Digging Value is a twice-a-week column where I deep dive into markets, mining, and whatever financial absurdity caught my attention.
If you like your investing insights (not advice!) grounded in cash flows, hard assets, and common sense—but also recognize that markets frequently ignore all three—you’ll probably enjoy this.
Let’s explore the wild world of value investing in natural resources together.
Today’s column: The small cost of polluting rivers, hoarding as an investment service, and a complete nickel market upheaval.
“Digging for Value, One Story At A Time.”
Why Sign Papers When You Can Poison Water?
Mining companies tend to operate on a simple calculus: extract valuable stuff from the ground, sell it for money, and occasionally pay fines as part of the cost of doing business.
But maybe— just maybe — if you’re regularly fined for poisoning waterways or facing lawsuits over human rights abuses, it’s time to rethink your approach? Or at least hire someone whose job is to file paperwork when you think regulations are unfairly strict?
I don’t know. Barrick Gold seems to think it’s easier to poison rivers than pay the fines later. From Mugglehead Magazine:
“Barrick Gold (TSE: ABX) (NYSE: GOLD) has been fined USD$114,750 for environmental issues at its decommissioned Nickel Plate gold mine outside Hedley, British Columbia.
The penalty is for 17 separate instances between September 2021 and October 2023 when Hedley Creek had far more cobalt than is permitted under the guidelines set by the Ministry of the Environment.”
Cobalt is like most metals: it’s vital for life in small quantities but deadly if you consume too much. Kind of like the All-In Podcast.
But come on guys, let’s give Barrick a break. I mean, not putting cobalt into rivers has gotta be hard, right?
“Barrick has tried to reduce the amount of cobalt in mine tailings but has struggled to find a scientific solution. The cobalt generated at Nickel Plate Mine forms a complex compound rather than free cobalt, which is easier to filter out. Barrick also claims that complex cobalt is more inert and therefore presents less of an environmental hazard.”
And I bet the regulations are egregiously stringent, and there’s no way a company like Barrick Gold could ever meet them.
“The company has also argued that the revised cobalt limit introduced in 2004 is unreasonably low and difficult to meet. However, the ministry noted that Barrick has never applied to increase the limit. It has also repeatedly allowed excess cobalt to be released into Hedley Creek.”
Barrick Gold (GOLD) – a $34B company – said:
- This new complex cobalt is too hard to filter. Sorry, but we had no choice (than to dump it in the river).
- These revised cobalt limits that we’ve known about for 20 years and have had time to adjust/fight, but didn’t, are still too low.
A $34B company with hundreds of millions in R&D budgets (maybe?) and a 45-person legal team can’t figure out how to filter cobalt or sign some papers saying, “we think these limits are too low.”
And that’s kind of the point? Barrick was fined $114,750. The company generated $12.3B in revenue last year. They probably found the $114,750 in a few couch cushions around HQ. I can hear Lucille Bluth now, “I mean it’s one river Michael, how much could it cost? $114,750?”
It all goes back to incentives. Why should Barrick follow the rules if the fine is so small? Why not just mine the cobalt and assume you’ll pay a fine?
Mining companies report “All-In Sustaining Costs,” or AISCs, which show the cost of mining one ounce (or pound) of metal.
This $114,750 fine maybe adds $0.00001 to Barrick’s AISC?
Speaking of cobalt.
Hoarding-as-a-Service (HaaS)
A hedge fund is a pretty good business:
- You develop an investing philosophy/framework that will provide attractive risk-adjusted returns.
- You tell people, “I would like some of your money and hope to achieve market-beating returns over time.”
- People give you money because they trust you or like you or because they’re family and want to see you succeed.
- In return, you collect a management fee of ~1% of the money you get and a 25% cut of any excess profits beyond a hurdle rate.
- You pick some stocks and hope they beat the market while collecting management fees and (hopefully!) performance fees.
But here’s an even better business:
- You develop some fetish for a commodity, say, cobalt.
- You tell someone, like Glencore, “I really like cobalt and think it looks cool to hold. I want to start a company to buy as much cobalt as possible.”
- Glencore, realizing it never hurts adding another demand source to a commodity, says, “Sure, why not.”
- You charge a management fee for holding physical cobalt.
