Disruptive Discoveries Journal

Consolidation Amongst Miners Picks Up As Growth Slows

Chris BerryComment

By Chris Berry

 

 

It’s interesting to note that on the same day the International Monetary Fund released their annual World Economic Outlook which lowered expectations for global growth (yet again), that several potentially large mining deals were either launched or mooted.

While the talk of the potential deal for a merger between Glencore (GLEN:LN) and Rio Tinto (RIO:LN, RIO:NYSE) dominated the headlines, two (relatively) smaller deals were also announced recently.

Anglo American (AAL:LN) will reportedly commence with a sale of up to $1 billion worth of copper assets in Chile including the Mantos Blancos and Mantoverde mines, along with AAL’s 50.1 percent stakes in the El Soldado mine and Chagres smelter according to Bloomberg. These assets are small relative to others in AAL’s portfolio, but a willingness to part with them says a great deal about the company’s thoughts on the need to generate returns in the current macroeconomic environment.

Q3 2014 Energy Metals and Economic Review

Chris BerryComment

By Chris Berry

 

For a PDF version of this note, click here.

 

  • To call Q3 “challenging” is an understatement. Growth momentum is increasingly absent.
  • Most metals were relentlessly forced downwards in Q3.  Gold declined .13% (almost wiping out its gains YTD), silver fell .11% (down 13% YTD), and copper swooned 4.96% (down 9.42%YTD).
  • Rather than pinpoint an “elephant in the room”, there are multiple negative catalysts including slower growth in China, a relentlessly stronger US Dollar, and excess commodity supply.
  • Geopolitical events including the downing of Malaysian airline’s MH17, the potential spread of the Ebola epidemic, and the “rise” of ISIS have not had a significant effect on metals prices. The “metals” disconnect has many analysts, myself included, puzzled.
  • It raises the question of whether or not the current downturn is structural rather than a “normal” cyclical downturn from which we always expect to recover.
  • Q4 themes and catalysts may include a stimulus package in China aimed at boosting consumption, continued US Dollar strength (negative for gold and a deflationary precursor) , an announcement of QE in the Euro Zone, and the end of QE in the US.

 

In Deflation’s Grasp?

We have discussed the inflation/deflation debate many times in the past. It now seems clear that deflationary forces are predominant. Falling commodity prices, sparked by excess global supply and muted demand, aging societies, a stagnant velocity of money, and the ubiquity of technology continue to conspire to suppress and overwhelm the Federal Reserve’s attempts to stoke inflation.

As Lithium Nears An Inflection Point, Lithium Americas Poised to Capitalize On The Growth

Chris BerryComment

By Chris Berry (@cberry1)

 

Introduction

I have been optimistic on lithium demand since we first started covering the space through Salares Lithium and its merger with Talison Lithium in 2010. My investment thesis revolves around the fact that though lithium is plentiful and the market structure resembles an oligopoly, there is “room at the top” for select lithium development plays that possess a distinct disruptive advantage which lowers their overall cost of production and allows them to sustain operations and thrive.

Demand for lightweight electronic devices and mobility that is reliable and cost effective ensures robust lithium demand in an electrified future. There simply is no readily available substitute to the lithium ion battery and the double digit growth rates in battery use in recent years confirms this.

One company that I believe holds promise to join the ranks of production companies is Lithium Americas (LAC:TSX, LHMAF:OTCBB). I have discussed the company in video interviews previously. This is the first time I have discussed it in depth in print.

There are several reasons for LAC’s unique value proposition. The company’s new management, strengthened balance sheet, superior asset, and important cooperation agreement with POSCO (PKX:NYSE, 005490:KRX),  rank it among the top near-term lithium production stories.

The agreement LAC has in place with POSCO has the potential to transform the production dynamics of the industry and render the age old debate about which lithium production method is better – brine or hard rock - irrelevant.

LAC appears to be at an inflection point and is the focus of the following report. 

 

Anatomy of a Graphite Deal: Flinders Resources Takes Out Big North Graphite

Chris BerryComment

By Chris Berry

 

 

Off To The Races

The first business day after a major holiday is always fun in that your inbox is flooded with press releases, analyst updates, and the occasional bit of significant news. Such was the case Tuesday when Flinders Resources (FDR:TSXV) announced its intention through a binding letter agreement to acquire all outstanding common shares of Big North Graphite (NRT:TSXV) by way of a plan of arrangement.

