Tavi Costa on the next boom in commodities and mining
Tavi Costa believes investors have spent years favoring financial assets while overlooking the industries that supply the resources modern economies depend on.
In this episode, the founder of Azoria Capital argues that a new investment cycle is emerging—one driven by resource scarcity, shifting geopolitical priorities, and the growing importance of hard assets.
As governments focus on securing critical supply chains and rebuilding industrial capacity, he sees opportunities developing in places and sectors that much of the market continues to overlook.
Watch the episode now.
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Transcript
Tavi Costa
That changes the whole landscape because countries are realizing that resources are very strategic and critical for their onshoring efforts that we’re seeing worldwide, right? Everybody’s looking inwards and trying to reduce reliability of, you know, China and other countries that they have been very reliable or dependent on. And so as we see that shifting, you’re going to see an extra push towards production, extra push towards developing mines and so forth.
We did this with Bolivia and enjoyed the fact that we saw a shift in politics in the political environment there has completely shifted and is much more open to foreign investment, and we’ve reduced the risk of nationalization to pretty much low single digits, which probably used to be high single digits in the past, and now it’s not anymore. So I do think that that has an inherent safety floor that is not appreciated by the market just yet. Overall, jurisdiction risk has been improving quite significantly in separate regions, and I would point out that Latin America is probably the biggest shift we saw over the last 3 to 5 years.
Monetary Metals
Welcome back to the Gold Exchange Podcast. I am joined by our good friend Tavi Costa, who is the CEO and founder of Azuria Capital. He joins the podcast today to talk about emerging markets, mining, and a whole lot more. Tavi, welcome back to the show.
Tavi Costa
Thanks for having me, looking forward to this conversation.
Why mining stocks are still undervalued
Monetary Metals
All right, let’s start with the mining companies. A lot of people have seen that gold is in somewhat of a bull run, in a bull cycle. Where are the mining companies who actually extract the gold out of the ground relative to this gold bull run that we’re in?
Tavi Costa
Very undervalued, most likely because a lot of investors don’t believe in the sustainability of this profitability that they are seeing. I think we haven’t really experienced this in the last few decades. What I’m referring to is the margins that most of these companies are enjoying at the moment. And there has been a lot of misunderstanding about especially energy costs and other things and how that can actually squeeze the margins of these companies, of which It’s not as severe as a lot of people were saying.
Also, there’s a lot of questions about the sustainability of metal prices themselves at these levels, of which I’m a firm believer we’re in a world of structurally higher resource prices. And so I do think that these margins are likely to be sustained for much longer than investor base of these companies believe. And so if you’re off that view, then they are a bargain today. Mining companies like Silver Projects that are producing at around $15 an ounce, and you’re probably selling your silver for $60, $70, even $80 depending on the day, or $90 in the day. These days are very volatile, but it doesn’t matter. It’s a great margin.
It’s better margins than any other technology company. And people are still very, you know, in my view, don’t own enough of these types of companies. They’re going to be critical and very likely to be a main focus for a lot of capital allocators in the near future, in my view.
Monetary Metals
And in your opinion, where is this reticence coming from? Is it, hey, there’s an opportunity cost if I don’t buy big tech and it runs up, I’m going to feel like a fool buying miners? Or do you think that people simply don’t trust mining as an asset class compared to bullion or some other types of investments?
Tavi Costa
I think it’s a little bit of both, honestly. I also think it’s a little bit of a traditional skepticism towards this industry because of them being capital bleeders. And that was right, you know, but that’s the lenses that, you know, we’re not going to We have to adjust our views when the data changes, and the data has changed. Companies are generating more free cash flow than they’ve ever done.
It’s remarkable to see share prices actually retesting levels of 2011 or other times, but then you look at the profitability, it’s way higher than any other time in the history of the company. So the share prices don’t reflect that. The share prices should be all-time highs by far, you know, because that’s what profitability shows. Unless you believe that profitability is not sustainable. Again, And so, you know, that’s not the case here. I think most of these companies are being forced to be very disciplined and they are doing that. They’re paying down debt, their balance sheets have improved drastically.
You’re seeing companies paying large dividends, doing a lot of buybacks, and that’s also to attract capital. And in a way, I, I do think that buybacks are, are smart in this case here because for companies that have enough resources, are not just depleting their resources in order to produce cash flows and so forth.
I do think we’re sort of, you know, for those that appreciate the mining industry, we are what I call the honeymoon phase of appreciating their profit margins. But then eventually it’s going to go into another phase where you start, you know, really worrying about top-line growth and realizing that yes, we’re seeing a depletion of reserves that is also deteriorating through grades of the existing reserves that they have, and hasn’t been much focus on exploration.
And so eventually that top-line concern of pipeline growth in this, in these companies is going to become an issue. And so you want to be focused in kind of both things, like companies that have the ability to grow and companies who have ability to do M&A. And also those potential targets for M&As are going to be very critical here. So that would be at least my focus as an investor.
