Transcript of Dan Dreyfus: America's Critical Minerals Crisis is Here

We've got Dan Dreyfus on the show. He's with Borneite Capital. We're going to be measuring human progress by how much electricity we consume. The semiconductor industry, I view that as an industrial or infrastructure company. I mean, it's effectively a factory. We try to figure out where the world is going and then we try to figure out what we're going to need to get there. In the next 10 minutes, I am going to try to teach you about critical minerals Commodities are incredibly fragile infrastructure here in the US that is going to require trillions and trillions of dollars of investment if we want to achieve our technological objectives, our reshoring, reindustrialization objectives, and our national security and military objectives. But first, a little bit of history. We are at a very significant inflection point right now in US economic growth and what it's going to look like. Really, from the early 2000s until just a few years ago, the US went through effectively what I think was an economic miracle where we created so much growth, so much market cap, so much value. Without really having to invest any capital at all. I mean, think of all the companies that were created with no capital.

You had Google with the search engine, you had Meta with social media. They bought WhatsApp for $30 billion with 12 employees, you know, no capital whatsoever. You had the streaming platforms, you had the food delivery platforms, you had Apple Computer, which was capital light, created trillions of market cap. You had software as a service. Absolutely no capital required to create all that value. And at the same time we were creating these companies, at the same time we were doing that, we were literally tearing down all of our critical infrastructure and moving it overseas to China. So we were really doubling down on that capital-light mentality. But then it sort of, sort of come back to bite us, right? We had COVID, we had the Russia-Ukraine conflict, we had the tariffs. Now we have the Iranian conflict. And every time we had one of these geopolitical flare-ups, inflation spiked like a rocket. You need a telescope to see how high inflation went, and it never came down. And the reason for that is we let our supply chains get way too fragile and way too weak, and there's no resiliency in the supply chains. And now we're at this inflection point where we want to reshore everything that we tore down and moved to China.

We want to reindustrialize. We have this technological compute revolution that is infinitely more infrastructure intensive than compute was in the last generations. And this is creating this really wild demand shock for infrastructural critical minerals, commodities at the same time. Where there's a supply shock because we just haven't invested in this stuff for so long. Now, there are so many capital cycles going on at the same time. I've never seen this many going on at the same time in my career. We have the aerospace cycle. Boeing and Airbus have a trillion dollars of backlog over the next 10 years. Now throw in the space economy, which is gonna compete for the exact same materials and backlog that Boeing and Airbus are trying to source. We have the grid, right? Anytime it gets a little bit cold in Texas, the ERCOT, the Texas grid's not connected to the rest of the US grid. Every time it gets a little bit cold, that grid shuts down and they're freezing in the dark. Then we've got, you know, here in California, Paradise, California, that power line that caught on fire and killed 300 people. Did you know that that power line was over 106 years old?

There's parts of the grid in this country that are over 106 years old. And here in California, if half the people buy electric cars or there's robo-taxis and we all go and plug them in at 6 PM after work and turn up the air conditioning, we're just gonna kill the grid. Boom! We're gonna kill it. We're all gonna be sitting in the dark. So the grid barely works for what we need it for right now, and we haven't even started talking about the tsunami of demand electricity demand that AI is going to bring. And there's power generation. You know, we've let China go and build multiples more power generation than what we have here. And this is a trillion-dollar-plus capital cycle that's probably going to be a trillion dollars every 10 years for the next 30 years. Data centers— this is now a trillion dollars per year, per year. All infrastructure, all, all commodities. Then there's semifabs. The CPU is making a huge resurgence. CPU intensity is going up like a rocket. And I bet you this number is way too low, $750 billion. I bet you that's going to be measured in the trillions.

And then there's defense, right? Everybody, you know, Taiwan's turned into a porcupine. Japan's raising their defense budgets. Europe's raising their defense budgets. The US raising their defense budgets. What the similarity is amongst all of these of these end markets is none of them will work without critical minerals. None of it. None of this can happen. And so here's the problem. Last April, China announced that they were going to cut off exports of some critical materials to the US: samarium, gadolinium, terbium, dysprosium, lutetium, scandium, yttrium, erbium, silver. Just cut it off. And we're close to a lot of big industrial supply chains. And the cutoff of samarium-cobalt magnets, we learned that the Ford Motor Company was within days, literally days, of their entire production line shutting down. The whole Ford Motor Company. And same with McDonnell Douglas too, by the way. And this put people in the Department of War, Department of Energy into a panic. And to their credit, they're doing something really aggressive and really important. They are now going around to small resource owners across the US and into Canada, and they're knocking on the doors of these companies that were left for dead in the last 20 years, and they're saying, here is 3 pieces of paper.

