Inside Commodities: Building a $25B Metals Business with Mark Edelstein, Chief Executive Officer of Auramet International, Inc

Speaker A: Hello, this is Mark Gerson. I am the co founder and chairman of three Eye members, and I am so delighted to welcome to the 3i podcast this afternoon Mark Adelstein. Mark, welcome to the 3i podcast.

Speaker B: Thank you, Mark. Good to speak with you today.

Speaker A: So you have a fascinating story, and I think your American story began when you came to the US from South Africa in the mid-1980s as a soccer player.

Speaker B: Correct? Correct. Um, I grew up in South Africa, which was under the apartheid regime, and I was always looking for a way to leave South Africa, uh, because of that. And I was a student at University of Cape Town, and I had an aunt in New Jersey, and I told her I wanted to come study in the US And I was a reasonable soccer player. So she harassed the Rutgers coach, uh, into taking a chance on me. Um, and it worked out pretty well. Uh, I came over first as a junior, and based on how I played, they brought my brother over as a freshman. So in my senior year, we played together, which was, uh, a great experience.

Speaker A: Oh, that's great. So you played for, uh, Rutgers.

Speaker B: Yes, correct.

Speaker A: What was your position?

Speaker B: I was a right winger. Um, and. And we played with some players who went on and did very well. Um, so, for example, one of the guys went on to captain the U.S. national team. And so, uh, it was a pretty high level, which was good.

Speaker A: And, uh, did you think about playing professionally, or was your graduation from Rutgers? Was that it?

Speaker B: Well, I went on, did my mba. I did think about actually playing professionally. There wasn't a professional league in the US I did have a dream of maybe trying out in the uk, but, uh, I felt that I had to make a living. So, uh, I went and did the real thing of going to. Did my MBA and went into the workforce.

Speaker A: And when you went into the workforce, where did you start?

Speaker B: Well, my first job was with Amarada Hess Oil Company. Uh, I wanted to be an investment banker, but all the banks in the late 80s were laying off people, not hiring people. I didn't have any connections. So I got the first job I could get, which was at Emerada Hess Oil Co. As a credit manager. Um, it was a very menial job in the beginning. In fact, that was my first job. I was reviewing the background of people who pump gas at the gas stations for Hess.

Speaker A: Really?

Speaker B: Yes, it was very basic. Um, but I used to take many of those files home with me so I could do more than everybody else. And it's what I tell every young person. Whatever job it is, no matter how menial it Is always do the best you can because you never know where you may land.

Speaker A: There's always an opportunity within.

Speaker B: Correct. And with us at Emirata Hess, they opened up an oil trading desk in New York, and they took two of us from the credit department to go do risk management there. And that's how I got into commodities. So I kind of fell into commodities. I didn't choose it, but I went to, uh, be in the back, you know, the back part of, uh, back office side of the world, uh, traders.

Speaker A: Um, so you went from being the hardest working guy in the credit department of Emirata Hess, and that got you on the path to where you are now?

Speaker B: Yes. Correct.

Speaker A: What a great young people listening. Take note of that, uh, whatever job you have, be the hardest working guy there, because it's going to lead to something that is, is not what you're doing now, but is might be something that you really want to be doing in 20, 30, 40 years.

Speaker B: Yep, exactly. Um, so then I got a job. Then I got recruited to go work at a Japanese trading company, and then the metal company in Connecticut where I met my future partners. Um, so that's kind of how I really got into the commodity.

Speaker A: Was the Japanese company in Japan?

Speaker B: No, it was in New York. Sumitomo.

Speaker A: Okay.

Speaker B: One of the big Japanese trading companies.

Speaker A: So how did you make the decision to go from Japanese trading company to being an entrepreneur?

Speaker B: Well, when I went to the metal trading company in Connecticut after the Japanese trading company, that's where I met my future partners. And that's where I learned my craft in terms of metal trading. Um, um, and we discussed, because there was a gentleman running the company. He owned all of the shares of the company. He was in his 70s, and he was. He wasn't passing on any of the shares to the employees. And so we talked about my future partners, that we would do this for ourselves one day. Um, we left.

Speaker A: I think there's a lesson there. So if this, uh, then older gentleman had said, uh, I'll give you guys half the company, would you have stayed and he would have had half of something rather than what ended up being, I'm guessing, zero of whatever he was left with.