Gold miners vs silver miners vs copper
Monetary Metals
And what about the difference between the gold miners and the silver miners? Obviously not a lot of silver is mined as the main metal. Usually it’s a product metal from lead or zinc. So how do you see someone who’s purely mining gold and maybe some copper comes out versus someone who’s mining another metal and some silver comes out in terms of as an investor focused on, on the mining space?
Tavi Costa
I don’t think there’s like major, major, major differences. At the end of the day, you know, each project is going to be very unique to their own economics. And so the way I see the mining industry is, you know, in one way, like I do think there’s 3 metals that really matter, and other metals are more—not that they don’t matter, but there’s too much attention towards them relative to their relevance in the markets and how much they need of capital and supply going forward.
In other words, gold, silver, and copper. If you just want to do the what matters here, what is really relevant, I would say that those 3 are extremely important, especially copper for society. And then you have gold given imbalances, and silver kind of fits in between the 2. They all very supply constrained. They all have their own economics. Some of, sometimes like you mentioned, you find deposits there that have the three or have two of them within one project. And I don’t necessarily look at these companies in a separate manner. I think that today silver miners are potentially a little more undervalued relative to the others.
Don’t know if I would necessarily say this, you know, with a lot of conviction, but I do think that there’s maybe some stories that are a little more undervalued relative to others. On the silver space. And again, mostly because people don’t believe that silver prices will last here above $50 and so forth. And I do think we will, and we potentially push a lot higher. On the gold side, I think there’s still—my goodness—a lot of opportunities there as well. The operation leverage has not been priced in markets yet. We’ve seen metal prices move well.
We haven’t really seen the operational leverage be appreciated by the market just yet. I think If you own a mine, for instance, if you’re just in a private market owning a mine, which is my case, you’ve just been appreciating this whole environment in terms of the higher metal prices and low-cost structure. And who cares if somebody says that your business is worth something you don’t think it’s worth because you think it’s worth a lot more? You just keep taking the cash flows that you’ve been generating. So those that kind of in that space are really enjoying this moment right now.
And so I do think this is going to take a very long time in my view, as I said, I do think structurally higher resource prices is sort of at least my base case for the next 5 to 10 years.
Risks to the resource cycle
Monetary Metals
And what are some of those risks to that structurally higher cycle? Is it interest rates? Is it oil prices? Is it the prices of the metals themselves? Is it some other factor? What are the things that you’re looking for to say, hey, I think this kind of commodities or resource cycle is maybe peaking or coming to an end?
Tavi Costa
I think it’s going to be, you know, once you really start seeing pipeline supply really come into the market. You know, if start today with copper, for instance, and that’s why I’m just focusing on gold, silver, copper. If you take any of those three and say, all right, we’re going to fix this today, it will take 8 years, 10 years to get it done. So, you know, and are we doing that today? No, we’re not.
So, you know, and of course the market is going to look forward to this and not 10 years, and it’s not going to price 10 years today, but it will probably price, you know, once we get to start seeing some real developments on companies getting into production and so forth, it will start potentially changing the curve of future prices.
I think we’re so far away from that right now. So it’s a tough question to answer because if you asked me 8 or 9 months ago, if I don’t remember the last time we talked, but I was really concerned, very, very concerned about energy prices. I thought that you as a mining company, as an end investor, should be considering hedging your diesel exposure.
So for instance, our Syncristobal mine, 8, 9 months ago, we hedged 3 years out of diesel price. Why? Because silver relative to diesel prices were so undervalued. I thought that that was the right thing to do, take some off your cash flows and, you know, protect your margins.
There are things it’s really difficult to protect. No, I’ll give an example. For instance, labor cost. How do you hedge labor costs? It’s a very difficult thing to do. Maybe by owning some metals in your treasury, maybe you can argue that that might help you with real inflation costs, but you know, which I think every mining company should do. Like, why own dollars if you can just own gold? Probably a better idea.
Or maybe a mix of that with some yielding, highly liquid yielding instrument is probably a better approach, and use that yield to also, you know, try to reduce your uplift on cost from labor as well. That’s going to be the tricky part of what mining companies are going to have to navigate in this space. It’s going to be very profitable 5 to 10 years, in my opinion. But you’re going to have to be watching like a hawk your cost structure and looking for ways to protect your margins at all costs.
And it’s going to be—right now it’s really expensive for you to hedge, or much more expensive to hedge energy. I wouldn’t be doing it if you missed that bull. You kind of missed that bull right now. So there’s going to be another moment for you to step in and hedge that exposure to diesel and other things, I’m sure.
But that was kind of irresponsible if you’re in that camp that you didn’t hedge that aspect in your mining and Trust me, it wasn’t easy. Like, even in our own mind, it was very difficult to sort of share that opinion with board of directors and others. I mean, it’s very hard for people to see these things come to fruition, like we saw with oil energy, you know, completely, you know, surging recently with, you know, more further deglobalization happening in the Middle East and other places.
And so I think that’s going to be the biggest concern. Do I think that that changes drastically? Like, if you haven’t, you know, had your diesel exposure, it’s also not the end of the world. Like, I think you’re okay here. It’s not like your margins going to disappear.
