MacKenzie Davis, CFA, is a Managing Partner of SailingStone Capital Partners LLC, where he is an investment analyst and portfolio manager.
Prior to founding SailingStone in 2014, Mr. Davis was an investment analyst at RS Investments and co-manager of the RS Global Natural Resource and Value strategies.
Previously, he was a high yield analyst at Fidelity Management & Research Company, where he focused on distressed investment opportunities in the telecommunications, power and energy sectors.
He started his career as an analyst at Goldman Sachs (GS). Mr. Davis holds B.A.s in mathematical economics and modern American history from Brown University and is a CFA charterholder.
In this 4,606 word interview, exclusively in the Wall Street Transcript, MacKenzie Davis breaks down how to view the coming transformation of the world’s energy supply.
“Really, what defines what is in each of the strategies is in large part a function of the different institutions’ mandates.
Some institutions can invest wherever they want within the broad natural resources and infrastructure space.
Others have policy considerations and constraints that keep them from investing in things like oil, for instance, or hydrocarbons or mining. So, we end up customizing a lot of our strategies.
But the overarching theme for us as it relates to the energy transition is, first, to define it.
It’s a phrase that has become ubiquitous, and it’s often fit for purpose; people use it for whatever is convenient for them.
Because we don’t have a specific mandate from an industry standpoint or a commodity standpoint, and we don’t run an energy fund or a mining fund or a precious metals fund, we felt like it was important to start with first principles — which is, what exactly is the energy transition — before we start thinking about how to invest around it.
We define the “energy transition” as efforts to address two different but very important and highly related objectives. The first, of course from a Western perspective, is to decarbonize the world’s energy systems.
The second, and equally important and often overlooked in the West, is the need to address all of the challenges related to global energy poverty.
The reality is that the majority of the world’s population exists at or below that energy poverty line, and the areas with the fastest forecasted population growth are the areas with the lowest per capita energy consumption.
As we move forward it’s not sufficient enough for the West to decarbonize — we need to decarbonize globally, recognizing that emerging populations and growing economies absolutely need access to more energy, not less. And so, if we’re going to be successful on either front, they need to be addressed together.”
The global energy transformation has real world implications.
“Uniquely in North America, and particularly the United States, we have a large quantity of globally very competitive natural gas projects.
And as we look out at the world and think about trying to address these dual objectives of decarbonizing energy systems while also addressing this global energy poverty challenge, natural gas plays a really key role in that.
So we think demand for gas will grow, and we have some really wonderfully economic assets right in our backyard.
The second area would be around the metals industry.
We look forward and try to understand what the material intensity of the energy transition is or is likely to be.
It is very hard to forecast, and we should be careful about speaking in specifics, because I don’t think anybody knows what the future looks like.
But as we look at the forecasts and the scenarios and the underlying assumptions around material intensity, it is apparent to us that, in many respects, the energy transition will run through the mining industry, and that owning low cost, very long-lived resources in key enabler commodities — copper is an obvious one, nickel to a certain extent, aluminum — there’s a huge amount of value that will be ascribed to those assets over time.
So that’s a big area of focus for us.
The third area is around grid stability.
As we’ve introduced more and more passive and intermittent power, which is renewables, onto the grid, it’s increasingly clear, not just in the developing world but right here at home, that our grid was really not designed to handle intermittent power sources.”
The inevitable value creation of these trends has developed a high return on equity investment for MacKenzie Davis.
“As I mentioned earlier, our job is to preemptively identify the businesses that we want to own, price them, figure out the intrinsic value of the business today and what we think the business will be worth in five years.
If we can buy it at or below what we think intrinsic value is, the bigger the discount, the bigger the position, in many respects.
And when the market decides that they want to pay for unsustainably higher long-term prices, or ascribe lots of value to projects that we think haven’t been fully de-risked, we’re equally happy to sell.
Here’s a great example.
We don’t have a position in this company today, so I don’t mind talking about it.
It’s a company in the lithium market, one of the largest, lowest-cost producers of lithium, called SQM (NYSE:SQM) in Chile, with a few unbelievable assets.
Truly, geologically unique assets.
One is the Salar de Atacama, which is a potash and lithium rich brine that sits up in the Atacama Desert, which is the driest place in the world.
It’s a great place to have a lithium evaporation pond, because it’s really, really dry and the lithium precipitates out of the brine.
And the other is a caliche ore body, which basically sits at surface and has very high concentrations of iodine and some unique salts.
We had identified that company from an asset and a management perspective 20 years ago, and it wasn’t until there was a really severe disruption in the potash market that the price was low enough that we could afford to invest it and have the margin of safety that we needed to put capital to work.
And then the lithium market took off, and the company went from being a potash company to a lithium company, in the market’s view, overnight.
We ended up selling our stake in a negotiated transaction to a strategic buyer at a significant premium to the current stock price, because somebody was willing to pay us more than what we thought the company was worth.
That’s hopefully a not too long-winded example of the type of work that we’re doing ahead of time, so that we can take advantage of market dislocations when they occur.”
Read the complete 4,606 word interview with MacKenzie Davis, exclusively in the Wall Street Transcript.