The Metal We Want to Own
Here’s Why Electric Vehicles are Here to Stay and the Metal We Want to Own Because of It
The average American drives about 14,000 miles per year.
We average less than 20 miles per gallon around town. I personally get about twenty-one miles per gallon (mpg) on the highway, in my four-cylinder mid-size SUV.
We spent a lot of time in our car this summer, road tripping to visit family, look at colleges for my youngest, and just running errands. We paid, on average, $3.30 per gallon for gasoline. That means it cost me more than $60 to fill my tank.
That gets old. So, I crunched some numbers to see what I could be saving with better gas mileage. And I figured out why plug-in hybrid (PHEVs) are a growing segment of the electric vehicle (EV) market.
This table shows the fuel cost by mileage for an average year of driving:
As you can see in the table, a PHEV that gets 50 mpg would save us more than $1,680 per year at $4 per gallon gasoline price. A simple jump to 35 mpg would save us $1,200 per year. For many people, that’s meaningful savings.
The improved gas mileage comes from the design. A PHEV has both a gasoline engine and a battery. While it doesn’t have anywhere near the range of pure EV, the battery dramatically improves gas mileage. And the price tags of the PHEVs are in line with traditional cars.
PHEVs are the ideal compromise for folks that spend most of their time driving around town, but occasionally need to road trip. They are a much easier step for many of us than ditching our traditional cars for a fully electric vehicle.
That’s why the numbers are growing.
This month, we’re going to dig into the fastest growing segment of the EV market. And we’re going to buy a critical piece of the EV market.
What is a PHEV and Why is It So Popular?
A PHEV is a hybrid vehicle with two power sources. It has both electric and gasoline engines. According to S&P Global, sales of PHEVs grew 44% globally from 2023 to 2024. In the first half of 2024, sales rose 22.3%. In the U.S. hybrid sales exploded by 34% in the first half of 2024.
This data supports auto industry sentiment that there is a shift from fully electric vehicles to PHEVs. This is particularly noticeable in China. PHEV sales made up half of overall Chinese vehicle sales. H1 2024 PHEV sales accounted for 41% of all Chinese sales compared with 32% the year before. According to researchers at the Macquarie Group:
“The share of plug-in hybrids in total sales at 35% is the highest since 2017. The move back towards PHEVs mainly reflects strong growth in Chinese “range extender” cars, where the internal combustion engine vehicle is used solely to recharge the battery and not drive the vehicle’s wheels.”
This is an important thing to understand. Range continues to be the main issue with EVs. By combining a small combustion engine to recharge the battery, these vehicles can fix that problem.
The important takeaway here is that EVs continue to dominate car sales in China.
And Chinese customers by the most cars…and it isn’t close. In 2023, China sold 25.8 million cars. That’s twice as many as sold in all of Europe. And it’s 34% more than we sold in the U.S.
That’s important to know, because it comes back to our basic premise that EVs use more odd metals than regular cars. And if you listen to American media, EV sales are dying. That’s actually a misnomer. Take Ford, for example. CNN ran a story titled, “Ford is Making Major Changes to its Electric Vehicle Strategy.”
And that’s true. The car maker faces two major headwinds for its EVs – price and range. Those are the same problems all the EV makers face. At Ford, they announced a huge change. They killed plans for a line of electric SUVs.
The company replaced them with PHEVs. The switch will cost the company at least $400 million (with estimates as high as $1.5 billion). The reason for the shift is that universal problem – buyers want longer driving range and a safety net if the battery dies. That comes from the combined gasoline/battery option.
Additionally, there’s the price. A fully electric SUV starts around $50,000 and goes up to over $100,000. And the electric models tend to cost a lot more than their gas-powered cousins. And the fuel savings isn’t enough to offset the higher price and the “foreign” feeling of a fully electric vehicle.
However, PHEVs have comparable prices, but much higher gas mileage. And because they have gasoline motors, buyers are familiar with them.
However, the perceived decline in demand for fully electric vehicles impacted battery metal prices. According to the website Trading Economics, which tracks metal prices, lithium carbonate fell to its lowest price since 2021, around $10,391 per metric ton.
Cobalt, another critical battery metal fell to its lowest price since 2016, at $24,300 per metric ton. Nickel recently climbed off its low to hit $16,758 per metric ton. But that’s well below its recent high of $48,000 in 2022.
The metal of electrification, copper, tells a different story:
You see, copper isn’t just a battery metal.
It doesn’t rely on massive sales of EVs to push up demand. That’s why copper prices remain high today. And they didn’t dip far, during the post-covid inflationary period.
Thanks to much higher interest rates, demand for all cars fell, not just EVs. However, interest rate reductions could happen as soon as September. That means we could see car sales pop back up in the second half of 2024 and into 2025. In addition, consumers who aren’t buying EVs are mostly switching to PHEVs rather than traditional cars.
That’s why we are staying with copper producers going forward. They have less price risk than other battery metals, thanks to diverse demand. And an increase in vehicle sales should push the price of the red metal higher.
This month, we have a Canadian copper producer focused on Brazil, which plans to double its copper production by next year.
Ero Copper (NYSE: ERO) Brazil-Focused Copper Miner
This month we’re focused on Ero Copper, a $2.2 billion Canadian copper miner. It just sold its first copper concentrate from its Tucuma Project in Brazil. The company will now ramp up to commercial production. The company’s goal is to double its copper production by 2025.
Ero’s chart looks good. The company’s share price proved to be sensitive to the copper price. But as it moves toward doubling its copper production, that will improve.
What we like about Ero is that it’s a strong, stable, profitable mining company that trades for about half of what Lundin Mining and BHP paid for Filo – which had no production at all. By that comparison, Ero should trade at a much higher value than it does today.
And we like everything about this company – management, financials, mines, and business model.
The CEO of Ero, David Strang, is an incredibly experienced manager. He has more than 25 years in corporate finance, particularly in copper mining companies. We met David in the mid-2000s when he worked for Northern Peru Copper.
Financially, the company looks strong:
Ero has three mines: Tucuma, Caraiba, and Xavantina. Tucuma, Caraiba, and Xavantina are in production.
Caraiba and Tucuma are the copper producing mines. The company forecast copper production between 59,000 and 72,000 metric tons for 2024.
However, that will grow during the next year. In 2025, the forecast is between 95,000 and 105,000 metric tons of copper. That’s a huge leap in production.
The company mines gold at Xavantina. This year, the mine forecast is between 60,000 and 65,000 ounces of gold. That settles down to 55,000 to 60,000 ounces per year after 2024. This is a high-grade underground gold mine that is exceptionally profitable.
On July 22nd, Ero made a deal with giant miner Vale to acquire 60% of the Furnas copper project. This is an advanced exploration stage copper project. Geologically, it is an iron-oxide, copper, gold deposit (IOCG).
However, the drill results show a high copper endowment, with modest gold. This will be an excellent development project going forward.
Finally, we really like the company’s business model. Ero leads the “new mining” movement. Ero uses renewable electricity for its mine. That puts it among the world’s lowest carbon-intensive copper producers. And ratings agency MSCI gave it an “A” ranking for ESG, which is in the top 32% of its peer group.
Action to Take: Buy Ero Copper (NYSE: ERO) up to $25 per share and use a 30% trailing stop. That means, if we pay $25 per share and the stock falls below $17.50 per share, we will sell.
We see the coming interest rate cuts as a potential boom for car makers. We believe folks put off financing a new car at 7%+ rates.
However, a rate cut or two should rekindle interest in new vehicles. And it doesn’t matter if the car is a fully electric or a PHEV, they both use a lot of copper.
For the Good,
The Mangrove Investor Team