Why? Because metal prices have gone up so much. That on itself has basically saved their butt. But at the same time, I do think it was irresponsible not to hedge that because it was right on your face. It was an easy decision to make in that regard. Regardless if you’re wrong, if 3 years from now and diesel didn’t go up, you should have done that. That was the right thing to do.
So those are my thoughts into how nationalization it would be another one that you can be worried about perhaps. But I don’t think that’s going to happen here in places like South America, for instance, where you’re seeing a lot of interference from US into the politics in those areas. And I’m not sure you should really be concerned about that today, but maybe one day, maybe, you know, if politics change, you know, I would change my mind on that very quickly.
Emerging markets and jurisdiction risk
Monetary Metals
And let’s talk about some of these emerging markets. Obviously, where a mine is located could potentially become even more important as nearshoring or onshoring happens. What do you think about the different locations for these mining sectors? Historically, there have been some mining sectors that are better than others. Has that changed over time drastically?
Tavi Costa
Yes, it does change. And, you know, there’s areas that were uninvestable that are becoming investable. And you either were very good at picking and investing in an uninvestable area that has become more open, like Bolivia. You know, we did this with Bolivia.
And enjoyed the fact that we saw a shift in politics. And the political environment there has completely shifted and much more open to foreign investment. And I think we’ve reduced the risk of nationalization to pretty much, you know, low single digits, which probably used to be high single digits in the past, and now it’s not anymore. So could that change in the future? Of course, things can always change, but right now, certainly, I don’t think that’s the case here.
So there, there has been a few important changes in jurisdiction risk. I would say in general South America, Latin America, because it includes then also Mexico and others. I do think that that has an inherent safety floor that is not appreciated by the market just yet. I think it’s highly unlikely to see something that happened, for instance, with that mine in Panama from First Quantum and things like that. I think it’s highly unlikely to see something like that again.
I think that would call too much attention. Of the US government. And I think those that are in more still on the left side of politics in South America or Latin America would like to not bring that attention from the US. And so, you know, there’s, there’s different ways those in, in politics can act without calling as much attention as nationalizing a mine.
So I think that that’s highly unlikely, and that, that changes the whole landscape because this is a region that has been highly unexplored as well. I think overall countries are realizing that resources are very strategic and critical for their onshoring efforts that we’re seeing worldwide, right? Everybody’s looking inwards and trying to reduce reliability of, you know, China and other countries that they have been very reliable or dependent on.
And so as we see that shifting, you’re going to see extra push towards production, extra push towards developing mines and so forth. And eventually that’s going to have an impact on supply like we were talking, talking before. The problem is it’s inherently also difficult to find and challenging to find new discoveries and other things. So that’s a whole other separate discussion.
But I do think that the overall jurisdiction risk has been improving quite significantly in, in separate regions. And I’ll point out that Latin America is probably the biggest shift we saw over the last, uh, 3 to 5 years.
Monetary Metals
About these shifts, obviously over time they can change in the future where maybe a jurisdiction that was good is now bad, or bad is now good. What are the factors that you look for specifically to say, hey, I think this region is either on an upswing or on a downswing?
Tavi Costa
Willingness to allow projects to be developed, tax regime approvals and permitting for that tax regime, and, and others will have a major impact on helping you to raise capital for that project, which in some areas it makes it very difficult. Belize is still very difficult in that case. They do need to change their tax regime, but that’s a process.
You’re not expected to see all that to change on day one. These things will change eventually. And so I think those are some of the main factors, but also safety, right? I mean, safety is a big one. Mexico makes it a little more challenging than other areas. Community relations and other things and dealing with drug dealers and others. I mean, that of course makes it much more challenging than other areas. You know, you’re not dealing with that in Canada, but then you’re dealing with natives.
And so every jurisdiction will have their issues. And as soon as you start seeing, for instance, one thing you can watch for in Canada, you know, if you start seeing a native community create sort of a template to deal with a certain mine, to help the mine to get into production quicker and so forth, that would be something that, that’s, you know, likely to be a template that may be used with other communities.
And you should watch those developments. As they happen. We’ve seen a few in, you know, potentially in the Yukon and other areas that I pay attention to. Those are going to be interesting ones. And then you have other developments on the other side of things that have gone too south and potentially have hit a bottom.
Like, I happen to believe maybe Mexico is hitting somewhat of a bottom here, but maybe I’m wrong. I’ve said this before and the bottom has gone further, but I do think that we’re probably getting close to a bottom in Mexico in terms of jurisdiction risk. Of course, things won’t change structurally. There’s going to be issues there all the time, but the need is so high from the US and other countries to get resources that I think there’s going to be a push towards developing these things.
And they’re so profitable today that, you know, basically politics follows money, not the other way around. And so, you know, if there’s money to be made, politics will adjust accordingly. So I do think that that’s going to be the case here.