The first piece of paper is an equity check that we're investing into your company so that you can go and start converting your resource into a mine. And then the company says, oh, that's great. Wow, that's a shock. But, you know, the problem is I've been waiting on my permit for the last 20 years. Nobody wants to give me a permit. They say, oh, look at the second piece of paper. There's your permit. Go and start building right now. And then they show them a third piece of paper. And then the company says, what's this? And they say, this is an offtake agreement, take or pay with a minimum floor price. It's going to guarantee you a very high internal rate of return on your project. Where you can keep all the upside above the minimum price, but here's a minimum price that you can go out and raise a bunch of capital to get this thing fast-tracked and up and running. Now, China has an absolute grip— it's absolute— on all of these critical minerals, and it's going to take at least 10 years, probably 20, to catch up. But we got to start somewhere because we just can't have China leaning over us and squeezing our testicles every time that we don't do something that they don't like and say, we're going to cut off your exports, we're going to cut off our exports of critical minerals, and you guys are going to freeze in the dark.

So I give a lot of credit to the administration for doing this. And really, you know, I've done commodities now for 25 years, and I've never seen something like this happen before. It's truly what I call a vuja de moment, which is the overwhelming feeling that none of this has ever happened before. So here's copper. This is the king of metals. This is just one example. We need copper for everything. You know, if we want clean energy, You know, solar power per megawatt takes 5 amounts, 5 times the amount of copper than a typical baseload CCGT gas-fired turbine. Same with wind, 7 times the copper. Data centers for a 1-gigawatt AI factory. Now you need 50,000 tons of copper per gigawatt, and we're going to start building 15 gigawatts of these things per year, per year. So 50,000 tons per gigawatt and 15 gigawatts is 750,000 tons of copper that we're going to need for these things. Do you know what the copper supply was last year? It grew only 500,000 tons. And this is just the data centers. Then electric cars. You know, if we're going to have robo taxis everywhere, an electric car consumes 5 or 6 times the copper than a traditional internal combustion engine.

And then there's the military. In the Ukraine-Russia conflict, did you know that we used more explosives than in all of World War II? Did you know that? And the artillery shells of these explosives, guess what they're made of? One of them is called the Copperhead, very cleverly named after a poisonous snake. They're all made of copper. Do you think we go into the battlefield and recycle that copper? No, that copper is gone. So we need this, these metals for everything that we do. Now, where are we going to get it? Going back in human history to Mohenjo-daro, We have mined 700 million tons of copper. 700 million tons of copper over the past 10,000 years. Now, 80% of that copper, we could probably get it all back if we wanted. But what we'd have to do is we'd have to tear down this building. We'd have to rip up the grid. We'd have to tear down the buildings in Europe, in Japan, in China. And we could get all that copper back, sure. But then we'd be doing this conference in a tent. So how are we going to get it? Well, right now copper demand is 30 million tons per year.

About 4 million of that supply comes from recycled copper. The rest of it is 26 million tons is mined. And if we just grow in line with GDP, so forgetting about data center upside, forgetting about green energy, solar upside, just growing at GDP like we used to. Now listen carefully. That means over the next 18 years, we're going to need 700 million tons of copper. Over the next 18 years, we're going to need as much copper as we mined in the last 10,000 years. That means we're going to need 5 world-class mega tier 1 mines coming online every single year. And you can go and Grok this or ChatGPT this. You can count on one hand and have some fingers left over, uh, the number of tier 1 mines that are coming on between now and the end of the decade. So I don't know what they're going to do because it takes 7 to 12 years to build a copper mine. The existing copper mines are dying. You know, the big mines in Chile, over 100 years old, the grades are depleting. And, um, this is going to be a major, major challenge and an upcoming bottleneck.

Right. Today, all the rage is in memory and HBM and NAND. Prices are going vertical because that's the bottleneck. Now, if you want to look around the corner and see the next bottleneck coming, I strongly urge you to look at copper. And so here we are, a supply shock meets a demand shock. Commodity cycles typically last 15 years and have multiple hundreds percents of upside. We're only a few years into this. This is just really getting started. And I want to say one more thing, right? We spoke about demand. We're having this demand shock. We spoke about supply. But what we haven't spoken about is how we're destroying the value of the US dollar. Since COVID we have absolutely destroyed the value of our fiat currencies. Today we have $40 trillion of government debt that's growing at $2.5 trillion every year. On top of that, we have $100 trillion of discounted present value of the future social liabilities. So Medicare, Medicaid, Social Security, pensions— that's also growing by $2.5 trillion a year. So you have $2.5 trillion of growth on the federal debt, $2.5 trillion of growth on the social liabilities. The US government only has $5.5 trillion of tax receipts every year.