- You market your fund as “Nationally Strategic” because “we need cobalt for everything.”
“Cobalt Holdings will buy physical supplies of cobalt in the manner of other commodity investment vehicles such as the London-lsited Yellow Cake which operates in the uranium sector.
Glencore has agreed to sell $200m-worth of its cobalt, produced as a by-product of its copper mining in the Democratic Republic of Congo, to Cobalt Holdings under a long-term agreement, which would take some metal off the oversupplied cobalt market.”
It’s a win-win for cobalt producers. They get another demand source and put more pressure on supply, which helps increase spot prices. At least that’s the theory.
“Selling $200m in cobalt to Cobalt Holdings would be meaningful, said the FT citing the comments of Fastmarkets analyst Rob Searle. “A cut of supply this large will probably lead to a significant price correction in the coming months,” he said.”
The other interesting thing about this type of fund is that it’s kind of a legal way (not advice) to corner a commodity market?
What if the Hunt Brothers created “Silver Holdings LLC” and marketed their operations differently? Maybe their cornering would’ve worked. Regardless, I love this guy’s enthusiasm:
““Ultimately you really want to hold physical [metals], if you’re an investor,” Ryan McIntyre, a Sprott managing partner told the newspaper. “You can trade derivatives all day long but if you need physical you need physical.””
I love it, but he’s wrong. Well, maybe he’s right if it’s physical gold or silver. But how often have you heard an investor (or anyone) say, “Man, I really need to diversify, I should buy more physical cobalt.”
Ultimately, if you’re an investor, you don’t really want to hold physical metals. You want to make money on a trade.
But it got me thinking. Why couldn’t I do this for any other metal? Like antimony or tungsten? It seems relatively straightforward. I’m kind of serious.
The Good Thing About Low Prices
Nickel is one of those metals that most people don’t really think about until suddenly everyone is thinking about it, usually because something weird happens in Indonesia or the Philippines. And guess what? Something weird is happening in Indonesia and the Philippines.
This matters a lot because Indonesia and the Philippines are the #1 and #2 largest global nickel producers.
It’s almost like Indonesia and the Philippines met and said, “Why shouldn’t we? Why shouldn’t we wreck havoc to the nickel industry?”
From SmallCaps.com:
“The global nickel market is facing new turmoil, with the world’s two top producers considering significant financial and production changes.
Indonesia is proposing major cuts to nickel mining quotas and considering raising royalties paid by mining companies.
Meanwhile, the Philippines – currently second to Indonesia in annual nickel production – is proposing an ore export ban.”
Let’s start with Indonesia. Indonesia reached #1 global producer status thanks, in large part, to Chinese investment. The country has long said they would flood the market with nickel, regardless of the price, to achieve majority global production control.
And it worked. Nickel prices are down ~65% from their 2022 highs.
But there’s a problem. Nickel prices are now so low that Indonesia can’t make money.
So what do you do when you can’t make money producing a commodity? Reduce the amount of global supply – and make it more expensive for miners to mine said commodity.
“The Indonesian government’s proposed nickel mining quota cuts will potentially lower the amount of ore mined from 272 million tonnes in 2024 to as little as 150Mt in 2025.
At the same time, officials are proposing raising the royalty rates paid by miners and producers of metal products, as well as introducing rates of between 14% and 19% for nickel.”
I don’t know. If the #1 global commodity producer reduces its supply by 44%, this will probably be bullish for the commodity’s price. Increasing royalties also raises the cost curve, further reducing supply.
Not to be outdone by Indonesia, the Philippines also offered some changes:
“Philippine lawmakers introduced a bill in February to ban raw nickel ore exports, aiming to encourage domestic value-added processing and replicate neighbouring Indonesia’s success in downstreaming its nickel resources.”
Why export low-margin nickel ore when you can keep it, turn it into an EV battery, and sell it instead? Batteries are cool and sexy.
So what happens next?
Maybe Indonesia and the Philippines successfully transform themselves into battery-making powerhouses. Maybe they don’t. Maybe nickel prices skyrocket, maybe they crash. Maybe Elon Musk tweets something cryptic about nickel again (he probably will).
But one thing’s for sure: as long as countries keep deciding they’d rather sell batteries than rocks, life in the nickel market will continue to be exciting—and by exciting I mean chaotic.