US yields, debt, and rate suppression
Monetary Metals
I want to ask you about some macro factors now. I want to talk about yields. Obviously yields have spiked in the US a little bit over 4% now. How does that affect this cost of capital going forward, not only for the mining space but for the rest of the macroeconomy? How important are these yield rates, these interest rates, and these kind of financing costs?
Tavi Costa
I like to say, usually at these levels of debt, nothing good happens at above 4% on the 2-year yield. And it is a problem. It’s a very, very problematic thing that the Fed is going to have to address. And the problem is a lot of people are now pricing in that the Fed will hiking rates here because of inflation data.
But, you know, in comparing this to 2021, where we embarked one of the, you know, most aggressive tightening policies we’ve seen in history was when we in 2021, after doing QE and all the math that we did with expansion of money supply and so forth and creating so much money in the system during a very, very inflationary era.
On the back of that, we end up seeing a lot of of interest rate hikes. Can we do that today? I don’t think so. I, I think that at that time, at a 0% rate, and your debt service ratio was very low because of low interest rates. Now at a, you know, surrounding 4%, it’s tough, you know. I mean, about one-fourth of the federal debt is going to be basically rolling over or maturing in the next 12 months, less than 12 months, and the entire interest rate curve is higher than what we’re paying on the, on the debt.
So that means that interest expense expense on the debt is going to go up a lot in the next 12 months unless we drastically change rates. And so do I think we can see a 25 basis points rate hike? Sure, we can probably see one or two. I think the Fed is going to have to find a way to justify being, you know, either not doing anything or easing conditions substantially. And if we see that, then I think it’s going to be good for the metals.
Eventually we’re going to go there. I think suppression of rates is inevitable. You know, it’s the only way to live with a lot of debt. And if you’re running the fiscal deficits that we have and the trade balance issues that we have, the only way to allow this to occur moving forward and compounding the debt problem as much as we have been is through a weaker dollar and through a lower interest rate environment. And so we’re probably going to see both, which then brings you to emerging markets, because those two factors, if they go up it kills emerging markets. And I don’t think they’re going to go up.
I think we—they’re capped. That’s basically my, my point. Can they go up a little bit? Sure, but they’re capped. I, I don’t think they can go up a lot. And if they’re capped, it’s usually the main factors that you want to avoid investing in emerging markets. So if you, if you take those two away, essentially, then, then it makes it a very compelling case to put some capital there. And I think the smart money is already going there. It’s why you’re seeing the outperformance of these markets.
The dollar milkshake theory is breaking
Monetary Metals
And this kind of weaker dollar, lower US interest rates strategy that can potentially be a boon for the emerging markets. Where do you see this kind of dollar milkshake theory, which is that, hey, there’s really no alternative to the dollar. Every time the dollar goes weaker, people say, oh, now’s the time for the emerging markets. And then the cycle shifts, the dollar gets stronger, and we do the same cycle over again. How true do you think this kind of cyclical nature to the emerging markets versus the US hegemony is for investors?
Tavi Costa
I used to be a big fan of that thesis, and the main reason why I changed my view is because of one, you know, stats that I worked on that I think it’s now getting around as well, which is interest payment on the debt relative to GDP in the US but versus other countries in the world. And, you know, the US essentially has the largest fiscal problem of any other country, not debt, debt to GDP. Worse in Japan, you know, worse in European countries.
Fine, it is what it is. Now, you can grow your debt as much as you want as long as you’re not paying a massive amount of your GDP growth, having to grow your country essentially just to pay down the debt. That becomes a problem. So if you have 0% rates and you keep growing debt, who cares? Your cost is zero. So of course there’s a cost to that, which is your currency. Look at what’s happening in Japan, right? I mean, your currency went to the toilet as you cap rates rates at low levels and debt at all-time highs. Now we’re seeing rates go up in Japan, right?
But it’s on the 30-year, the 10-year. It’s not the short end. Where’s the debt? It’s in the short end. That’s what matters. And people are just like, you know, focusing on the wrong stuff here. Like, 30-year yield going up doesn’t really matter in Japan at that point. Like, it’s not changing their interest payment on the debt really.
Now, 2-year yield going up in the US matters. I can tell you, it matters a lot. A 5-year yield going up, it matters a lot. That’s where the thick of the debt in the US is. And you know, this is an issue what we’re seeing right now. So all I’m saying is the sense of urgency of the US to lower rates relative to the rest of the world is much higher.
As we see that happening, I suspect that we’re probably going to see interest rate differentials benefit other currencies relative to the dollar. So So this is why I believe strongly that we’re probably peaking on the US dollar relative to other currencies, i.e., the DXY. To be very specific, the DXY index is likely to be moving lower, not higher, over the next 5 to 10 years.
And if that’s the case, unleashes a lot of things. And so I think that, that, you know, the Milkshake Theory is really clever and interesting. And look, I used to, you know, be a big bear on China and other things just because of that view. And I think that was appropriate, but I think the COVID world changed a lot of things.
The way the policymakers in the US in particular reacted towards that lockdown issue and so forth and that recession and the amount of money creation we saw back then, to me was something that, you know, that’s why we’re seeing inflation the way, you know, the way we are relative to prior to COVID. Not that we didn’t see inflation prior to COVID.