Speaker B: Well, for sure. I mean, he eventually sold the company, did very well out of it, but by then we had moved on. Um, I think he lost. Instead of retaining a lot of good people, he did lose them. His idea of a succession plan was, what do I care? I'll be dead. Which wasn't exactly what, uh, we were looking for.

Speaker A: That's how we learned in business school.

Speaker B: Yeah, yeah, yeah, exactly. So, um, and then we went to a bank after that. A bank recruited us from m that. So there was an intermediate step. Uh, we built the business for the bank. Um, but again, when you work at a big institution, we beat our budget like two or three times. We'd get half the bonus because the bank was having blowups in other parts of its businesses that weren't related to us. And they just said, oh, you got to feel the pain. You got to feel the pain.

Speaker A: You got to pay for them.

Speaker B: Yep, one time, you'll be fine, don't worry. And we just said, okay, now it's time to do it for ourselves.

Speaker A: Right?

Speaker B: So, uh, off we went, the four partners leaving comfortable jobs, uh, and went off on our own and started Automat 21 years ago.

Speaker A: So let's say started oromet. Now, when you say metal trading, is that gold, silver, copper, that kind of thing?

Speaker B: Uh, we do precious metals, gold, silver, and then platinum group metals, which is platinum, palladium, rhodium. So yeah.

Speaker A: So who's the customer?

Speaker B: So, well, it's interesting you say that we buy from the mining companies and we sell to the bullion banks in gold and silver on, um, platinum group metals. We buy from the mining companies and recycling companies and we sell to the big OEMs, uh, that use it in catalytic converters of automotive. So we deal with all the major OEMs, uh, on the sales side.

Speaker A: So you started Oramet 21 years ago.

Speaker B: 21 years ago, yep.

Speaker A: So what have been the biggest dynamics in the industry, uh, that have changed that you've identified in the last two decades?

Speaker B: Well, the markets are always changing in terms of the price of the materials. So, um, it's kind of a challenging, ah, sector to be in, uh, as a physical merchant of these metals, uh, with prices that change every minute of every day. Um, so it is definitely a dynamic, ever changing industry. You got to keep up with it. You got to keep up with trends. Everybody told us platinum group metals are going to die because electric vehicles are going to come. And we all said, well, it's going to take a lot longer than you think. And now everybody's coming around saying, you know what, it's going to take a lot longer than you think. So we kind of very close to the industry. We can see some of those trends and see what's really happening. Um, so we've still got a pretty good Runway in terms of platinum group metals here.

Speaker A: But when you buy from a miner or from somebody else, I presume you're buying for a relatively short period of time. So if there was a big change, you would have been out of the material by then.

Speaker B: Yeah, and we hedge everything. We have a balance book and we, you know, we're very good on maintaining our risk management silence. On the pricing side, we're not speculators, we're not screen traders, we're not punters, we like to sleep well at night. We have most of our network tied up in our company. So you know, that's a very important part of it.

Speaker A: Right, so you're delivering real goods to companies that need them for one purpose or another. Now what would the gold bullion companies need them for?

Speaker B: So on the gold side, when we buy from the mining um, companies, we actually sell the gold and silver to the big bullion banks. So when I'm buying from uh, a mining company, that gold ends up being transferred through our clearinghouse in London. J.P. morgan's our clearer. And we hedge on the other side with Morgan Stanley and Goldman Sachs, the big bullion banks. So we become a big aggregator for them and then you know, they sell it to the reserve banks and around the world and whoever they deal with the hedge funds and uh, other folks, it's very much a high volume, low margin business. Um, so we become a pretty good size aggregator. Our target is the mid market mining companies because the big banks don't want to deal with somebody who produces 60,000 ounces a year or 100,000 ounces a year. They want Barrick Newmont, all the big mining houses who produce millions of ounces a year.

Speaker A: What's been your perspective, if you do have a unique view on crypto? Because of course crypto came into the world long after you started Oramet. And uh, here we are 21 years later and about 16, uh, years into crypto. So, uh, you've had a complete view.

