An Electric Investment!
Byron King

When I travel by air, which I do often, I usually choose a window seat. Looking out over the American landscape, I’ve noticed some changes in recent years.

Among the forests, fields, farms, housing and office park developments, I see many solar panel arrays. But there’s something else as well, and a lot of it. I’m talking about data centers.

They’re especially common in northern Virginia, outside D.C. Northern Virginia is home to 70% of the world’s data centers.

AI Devours Energy

Much of it has to do with AI. AI requires a lot of power to run the chips and servers, and thus there’s associated heat; it’s thermodynamics at work. Channel big flows of electricity through wires and chips and the laws of physics dictate electrical resistance, which converts to heat.

On the other side of the energy equation, those data centers require air conditioning and water to cool everything down. And this also requires large amounts of energy, in particular to run fans and pump immense amounts of water or other cooling agents through all the pipes and ducts. In fact, these data centers use electric power at every stage.

How much electric power are we talking about? Let’s use familiar ideas and explain by analogy: A server about the size of a briefcase can use as much electricity in one year as a typical house.

So take many thousands of servers, and all the rest of the gear inside just one of those big buildings, and you’re looking at an electrical load equivalent to that of a medium-sized town (plus water, too).

Now take dozens of data centers and hyperdata centers and hook them up. It’s the power load of a large city, and these places operate 24/7/365, pulling electricity from the lines. And what does this mean to the U.S. electric power complex?

The Electrical Grid Is Ancient

The backbone of your regional and local power grid might date back to the 1930s, ’40s, and ’50s. Yes, it’s that old. On top of the legacy issue for much of the U.S. power complex, over the past half century, much of the U.S. electric buildout has been piecemeal and patchwork.

Indeed, it’s not wrong to say that, despite all the pontifications and regulations of federal and state politicians and bureaucrats, there’s no real national plan for what the overall power grid ought to look like.

Still, the lights work, right? You flip a switch and things happen. Yes, because all across the U.S., over 3,000 separate, distinct electric utility companies generate electricity. Some use coal for power, which is more and more frowned upon due to carbon dioxide emissions.

Then there’s nuclear power, which has stagnated in the U.S. for many decades due to political opposition. And hydro, too, although all the good dam sites were long ago built out, and many dams are being demolished due to age, if not for environmental restoration of river systems.

Recently, more and more power plants have been built to burn natural gas; in fact, this segment has grown strongly in the past 15 years or so due to abundant gas from fracking, low cost of fuel and speed to build. But again, more than a few policymakers oppose natural gas because of the carbon dioxide fixation.

“We’re Simply Going to Need More Electricity”

Then there’s solar, which has its own limitations. Obviously, solar doesn’t work at night or in bad weather, and there’s much to say along these lines. One key point is that “renewable” systems always require backup. That is, due to what’s called intermittency (i.e., day-night, sunny-cloudy), solar requires a backup method to assure grid quality.

One big takeaway from all of this is that the U.S. is on the cusp of massive new growth in demand for electricity, certainly from data centers. Then add in, for example, the fast-growing numbers of EVs on the road that must somehow be charged, plus consider overall population increase and baseline economic growth.

We’re simply going to need more electricity.

As a natural resources guy, I could discuss energy systems and data centers all day, but by now you get the point. From an investing standpoint, there’s much room to invest in the growing build of the U.S. electric grid.

Here are a few ideas, generally speaking. Please understand that they’re not official recommendations, I’m just throwing some names out there. Do with them what you will.

How to Invest in the Grid

First, there’s natural gas: As I discussed, coal, nuclear and hydro face tough going for a variety of policy reasons. Yes, they have a future. But it’s in the out-years, which means that, closer in time, the fastest way to generate large amounts of ready-to-dispatch electric power, either as primary or backup to solar, is with gas turbines.

Along these lines, look for solid plays in the U.S. gas patch. Consider EQT Corp. (EQT), America’s largest gas producer, with an extensive business base in the prolific Appalachian Basin. The company’s market cap is over $19 billion and shares trade in the $33 range. And the company pays a dividend of about 1.9%. EQT has great growth prospects ahead, to be sure.

Second, look at copper. Copper is a critical component of energy systems and we’re going to need a lot of it. You might want to look at one of the world’s great copper mining companies, Freeport McMoRan (FCX). Currently, shares trade in the $43 range, giving the company a market cap of over $62 billion. And it pays a dividend, about 1.8%. In a rising market for the red metal, Freeport looks good in the years ahead.

Another company in the copper space is Rio Tinto (RIO), with shares trading now at about $62 and a market cap over $100 billion. Rio pays a dividend of over 6.5% yield, reflecting how much cash it generates in this environment. Again, great prospects ahead.

Don’t Forget Silver

Finally, we must look at silver: Yes, silver because it’s essential to fabricating those above-described solar panels, as well as many of the other electronic systems inside all those huge data centers I describe above. Silver is very much an electric metal, for which demand is climbing fast while global output is constrained.

There are many excellent names in the silver space, and I can scarcely begin to list them. But one that has done quite well is First Majestic Silver (AG), with a market cap of about $1.8 billion. Shares trade at about $6.15, and the company pays a small dividend. Looking ahead, as silver prices rise in a high-demand scenario with constrained production, First Majestic shares should do well.

Again, I want to emphasize that I’m not officially recommending any of these names. I’m just listing some of the companies that stand to be profitable as demand for power surges.

Just remember that, wherever you are in the world, your quality of life depends on the juice in the wires above, below and truly all around. Without electricity, it may as well be 1824, not 2024.

And investment prospects are strong for what makes it all possible.

Byron King is a Senior Geologist at Rickards' Gold Speculator. He is a Harvard-trained geologist who has traveled to every U.S. state and territory and six of the seven continents. He has been interviewed by dozens of major print and broadcast media outlets including The Financial Times, The Guardian, The Washington Post, MSN Money, MarketWatch, Fox Business News, and PBS Newshour.

 

 

dailyreckoning.com