But this is, you know, this is a different beast what we’re facing right now. I mean, I’ve lived in the US for, you know, decades, and I can tell you I’ve never seen this level of inflation. I’m in Brazil right now. It feels like we’re in Brazil, uh, in terms of the inflation problem that we’re facing there. It’s way worse. It’s more expensive to live there than any other place in the world.
If you travel around the world, the US has never been that expensive. So I think it’s a different beast what we’re seeing today, and why I think that the dollar is going to weakening much further.
Structurally higher inflation ahead
Monetary Metals
Let’s talk about the inflation story. One of the last times you were on, you said, I just want to know, what do the people who thought we were going to have much structurally higher inflation differ from the views of those who thought, no, maybe this is more of a transitory cycle? Where do you sit now? Are we in structurally higher inflation, and what does that mean for investors?
Tavi Costa
I don’t think I’ve changed my views at all on this. When I say structural higher inflation, I—all I mean is if you look at the average average inflation rate annually for this decade is going to be higher than the prior decade. It means it’s also going to be higher than the other decade.
It means that it’s going to be higher than the historical average of decades of inflation. And that’s been the case right now. I think we’re about 4% of CPI, which is, you know, miscalculating what inflation really is. But let’s just use that for the sake of the argument. And yeah, we’re way higher than what we saw in the prior, prior decades already. So I think we are, you know, of course it’s going to be ups and downs. Right now we’re seeing an upper trend because of the war and other issues.
And how long would that take me? About 12 months or so. And then you probably will have a peak in, in that number. And then, you know, just like in 2022 or so when we saw inflation peak and come down from 9% on CPI all the way down to, I don’t know, 1 or 2%.
10, and then we bounce again. So I don’t think we got quite low as low as 1, but yeah, I, I think that’s, you know, very likely to happen. That waves of inflation that I like to talk about, usually I think that, you know, we’re going to see higher lows and higher highs on inflation over time. I don’t think we’re going to peak at 9. We’re probably going to peak at double digits this time here. And, you know, if that’s the case, it’s really high. It’s government data, is really hard to picked.
Kevin Walsh is coming in, he wants to use the mean-trim CPI. I mean, that’s just basically trimming all the energy, food, and all sorts. I mean, if you’re excluding all these critical things for especially lower-class living standards, of course you’re going to get inflation numbers to be lower than what reality really is. And I don’t think that’s really appropriate. So that’s what policymakers will probably do. They’re going to use crazy, you know, adjusted numbers to justify that they should be lowering rates. And so those are my two cents on all that.
The Fed and Kevin Warsh
Monetary Metals
And let’s talk about the Fed just for a minute here. Obviously, Kevin Warsh being appointed Fed chair, we’ve had Daniel DiMartino Booth on the show talking about the Fed. Where do you see the importance of the Fed going forward? Do you still think, hey, these are very important actors in the economy, we need to be focused on what they’re saying, or do you think there are other structural factors that are actually leading the Fed to do what they’re doing and investors should be focusing somewhere else first?
Tavi Costa
Well, first thing is, I think the Fed has lost its independence a long time ago and this change of guard is definitely reinforcing that. And I, in closed doors and even before it was more open, now that Trump realized that the dollar was steeply falling apart and they needed to do something about that because inflation is obviously higher than he would like it to be.
Now he’s praising independence. I mean, he just was presenting Kevin Walsh now, just now before we filming this and claiming that this is going to be very independent Fed and so forth. And we know, you know, Trump has opinions about interest rates and the dollar and so forth. You know, if you don’t believe in that, you know, shame on you because that’s, you know, it is what it is. And it’s not just Trump, it’s going to be anybody.
I mean, I mean, during the Biden administration, the Fed wasn’t independent either, right? We all know that. So it is what it is. We as investors need to just, you know, take that political aspect out of the equation here and just think about it more practically. And what is likely to happen here is, again, I think the market is overly pricing a hawkish Fed when I’m not sure that will be the case.
That’s where I feel very strongly about with this whole situation. I do think that Kevin Walsh is going to be way more dovish than the market is thinking. This reminds me a lot of 2024 when Trump got elected and the dollar surged because they thought that Scott Bassett was going to want a stronger dollar and other things.
Oh my goodness. I remember this because I was very bearish on the dollar and this was just ripping on my face. You know, I had positions in the markets and And it was not easy to see the market just react very different than I thought. And I kept, you know, I still thought my views were right. And then we saw a major reversal in the dollar. I think that’s going to be the case here with rates as well.
I, you know, I would watch it very closely. You know, we’re not too far from a peak and, you know, we may see a breakout, then a peak. You know, it would be perfect if we see that. Everybody, you know, basically go on to say, oh, we broke out, this is a new trend, new regime.
And no, Jerome Powell, if rates need to be suppressed, I mean, what do you want? You want the US economy to collapse? I mean, if that’s the case, you probably don’t want to own any hard assets because, you know, it’s going to be very deflationary. And I think it’s highly unlikely. I think, I think we’re going to see rates, you know, diminished.
