“Changing the balance”: John Ciampaglia on the energy transition

John Ciampaglia is the CEO of Sprott Asset Management, which recently launched four new ETFs into its suite of energy transition funds. In this episode of Opto Sessions, Ciampaglia discusses the new Sprott Energy Transition Materials ETF, the minerals to which it offers exposure, and why Sprott is so well-positioned to provide it.

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Before joining Sprott Asset Management, John Ciampaglia held senior positions at Invesco Canada and TD Asset Management. “I’m coming up to 30 years in the investment business”, he says, and attributes his success to focusing on his clients’ needs.

Ciampaglia joined Sprott in 2010 as chief operating officer and became CEO in 2017. The asset management firm was founded in 1981 by Eric Sprott, “a champion of precious metals investing”, Ciampaglia says.

Given that Sprott is located in Toronto, which Ciampaglia calls the “the mining finance capital of the world”, it’s no surprise the firm is involved in “all things related to metals and mining”.

When Ciampaglia gives a presentation to institutional investors, he says, “it’s part chemistry class, part physics class. We get into some technical stuff in terms of how energy is produced and what minerals you need to store it.”

For this conversation, Opto met with Ciampaglia in London to discuss the recently launched Sprott Energy Transition Materials ETF [SETM], one of four new ETFs to join a total of six in its suite of energy transition funds.

A double challenge spurs activity

When Sprott began looking at energy transition materials in 2021, it was a hot topic because of COP26. The US was re-entering the Paris Climate Agreement “and there was finally acknowledgement that things needed to be done”.

“The reality is our energy systems, our transportation networks, are all based on fossil fuels.” However, rather than being anti-fossil fuels per se, the energy transition “is about trying to change the balance”.

While energy transition is primarily about decarbonisation, in the last year it has also become about security—something that has been particularly notable in Europe. The combination of climate change and energy security is what Ciampaglia calls a “double challenge” facing politicians.

“That has been the thesis that a lot of investors are latching onto, with governments around the world putting out green taxonomies. They're all trying to essentially send investment signals to the market, that they want this transition to happen.”

As countries try to minimise the supply chain necessary for a rapid energy transition, they are allocating vast sums of money. According to research by BloombergNEF, spending on the energy transition jumped 31% to $1.1trn in 2022, matching that attributed to fossil fuels for the first time in history. Sprott believes that number will continue to grow and eventually outpace fossil fuel spend.

“What other technologies do we think the world can commercialise and deploy at scale to help with the transition? Everything from small modular nuclear reactors and microreactors, to hydrogen economy, to carbon capture technologies.”

The energy transition ETF

When it comes to the Energy Transition Materials ETF, Sprott looks for companies whose revenues or assets are closely tied to the critical minerals it believes will be the bigger movers of the energy transition. There are three stages to determining that.

The first question is: “how do you produce energy in a clean way?” The answer Sprott has arrived at is: uranium and silver. The former is essential for nuclear power, and the latter is a key component of solar panels.

“Most people have no idea, but about 10% of all the silver produced every year goes into solar panels.”

The next question is, “How does energy move around?” Ciampaglia says: “copper transmission lines, copper cabling and copper foil.”

The final step is determining the method of storage, which means looking at batteries. In that regard, “lithium is the star”, but nickel, cobalt, manganese and graphite all play important roles as well.

Every battery contains some form of lithium, and it’s concentrated in very few parts of the world—specifically, places where volcanoes formed millions of years ago. Finding it requires going to places where the Earth’s crust is particularly ancient, like the Andes, which he says are part of the “lithium triangle between Argentina, Chile and Bolivia”.

There are also concentrations in Australia and Northern America. In January this year, the US awarded a loan of $700m to a lithium mine in Nevada, where there are substantial deposits of the mineral.

A long runway

Ciampaglia is known for his emphasis on a long-term investment horizon—something that can be a challenge when it comes to mining, due to miners typically being pre-cashflow and in the process of opening a new mine, making them “less liquid and more volatile”.

The time it takes to get a lithium mine up and running, for example, can take anywhere from eight to 15 years, says Ciampaglia. In terms of future demand, he notes, the amount of copper needed to meet electric vehicle production targets is between 200% and 500% over 2020 levels, while for lithium that figure “is in the thousands of percent”.

“We think that this transition is going to take trillions of dollars and last decades,” says Ciampaglia, calling the transition a “long-term theme” that will kickstart a “new commodity supercycle”.

The last time the world saw something like this was in the early 2000s, when China was ramping up development across its cities. In this case, however, it’s “just starting to play out”.

While the Sprott Energy Transition Materials ETF doesn’t offer direct exposure to commodities, that’s only because a vehicle for them isn’t yet available. The next best thing, says Ciampaglia, is the producers and developers, which are heavily weighted in the fund.

Each of the metals is capped at 25%, to protect against one of them racing away and taking over the fund. Right now, there is already an exposure of approximately 25% to both lithium and copper companies, but smaller weights are attributed to nickel and other rare earths as well.

While the fund doesn’t offer any uranium exposure, investors can select the Sprott Uranium Miners ETF [URNM].

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