Speaker B: Yes, gold has been around thousands of years, um, and has been man's chosen currency going back thousands of years. Um, so it has a history. Everybody said to me, okay, where's the price of gold going to go? I've always said man's always had this affinity to gold, this love for precious metals and it's been the flight for safety for, you know, as far back as one can remember. Um, but there's no other reason that gold should have that. But just because it's been that choice for thousands of years, uh, then crypto arrived and I said, well this is just kind of a invented, modern day version, uh, that somebody has invented a technology and they're going to make it scarce. And so that's how they've just made up one. It's now become an asset class and it seems to have a huge following. I still don't um, put a penny into crypto. Uh, from my standpoint I think it's still smoke and mirrors. But I understand now that it is an asset class and people are giving it some of that, ah, flight to safety, um, smell and taste to it. Although in the most recent run up, ah, gold has certainly dwarfed way outperformed. Yes. Anything else? Uh, and everybody's gone back to the old. When the real geopolitical issues have arisen, everybody's gone back to gold.

Speaker A: Do you see uh, gold, silver, um, and platinum tracking, uh, geopolitical volatility?

Speaker B: This may be, I mean silver's always also, you know, people are talking about, uh, demand and supply factors on silver recently and they're really, you know, throughout my history in this sector, there's never been a demand and supply factor on gold for sure. And silver also, to a large extent, silver's typically just written on the coattails of gold as the poor man's gold. Okay. And there's always been the ratio that people look at and uh, which has no relevance. You know, gold and silver to have a ratio is just again made up relevance. But people have always looked to that to get some attachment. Like, okay, silver's the poor man's gold. Recently, uh, there's been a lot of noise about a shortage of silver and a lot of that's been self created. Um, there really isn't from an industrial standpoint, there's no shortage of silver. Uh, but the investment demand for silver has picked up dramatically. Um, it's gone in the last year from $30 an ounce to $96 an ounce, which is huge. Gold's only gone up from about 75% and this has gone up over 200%. So again, the relationship between gold and silver is just the poor man's gold. From my point of view right now,

Speaker A: um, in your business it would seem like trust would be, um, a very important factor. Is that true? Um, and if so, how do you build trust in the industry?

Speaker B: Well, when we come over, we had zero business when we started our own company, right? So we had a lot of good industry relationships and we'd built those up over many years and great bank banking relationships. And so with a very small balance sheet, we got into the space where people said there's no way you can do this kind of business with a small Balance sheet. But great industry relationships and having experience of being able to use leverage smartly in our space, we've been able to build a very nice business. Um, so industry relationships today are the key and core of everything we do. Uh, you know, a lot of people in today's age want to text and email. We firmly believe the best way to build those relationships are in person calling and visiting our, uh, people that we do business with. Uh, one of the major automotive companies considers us their in house trading desk because that's how close we are with them and that's exactly the kind of relationship we want. Um, you know, we compete in a lot of our businesses with banks who have a much lower cost of capital than us, much bigger, uh, you know, funding capability. But we compete by providing incredible customer service, personal relationships. If somebody's in a bind, we're the first party to go to and can help them. Uh, and we have no bureaucracy. We can make decisions immediately. No bank in the world can compete with us on that side. So that's how we differentiate ourselves in the space by uh, playing with the big boys and really a big boy market. Um, very interesting.

Speaker A: So, uh, what's an example of uh, the kind of need a customer would have that would get caught in a bank's bureaucracy and you could solve for right away?

Speaker B: Well, a company might have one of the OEMs as excess inventory on the last day of a quarter. They want to get it off their books for that quarter. Rather have cash on their balance sheet. There's only one party they can call to on the last day or the last two or three days of a quarter. And Auramet can make a decision in an hour or less. I mean we can make a decision and send the wire out in an hour. You know, it's that kind of thing. Uh, you know, no bank in the world could ever compete with that.

Speaker A: Right. And when the banks have seen themselves over the years losing to you, they've not been able to adapt to bureaucracy.

Speaker B: No, I mean it's, you know, banks will always have bureaucracy. They just to send a wire out from a bank, they can never make, you know, it'll never be like that. You know, there's certain things that we can do that a bank will never get there. Um, and they like and you know, we're friendly competitors with the banks on a lot of what we do, but we have our niche by being uh, much quicker, um, and making decisions and being able to do things at speeds that banks just, you know, will never be able to be at that pace,

Speaker A: in all of your years in commodities, I mean, so many people are interested in gold and silver and platinum and other commodities. What kinds of mistakes have you seen either investors or operators make consistently?