And, and as we see that, it’s, it’s going to have an impact on hard assets to go higher. And I don’t know if it’s 2 months from now, 3 months from now, or 6 months from now, but I’ll just stick with my long-term views and keep building wealth and accumulating things that I think are going to benefit from that environment.
Portfolio construction for hard asset investors
Monetary Metals
Let’s talk about a real asset investor, someone who owns gold or silver. How should they be thinking about allocating to their portfolio now between physical bullion, miners? Of course, maybe they own stocks and bonds. What should they be focusing on right now? There’s emerging markets as well, because for a lot of people, they own gold just as that safe haven asset. Maybe they own some miners from juniors to majors. What’s something that you think in terms of portfolio construction is underrated right now?
Tavi Costa
I think portfolio construction is—it’s hard to comment on this without knowing each person’s views about risk and tolerance for risk and so forth. I’ll speak about myself because I think I’m fairly young. You know, I’m 36 still. And here’s the way I view this is, is is I’m taking a lot of operational leverage. I look for high-quality assets that have a lot of operational leverage to hard assets.
I don’t own much bullion at all, and maybe that speaks to my age perhaps as well. And, you know, what I really in the process focus on building wealth right now, not protecting it necessarily. And I think there’s a huge opportunity for the next 5 to 10 years. I can’t follow everything. So I try to focus on 3 things right now, 3 buckets to me that are going to be critical for the next 5, 10 years.
And those buckets will change focus depending on, you know, markets will appreciate one bucket more than the other for a time. And then I’ll describe them as, as metals and mining being one, the number 2 would be emerging markets, number 3 would be energy. Right now energy is all over the news, everybody’s talking about them.
This is why I’m so focused on Latin America or emerging markets and metals and mining. Those are the 2 that you, you want to be very focused in terms of building, uh, exposure right. Within emerging markets, there’s plenty of opportunities. You know, there’s going to be people that are going to cut their teeth on Asia, maybe Africa, uh, who knows.
For me, it’s Latin America. It’s where I have an edge on. You know, I’m from here. I’m currently speaking from Brazil. I have businesses that I invest in Bolivia and other places. I’m very heavily exposed to this region, and so I do feel very compelled that this is a place where I would say I have better knowledge than the average person.
And so why not focus on this rather than Asia? I’m not sure I understand Asia as well as I understand Latin America. And so I think that’s the way investors should think about it. I’m sure there’s going to be somebody who has a better understanding of Asia rather than Latin America. That by no means—I really think you should focus on that then. Energy is going to be critical.
Right now, in the energy bucket, I would say natural gas is probably the thing that you should be focused on because it’s really mispriced relative to oil.
And, you know, strategic assets like midstream assets that you think you can get your hands on. Yeah, I think, you know, I’m looking at a few that look attractive in that side of things in Latin America as well.
And there’s sort of the intersection of theses. So like, for instance, you know, a mining company in Latin America. Yeah, you know, that scores higher in my head because I like both. And so, you know, I’m interested in those things. But real assets or hard assets, whatever you want to call it, it’s a big market. You know, There’s people that are going to cut their teeth in real estate.
I don’t think it’s as asymmetric as those 3 buckets that I mentioned, but there’s going to be money to be made there too. You know, some others are going to find opportunities in Greece and other, you know, developed markets that have been ignored for a long time but will benefit from a dollar declining trend. Don’t underestimate that either.
And so I’m open-minded to those views too. Yeah, I just happen to be focused on metals and mining, energy, and LATAM right now, or emerging markets.
AI and the future of mining
Monetary Metals
Tavi, before we get to a rapid-fire round, I want to ask you about AI. A lot of people are saying AI is this transformational technology. It’s going to redo how we do so many businesses. There’s going to be new efficiencies. There’s also going to be, you know, maybe disruptions to labor. Where do you see the AI story specifically for a hard asset investor where they think, how’s AI going to help the mining companies that I invest in? How’s it going to help the bullion I have that I own? Where’s the AI story for investors right now who are in the hard asset space?
Tavi Costa
AI is huge. I’m spending so much time with that recently. I am shocked by the productivity that I’m seeing in my own world of analyzing things with those tools. I keep hitting my limits of memory on my computer on a daily basis now of how much I’m using this.
And it is, you know, for me, an era of entrepreneurs that are looking to build businesses, build ideas, Wow, what a, what a tool. I mean, if you’re not using it, shame on you. Not you specifically, but I think it’s one of the best things I’ve ever seen. Of course, there’s a lot of bad things too and so forth, but that’s not how I see the world. I just, you know, I think there’s plenty of things to be building here through that technology.
Answer your question more specifically, I think that the AI companies related, you know, infrastructure or more model companies and so forth, LLM companies, Technology in general is generating still a lot of cash flows. And, and, you know, what is likely to happen, we’re probably going to see squeeze of free cash flows because CapEx is going to continue to grow.