And so what's going to happen the next time we have a recession where tax receipts go down and spending has to go up? We're going to print giga dollars. And in the 1970s, we had this problem as well. And the way we did it is we just debased the currency through some inflation, through some growth, and the currency lost 70% of its purchasing power. And commodities and hard assets and infrastructure will protect your purchasing power in that kind of environment. Go and look it up. In the 1970s, what was the best performing asset class? By a mile, That's your homework. So with that, uh, thank you and, uh, look forward to chatting with you guys.

Shabath, I think on the prediction show you, um, was your call— I forget which category it was, but you definitely had—

I thought the best performing asset was going to be copper.

Yeah, yeah, pretty.

And that's before I talked to Dan. That's right, which is saying something.

Well, you know, I think the copper price is easily going to double from here. I mean, I've seen I've seen molybdenum go from a dollar a pound to $33 a pound. So a double is no big deal.

Yeah.

And so take a step back. You said something really interesting backstage, which is if you look at everything that we're doing right now, we're barely going to keep up with just the natural energy demands of humanity. Right. Just explain that thesis the way that you framed it in the back.

So here's the issue. We have not invested in upgrading and modernizing and hardening the electric grid since post-World War II. We just let it go. You know, the last 2, 3, 4 administrations were sleepwalking and haven't done anything to harden this infrastructure. Now, if we simply just want to achieve our objectives to reindustrialize, reshore, electrify. When I say electrify, that just means replacing your old gas boilers in these buildings with heat pumps, which every commercial building is doing. It means, you know, electric car penetration going up. It means using your electronic devices more. Not even talking about AI. Not even talking about AI. We're going to have shortfalls just from that.

Just from living our life.

Just from living our lives.

So what happens? Blackouts, brownouts?

Blackouts, brownouts, and we're going to have rising electricity prices, rising electricity prices. But, you know, you brought up a really great point, I thought, on one of your shows where you were talking about how the utilities are just really goosing up the cost to do everything so that they can report to their regulator and earn that ROE on the higher capital base. What's really interesting, I think, is really underappreciated is that's where all the inflation is coming from. It's from the transmission and distribution from the utility, because power prices over the last 20 years, even after the rise we've just had, power prices are still down. They're definitely down in real terms, but they haven't really gone up much in absolute terms. And so when you're talking about— so making it— going up— making it is still cheap, but it's getting more expensive.

Getting it—

it's getting expensive. People is really getting it to people because, you know, the The labor by far and away is the biggest bottleneck, craft labor. What do we tell all our kids to do in the last 10 or 15 years? Liberalist degrees in the Northeast.

Liberalist degrees in the Northeast.

Yeah.

Right. Big mistake. And so I'm curious from the audience, in your homes, how many people have put up solar and/or Powerwalls? How many people have actually done that? So that's about half. Half the crowd. How many people, second question, are planning to do that in the next year or two? Okay, so that's another 20%. So it's pretty obvious this is obviously a fluent crowd. They are routing around the grid. Is the solution to this energy independence in the—

Great question.

You know, the home, in the business. Businesses are not waiting for the government. So maybe the grid is gonna be like, this weird archaic infrastructure, and it's just going to be a ground-up solution?

Well, you're going to need the grid no matter what for industrial use. I mean, that's, that, that's the foundation of industrial use. I mean, the scale of what we have to do just for industrials— here's a good stat for you. So a 1-gigawatt AI factory, if you wanted to do all solar, right? And I'm a big solar bull, okay? If you want to do all solar, because solar's capacity factor is 20% because the Sun doesn't shine all the time. With a capacity factor at 20%, a 1-gigawatt data center needs 5 gigawatts of solar. Each gigawatt of solar takes up 7,000 acres. So at 5 gigawatts, that's 35,000 acres. That's bigger than San Francisco. So where are you going to find the people? You know, where are you going to find— that's, that's the biggest bottleneck we have, by the way, is craft labor. Yeah.

What about generally scarcity breeds innovation? There's been a conversation, or I've seen some startups that are talking about new technology and mining. To access— I think traditionally rare earth is kind of the pitch, but everything we need is in the earth below us. It's just that we only mine the stuff that's on the surface is the general thesis. Is there a set of innovations that you think are coming to market that are going to ultimately unleash more productivity than we see? Because we're still using the same technology we did 100 years ago to get this stuff out of the ground.