The deal caught my eye as it is the first of significance in a graphite space which has been carried by the momentum from vehicle electrification hopes but suffers from excess capacity, financing difficulties, and investor malaise as do many other commodities today. 

Despite its small relative size (the Albemarle (ALB:NYSE)/Rockwood (ROC:NYSE) deal amounted to over $6 billion), could offer valuable insight into whether or not we’ve turned the corner in graphite.

 

The Details

One key element of a deal is to remember that shares can act as currency and this was not lost on FDR management. 

On Labor Day 2014 Beware, Equity Investor - The More Things Change...

Chris Berry2 Comments

In July 2008, then Treasury Secretary Henry Paulson touched off the greatest banking crisis of our generation stretching back to the 1930’s.   On Sunday, July 20th 2008 before the markets opened in Asia, the Treasury Secretary of the United States stepped in to guarantee the US bond portfolio owned by China.  Earlier that same day he had commented on national TV, 

“I think it's going to be months that we're working our way through this period, clearly months. Of course the list [of difficulties] is going to grow longer given the stresses we have in the marketplace, given the housing correction - but again, it's a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation.”

We have now spent 72 months - or 6 years - in the economic malaise that followed the US housing bubble’s implosion. 

The Wall Street Journal Gets It (Mostly) Right on Commodities

Chris BerryComment

By Chris Berry

 

 

  •  On Monday, the Wall Street Journal published an article titled “Commodities Rally is Half Baked” (sub, req’d).
  •  There are a number of reasons for this, but clearly excess supply is the main culprit.
  •  Not all commodities have under performed, however, and uranium offers an interesting and painful case study into how to equilibrate supply and demand.

 

 

An Unfortunate Validation of Our Thesis

Yesterday, the Wall Street Journal published an article titled “Commodities Rally is Half Baked” (sub, req’d). The gist of the article is that while 2014 started off as a positive year for commodity returns in general, the tide has turned and many commodities (as measured by various indexes) are now under performing the typical equity index as the latter continue to reach all time highs.

The Quiet Resilience of Energy Metals

Chris BerryComment

By Chris Berry

 

Despite their small size (in terms of yearly production) relative to base metals or fertilizers, many of the Energy Metals which I follow continue to make their strategic significance felt. We have talked a great deal in recent months about global excesses in labor and capital putting a “lid” on commodity demand. A confluence of geopolitical and economic issues has come to the fore which has only, I think, strengthened this thesis but has also paradoxically helped Energy Metals reassert their significance in global supply chains.

 

When it Happens…It’ll Happen Fast

The phrase above was said to me once by a money manager commenting on one of the main questions we have been asking ourselves in recent months. Namely, “When will this cycle turn?” With respect to Energy Metals, we could very well be at that tipping point.

 

Tesla Motors (TSLA:NASDAQ) - On The Verge of Changing Everything, But Questions Remain

Chris BerryComment

By Chris Berry

 

Charging Ahead

Last week, TSLA released its Q2 2014 earnings. As a proponent of disruptive business models and the raw materials necessary to enable the upheaval, I always listen with rapt attention. The earnings of $0.11 per share on net income of $16 million (non-GAAP), and a loss of $0.50 per share on net income of $62 million (GAAP) were enough to satisfy the market and after a brief dip in after hours trading, the share price rebounded strongly.

As is the case with many of the early-stage companies I follow, I’m more interested in production metrics, though revenue here is accelerating, indicating that TSLA is having no problem selling its cars. I’m willing to tolerate negative earnings and cash flow as long as the company is investing in future growth and increasing sales.

This is clearly the case with TSLA which reported record production (8,763 Model S) and deliveries (7,579 Model S) in Q2 and is on track for more than 35,000 deliveries in 2014 with the stated goal of 100,000 deliveries by the end of 2015. Additionally, with a Cap Ex guidance of $850 million, TSLA has a Cap Ex/Sales ratio of over 20% - unparalleled in the automotive business according to the FT. The next closest is Jaguar at 12%. TSLA is clearly a company in its early growth phase.

Rather than dissect the numbers here, I think it’s important to look at the main takeaways from the call and consider any questions that arise for the company as they continue on an exciting journey to revolutionize the automotive and energy storage businesses.