The key here is that these companies still have, you know, they have no debt. These companies have literally no—they have net cash in their balance sheets still. If you, if you look at aggregate, if you take the whole technology space and say, all right, how much how much debt versus assets they have and how much they have in cash relative to debt as well.
You will find that they have a net—it’s still a net cash. Of course, there’s a few companies, and that’s what media focuses on, or doom and gloom people focus on. It’s like, oh, this company has a lot of debt. Okay, look at the entire sector. That’s the best way to look at things. And you will see they are still, you know, swimming in cash, which means there’s going to be a lot of spending still, which means there’s going to be a lot of rotation of capital away from them into resource markets.
I think this is a big story. Focus on that shift of flows of capital away from tech into those areas. We’re still early on that, very early. I saw another analysis on, on X today or yesterday about the cost of these AI tools increasing, and, and companies are having issues because they had planned AI budgets for the year and they’re already hitting those budgets in 4 months.
And, you know, you think they’re not going to increase their budget? I mean, you’re out of your mind if you don’t think that’s going to be the case. It probably will. They’re going to lever up, in my view. Wake me up on these things that are, you know, 50% levered.
I think it’s going to happen. How the market will react to that, it’s a whole different question. You know, multiples are going to get suppressed and And, you know, that’s what it is. That’s, that’s rotation out of tech into other places. And so, yeah, I’m not long tech, but by no means I don’t think the trade is being long tech. The trade is, is just, is looking for where the money will flow into.
And now, you know, don’t, don’t underestimate that they can keep, you know, increasing their budgets. And why is because they see them, this whole situation as a threat for their business and they have to keep going. Because if they don’t, their neighbor will, and/or their competitor will. And you know, that’s, that’s the way these things work. And if they don’t, China will, right? And that’s, that’s the way the world is working right now.
And trust me, if they need to print money to do it, they will. And that’s what we’re probably going to see with government subsidies to keep this moving forward, because it’s a threat not just for those companies themselves, but for countries. And so, you know, it’s just a real war of, you know, of technology that we’re facing that will feed into the story of real assets in a huge way. And for mining companies, I mean, think about this, right?
Like, you know, we’re talking the other day, not my idea, but, you know, in one day, instead of having 500, 600 employees in a mine, maybe we’ll get just 13 people running a mine that used to be run by 600 people. And mostly because everything’s going to be automated. No politics, no drama,, you know, 24/7, and, you know, really high efficiency. And that’s eventually what’s going to drive the world of abundance, which will happen as well.
Now we’re in an inflationary era that will then end with a deflationary era. That’s the way I see the world. I, you know, right now we’re far from that. Don’t think about that right now. Think about the building aspects.
Think about, you know, structurally higher resource prices. We don’t have enough of—and until we build up all the robots and the automation needed to then get to the world of abundance, then you’re supposed to change your view, I think. So I’ll pay attention to that as we move forward. We’re far away from that.
Rapid fire round
Monetary Metals
All right, Tavi, let’s get into a lightning round. I’ll ask you questions all over the map. Let’s start. I’ll give you just one word and you can respond as short or as long as you want with your opinion. Let’s start with China. Where do you see China? Give us a one word or as long as you want.
Tavi Costa
Bullish. I think China—Chinese equities could go higher in the next 1 to 2 years. I think it’s very oversold and on their own. And think of it as a very high-risk play on the downward trend of the dollar. That’s my, my 2 cents. And I’m specifically talking about Chinese equities.
Monetary Metals
All right, next one for you: uranium as a metal.
Tavi Costa
Oh, bullish. I think it’s going to do well. I think it’s—yeah, it’s going to do well.
Monetary Metals
Let’s talk about gold’s competitor in some ways, which was Bitcoin. You still see Bitcoin as an asset class that is a competitor to the metals?
Tavi Costa
I never saw that as a major competitor, but a lot of people do. I think it’s more of a NASDAQ, you know, sort of not competitor, but NASDAQ derivative. So I don’t think that’s going to change the demand for gold because of Bitcoin. So I’m not too—I’m not concerned about that, if that’s the question.
Monetary Metals
All right, which metal in your opinion has the biggest supply shock going forward?
Tavi Costa
This one’s a tough one. As I said, I like gold, copper, and silver. I think the price of silver has adjusted a bit for the supply crunch we may see in the future. I think copper right now is the most mispriced to supply in the future, I guess. Yeah.
Monetary Metals
And in your opinion, which metal is going to have the biggest demand disappointment overall?
Tavi Costa
I’m going to go with rare earth.
Monetary Metals
Okay. Next one for you. What’s something that investors should be watching daily, whether that’s a trend or a chart or a factor? Of course, following you and I on X, what’s something that investors should be tuned into daily?
Tavi Costa
That’s a good question. I think a combination of liquidity. I was watching for liquidity over news, okay? I think that’s very important. In other words, money supply growth, expansion of the Fed’s balance sheet, changes in interest rates, financial conditions. That’s something I pay close attention to. Yeah, I think, yeah, I think I’m going to rank that as very important.