Speaker B: Well, operators for us are the mining companies. And you know, we always look for great, uh, management of mines. Um, you know, we see a lot of mining companies are run by people who are too promotional, uh, and they're not focusing on the cash flow from their company, rather on just driving their stock up. Uh, so we do see quite a lot of that in our space. Uh, the guys who are good operators and look at the basics of the business are always the ones. You know, we do a lot of lending to mining companies as well. So we look for those kind of people, not the ones who just want to promote the hell out of the company without looking at the actual business. Um, so on the operating side, that's what we look for. In terms of investors. I think investors of commodities where they make mistakes or when they do well, um, is when they. Well when they make mistakes I think is when they just follow the crowd. Generally speaking, uh, when I get in a taxicab and the guy starts talking about buying gold, that's normally getting towards the top of the market when the man in the street is all doing it. Um, and that's what we're now. Uh, I think there does seem to be quite a lot of frothiness turning towards precious metals. Although I think there are quite a few good fundamentals right now, um, in terms of the geopolitical issues. Um, a lot of the world looking to get away from the US dollar which is very, very real. Um, so there are some drivers, uh, which I think are very real. So I don't think we're quite where uh, the top is, but it's certainly been quite a run up this year. Um, but you have seen in a lot of other commodities, uh, where you know, whether it's rare earths or some of the other ones that are around that have been very frothy and that's when people jump in, is normally towards the end of the cycle. So I think a better strategy is deciding what a long term commodity outlook you want and then follow that track, um, and look for those fundamentals rather than just trying to chase the hottest one, uh, at the time, which I think a lot of people tend to do.

Speaker A: Right, and that's been the case with one metal or other since you got started in this business.

Speaker B: Yes. Yep.

Speaker A: Are there any metals that you can think of that were, that have Come and gone, that if we jog our memories, we'll say, oh, yeah, I remember that craze. And then we'll realize, oh, that ended fast.

Speaker B: Well, there was the Silver Squeeze, the Hunt Brothers squeeze in the late 80s. That, yeah, I mean, that was a classic one. But there've been others. There's been one PGMs rhodium, where rhodium, a, uh, few years ago, went all the way up from probably about 7,000 an ounce to $30,000 an ounce, which is crazy. And then came, you know, some funds were getting into it, and then it came all the way down very quickly. Now it trades at 10,000 an ounce. Uh, we've seen that, you know, that kind of stuff in nickel. Ah, we've seen the copper crisis happen, the tin crisis. I mean, there've been a bunch where we've seen things go to the moon and come crashing down.

Speaker A: So how much of one's portfolio should he have? Um, in commodities. And let's assume that the hypothetical person we're talking about is, of course, not a professional in commodities, but it's just an investor. They come to you, they say, mark, how much of my portfolio should I have in commodities and what commodities should I have?

Speaker B: I'm not an investment advisor, so I'm never going to give you that kind of information.

Speaker A: Let's say was you were at a dinner party and someone just asked over two beers.

Speaker B: I mean, I think commodities could be a 10 to 15% type, um, part of a portfolio.

Speaker A: And one should diversify across the commodities and therefore not take the risk of. You were talking before about tin and rhodium and all the other things that may be hot in one moment and forgotten in the next.

Speaker B: Correct. I would diversify. There might be a leaning, like right now, I think copper is probably a good bet. I think there is good growth in copper, nickel. I think there's good growth. And you know, those. Maybe you say, okay, well, I might get more heavier in two. One, a little overweight. Yeah, yeah. But yes. And that includes energy and agriculture and across the whole spectrum of commodities.

Speaker A: Right. Okay. Well, just, uh, in conclusion, could you just, uh, reflect on your three, uh, eye experience?

Speaker B: Well, I think it's a good. I mean, I've been only there one year, but it's been tremendous in terms of seeing how many incredibly accomplished folks you have, um, that you've assembled in this group. Um, and it's just been a great experience, uh, and I look forward really, from benefiting from so many more things. I've been too busy, unfortunately, this past year. Uh, but I certainly see this as something that I could take into my retirement and really get, uh, a lot more benefit out of it than I'm getting today. But I, I do enjoy the meeting the people I've met. Um, and I think the challenge from your perspective is going to be, you know, maintaining the quality, uh, without, you know, let's say, diluting, uh, the folks you have.

Speaker A: So exactly as we tell the team, to the point where the team doesn't need to be told anymore. Quality of member is everything. Yep, everything. And, uh, that's why we're so, uh, delighted and honored to have you as a member of 3i and look forward to seeing you, um, often at the events in, uh, New York and elsewhere.

Speaker B: Great. Thanks, Mark. Appreciate it.

Speaker A: Thank you.