbles. That mother of all bubbles has blown up where people own five, six houses and that was a form of investment and there’s so many empty houses and there’s so much oversupply that housing starts have fallen by 30 to 40 percent for three years in a row. Our 2008 2009 looked like a pipsqueak compared to what is going on in China right now.

[00:46:32] Arvind Sanger: That’s a major headwind. For all metals, China built a lot of steel capacity for this. They’re exporting that steel, but everybody’s not putting up tariffs. So they’re going to have to shut down that steel capacity because nobody wants to shut down their own steel industry. watching China data to see when things stabilize, China is still the second largest economy in the world.

[00:46:52] Arvind Sanger: It’s the second largest consumer of oil. It’s the number one consumer of steel, iron ore, seaborne iron ore. It’s the number one consumer of coal, even though it’s self sufficient. It’s the number one consumer of copper. It’s the number one consumer of aluminum. So there’s a lot of things in which we have to watch what’s going on with China just to see it’s not completely blowing up.

[00:47:11] Arvind Sanger: And then, the U. S. recession, U. S. demand, Europe has been in a doldrum for a couple of years. Is that coming back? So the macroeconomic factors and then, on the supply side, we look at all the supply data points on oil on gas on uranium, and whether the Kazakhs are going to continue to disappoint.

[00:47:31] Arvind Sanger: each one has its own little sub sector that we watch. So it’s not one big data point, but there are some important ones. 

[00:47:39] Clay Finck: Absolutely. And when I think back to what sort of happened after the GFC, the rise in shale production, I think It seemed like it took a lot of people by surprise and led to that down cycle being much longer than many might’ve anticipated.

[00:47:55] Clay Finck: With that in mind, are there any breakthrough technologies that might blindside investors in this cycle or what sort of things might lead investors to maybe be too optimistic on energy today with regards to a breakthrough type technology? 

[00:48:14] Arvind Sanger: there’s always a risk.

[00:48:15] Arvind Sanger: I couldn’t have answered this question with any intelligent answer. Back in 2007, 8 in terms of shale. I had no idea what was coming. So when I think about it, there are always going to be surprises. And I think the reality is that battery technology is a chemistry problem. It is not a Moore’s law problem, right?

[00:48:33] Arvind Sanger: It’s more akin to Murphy’s law than Moore’s law in terms of fixing some of these challenges with the supply chains. But if there is any breakthrough in a new type of, sodium battery, or, molten salt battery, there’s been many discussions, sulfur batteries, Something that allows for much cheaper storage of power from wind and solar, and that makes them much more competitive with natural gas, with coal, with other sources, and suddenly we can do a lot more, the reality is we’ll have to come back to the point that people are now putting tariffs on import of natural gas.

[00:49:10] Arvind Sanger: Solar modules from China, so it’s not just a one directional thing. We also have the strategic element that yes, we can get a lot of cheap solar, but if we want to increase our reliance on China, a breakthrough in batteries would be a very important element of that surprise and the other more pie in the sky.

[00:49:27] Arvind Sanger: But. Much more fundamental, in my opinion, long term is something like nuclear fusion, which I talked about earlier. Something like that would be. So I think those would be the two biggest. From finding copper, there are some technologies that might help us do a better job at finding and refining copper, but I don’t see those as breakthroughs.

[00:49:45] Arvind Sanger: Maybe we’ll find a lot more than we found recently and we’ll be able to meet the challenges, but it’s still going to take a while. On oil and gas, I don’t see anything, but I didn’t see shale, so take my word for what it’s worth. I was clueless about shale in 2007, so I may be clueless about the next technology coming along.

[00:50:01] Arvind Sanger: But when it does, hopefully, remember shale didn’t happen on day one. Took from 2010 when we started shale oil drilling to 2014 when we had the old shucks moment where oil prices fell apart. It’s not like any new technology. Breakthrough produces energy like this. It’ll take a couple of years, but being early on seeing that it’s going to be important.

[00:50:25] Clay Finck: Wonderful. Thank you so much, Arvind. This was great. so many interesting things to think about and consider here and really appreciate you joining me on the show before I let you go. How about you give a handoff to the audience to how they can learn more about you, Geosphere Capital and anything else you’d like to share?

[00:50:41] Arvind Sanger: Thank you, Clay. Thank you for the interview. I really enjoyed the conversation. And for investors who want to learn more, they can visit our website at geosphere cap. com. We are a hedge fund, so we can only take cash. qualified investors, but, on geosphere cap. com, we do have links to some of the other kind of pieces we’ve been involved with in terms of podcasts and publications for people who want to look at that, but if they need to and are interested in learning more about Geosphere and investing with Geosphere, they should reach out to IR at geospherecap.

[00:51:12] Arvind Sanger: com or Evan at geospherecap. com, but we are not allowed to advertise and we don’t advertise. We just, if somebody’s interested, they’d still have to be qualified. Thank you. 

[00:51:22] Clay Finck: Great. Thank you. Arvind. I’ll be sure to get that linked in the show notes.

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