Monetary Metals
All right, Tavi, what’s something that can kill a mining investment the quickest?
Tavi Costa
A lot of things. I’m inclined to say dilution. Yeah, I think dilution is one. Related to dilution is a very bad capital structure. That means taking money from the wrong people. That, that can kill a good business.
Monetary Metals
All right, let’s talk about energy now. What’s the most underrated story in the energy space?
Tavi Costa
Natural gas right now. I think if you look at oil and natural gas ratio BTU equivalent, you will see that what I’m saying—it’s—net gas is way too cheap relative to, to oil. And I think it’s, it’s a place to be focused on.
Monetary Metals
All right, another perfect rapid-fire question for you, Tavi. Let’s talk about emerging markets. Which emerging markets do you think are the most overhyped and underhyped by investors?
Tavi Costa
Bolivia is definitely the underhyped. Overhyped. Yeah, some countries have seen a little bit more of a move than others. Like Argentina has kind of led the way, so it looks less asymmetric in a way versus others. But you also have more quality because you’ve seen the political shift and it’s working. And so, you know, you get that too.
So it’s—you, you paying a little bit for the asymmetry. In other words, Bolivia hasn’t seen the shifts yet. You know, it’s got all the ingredients to see it, but it hasn’t seen it yet. So it’s sort of like price versus, versus quality here that you’re referring to. But I don’t think there’s anything overhyped necessarily right now.
Monetary Metals
Let’s talk about the BRICS countries. You’re in a BRICS country right now. Which of the BRICS countries do you think is going to outperform versus underperform going forward?
Tavi Costa
I think Brazil could really outperform. Yeah, I do. Otherwise, one, I wouldn’t be here. Two, I wouldn’t be focusing on Latin America. It’s the biggest country in Latin America. And 3, when it comes to capital allocation across emerging markets, look, why? Let’s just say why very quickly. BRICS, they have 2 categories. Countries that are authoritarian.
So you got China, you got Russia in that camp. Some people say Brazil’s in that camp. I mean, shame on you. Come here, you will see it’s not like that at all. And then you have other countries that are net importers or importers of commodities. So China is an importer, India is an importer, and you have exporters like Russia, like Brazil. So Brazil is kind of like in this intersection of both, right? Where—call it less authoritarian if you want to, or not authoritarian.
I’m not going to get into the debate, but calling it Chinese Communist Party is crazy. It’s not like that at all. You know, it’s much more divided, polarized, and it’s, you know, politically is a mess in terms—in that sense. However, it’s also very neutral, right? It’s not in a war. It’s not like very neutral relative to those two countries.
And you get the leverage of the commodity side of it, agricultural energy and metals and mining. So with also major hydropower running through rivers in the country that support, you know, growth. And so, yeah, I like here a lot.
Monetary Metals
What is in your opinion, the best advice you’ve ever received when it comes to investing?
Tavi Costa
Cheesy, my answer, but it’s probably going to be form your independent opinion on things and forces you to be curious, forces you to understand someone’s point of view, forces you to understand the counter view to your opinion that you’re leaning towards and forces you also to create a framework of principles that you follow as a guide to form opinions. And that has been always my motto. Like, I don’t—I spend more time building my own opinions than reading other people’s opinions.
And not that I don’t read other people’s research, but I spend much less time with that than, you know, sometimes, you know, and I appreciate that when people say that, well, how do you come up with these charts? Like, what It’s because I spend a lot of time doing my own research, you know, and I suggest you to do the same. Spend less time watching, looking at my charts. Go do your own stuff and you will see it. You will find your own stuff all the time. So that’s my suggestion to, to people.
Monetary Metals
All right, Tavi, I’ll end with our same question. What’s a question I should be asking all future guests of the Gold Exchange Podcast?
Tavi Costa
Well, I’m interested in other people’s views about that stuff that I said about, you know, being in an inflationary world as we build up to AI and all that infrastructure. Onshoring and so forth, call it 10, 15 years, and then seeing a very—a reversal of the world later, you know, like a complete change of deflation.
And yeah, like, I would love to hear other people’s opinions on this because I, I firmly believe that’s going to be, you know, we’re going to see almost opposing worlds in the next 30 years. 15, inflation, going up and then the next 15, call it down. Doesn’t mean exactly 15, I don’t know, who knows. It’s—there’ll be too much hubris on my side to claim exactly 15 years, but let’s just say 10, 15 years of inflation and then the other side of it would be very deflationary.
Monetary Metals
Yeah. For people who want more Tavi Costa and Azuria Capital, where should they go?
Tavi Costa
They can go to Substack nowadays. I’m on Substack now at Tavi Costa. If you like these types of analysis and you’re going to go deeper into how I view expressing those opinions in the markets, that’s where you go. And/or my X account if you just wanting to see one or two charts a day. Yeah, that’s, that’s usually where I post those.
Monetary Metals
Tavi, as always, it’s been fascinating getting to interview you. We’ll have to have you back on again soon. Thanks so much. Thank you.