For some commodities, yes. You brought up rare earths. So, so coming out of the 14th century, there were these guys called alchemists. Remember them? They said they could turn lead into gold. And back then, the periodic table was just 4 elements. There was water, there was fire, there was air, and there was earth. Now, fire, you could figure out what it was. The air was pretty pure. The water was pure. But every time they saw something in the earth, they didn't know what it was. They called it a rare earth. And so, Rare earths are everywhere, and the technology to extract rare earths is going to allow us to have a huge abundance of them. But the problem is processing them. That's the problem. The Chinese have all the technological know-how to convert what you take out of the ground and convert it into something that we can use. And so there's always going to be, you know, some element of conversion that you're going to need. With something like copper, the market is so big that it's really difficult to find a technology that could solve that problem overnight.

And if we are having— just to thread a couple of topics we've been talking about on the pod incessantly about— if we do have this rivalry with China and they are the provider and that's the brittle part of the supply chain, we can solve the problem of job displacement, not apocalypse, displacement. People in America who want jobs. These are going to be incredibly high-paying jobs. And we can start bringing the fabs from Taiwan here, which we're doing. And we're going to bring both to North America and I understand South America from a friend of mine who's got an automated mining system, Adams, Travis. We're going to be able to just create a large number of jobs here. So maybe you could talk a little bit about what impact— we keep talking about how behind America is, but what happens to China if we stop buying here and we start building?

What you said is very important for this whole jobs debate. The craft labor that we're going to need is going to be almost limitless for what we have to build, and there's really no other way around it, right? The, you know, in many ways, like, look what happened in the 2000s, right? We tore down all our factories and moved them to China, and who got killed by that? It was the blue-collar craft labor, created all kinds of unintended consequences, fentanyl, you know, wealth gaps.

Pennsylvania, Detroit. Who's a big problem?

You know, the coasts were making all the money, and the heart of the country, the salt of the earth, was getting killed. What's ironic today is that same part of the middle country, those people that got displaced, are now getting entry-level salaries. You know, if you go to Kwame University and you're top of your class, you're starting out at $150 grand right out of high school. And the jobs they're doing, ironically, are the jobs that may or may not be displacing some of the early, you know, lower-level white-collar labor And so the tables have totally turned. And so, look, it's an efficient market. The jobs are going to flow where the money is, and the money right now is really coming in this area.

Can we talk about a couple of other areas? What's your take on other forms of energy—nat gas, coal, nuclear, hydrocarbons? I mean, the demand pull seems like if just based on this, maybe the most reductive takeaway is Everything. But then how do you, Dan, differentiate? Like, why were you— why did you say, for example, you're super bullish solar? What are your thoughts on nuclear? How do you trade all these off, these different sources of energy?

So we're swimming in natural gas in this country. We can build solar, uh, you know, that's, that's not the bottleneck. And nuclear, you know, we, we can't really build it. We can't even build the containment vessels in this country. The Koreans can do it, but we can't do that here. So there's always going to be these big bottlenecks in the system. And whether you're talking about solar, whether you're talking about nat gas, whether you're talking about uranium, we're going to have the raw inputs like the natural gas that we drill from the ground. But what we're going to be short of is the critical minerals to build the nuclear power plants. We're going to be short the silver, for example, to build these solar panels, especially if we start launching data centers in space. Right? These are going to consume incredible amounts of silver. Right now, the silver supply-demand dynamic is we consume 1.2 billion ounces a year, we supply 1 billion ounces a year. So there's a 200 million ton deficit per year, and we only have 600 million of above-ground inventory left. So the clock's ticking. We got 3 years left, guys, before we just stock out.

And then the solar story is, where do you get the silver for the photovoltaic cells?

So for our kids and for the country, Generation Tool Belt, for us allocating, get some exposure to copper, silver, minerals. And then there's a bunch of service providers in and around that area that we should be investigating over the next year.

Don't forget the labor, the service providers, that's a big one.

Okay, how do you allocate capital? You're at the front end of owning what, mines and production, but then also the end use cases? Like, how do you decide where to not play? Because a lot of these things, it looks like these are incredible end markets, but you can get run over. Like, if you're in the wrong part of the market There are supply shocks, there's supply shaping by China, there's price dumping. It can be all obvious and you could make— you could lose a lot of money too.

Yeah, look, you really have to understand supply chains. And I think, I think to a lot of people out there, the supply chains are the sort of weird mystical concept. And I still think a lot of urban Americans still think a ham sandwich comes from the refrigerator, and they don't think about the 30 million pigs every month they're getting slaughtered outside of Chicago. Don't get framework started, please. But, you know, you got to understand where the pinch points are in the supply chain, number one. And number two, I think you have to really make sure that you're not going to get technologically disrupted where you can find— you know, I think this was to Friedberg's point— where you can find something that's going to replace that tightness in the supply chain. Give it up for Dan.

Well done. Very, very informative.