Disruptive Discoveries Journal

A Key Question in the Commodity Rout

Chris Berry2 Comments

By Chris Berry (@cberry1)

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To anyone involved in commodity markets, the events of the past two weeks should make one thing abundantly clear: a new paradigm in commodity investing is in play. The most recent iteration of the commodity super cycle (2001-2011) was unlike anything many of us had ever seen. Unfortunately, the aftermath (2011-????) and subsequent correction may also be unlike anything we’ve ever seen (at least in terms of duration and intensity). I’m fully aware of the cyclical nature of the commodities business, but clearly the greater the bull market, the more severe the bear market.

Here is the Bloomberg Commodity Index since 2011, down 28% over the past year alone:

The Collapse in Commodities: Miners at a Financial Crossroads

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By Chris Berry (@cberry1)

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The implosions of the Greek economy and China’s stock market have brought the mining sector to the crossroads that it desperately needs to face. We’ve discussed the need for this reckoning often over the past three years and believe we may be at the beginning of a correction in the equity markets that will further depress metals prices as the twin headwinds of excess supply and slack demand begin to dominate. The need for global debt deleveraging also looms on the horizon much to the chagrin of politicians everywhere – not only in Greece.

The precipitous decline in China’s equity markets with $3.2 trillion in value evaporating in three weeks has quite simply demolished the metals with gold, copper, iron ore, and oil serving as the unwitting poster children for what happens when things don’t go “as planned” in a centrally planned economy.  

A Strategic Shift in an Increasingly Tight Lithium Space

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By Chris Berry (@cberry1)

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$80 Million Deal Between Western Lithium and Lithium Americas Redefines the Junior End of the Lithium Market

On an otherwise quiet holiday week in North America for mining, the news of the effective merger between Western Lithium (WLC:TSX, WLCDF:OTCBB) and Lithium Americas (LAC:TSX, LHMAF:OTCBB) is an exciting and positive catalyst in the lithium space. I have maintained for some time that, despite the rosy demand growth projections for lithium, the market needs fewer players. The lithium market (at approximately 160,000 tpy of lithium carbonate equivalent) just isn’t big enough for numerous players to generate adequate cash flows (and hence returns). Further, the resulting players will need to demonstrate costs or competitive advantages that allow them to exist alongside the oligopoly in the space.

China, Minor Metals, and Supply Chains Over The Next Five Years

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By Chris Berry (@cberry1)

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China Repositions 

With attention focused on Greece and the brinksmanship on display, it was refreshing last week to focus on another topic and participate in a roundtable discussion on the development path for China and its minor metals business over the next five years. The seminar, held in New York and hosted by TREM and MMTA (two important think tanks focused on the strategic metals space), hosted numerous individuals across metals value chains, from traders, to strategists, to trade lawyers to investment professionals. I participated as a panelist with a group emceed by Clint Cox, founder of The Anchor House, an exceptional think tank on rare earth element matters.

 

What We Found Out

The seminar was more “macro” in substance and was a refreshing change from the typical conference where you’re pitched by a litany of REE juniors all trying to prove their worth. The conference centered on the methods China’s leaders are employing to build sustainable domestic supply chains and evolve China’s manufacturing base.

Confronting Dislocation in the Graphite Market

Chris Berry5 Comments

Co-authored by Chris Berry and Jonathan Lee

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It’s been awhile since I’ve commented on the graphite capital markets. Financing difficulties, slack demand, economic uncertainty, and investor apathy (issues facing much of the commodity complex) are also at play in the graphite space. Nevertheless, graphite will remain an important piece of current and next generation supply chains and so a sober look at the sector is warranted.

In order to take a “deeper” analytical dive, I’ve asked Jonathan Lee, an institutional mining analyst and President of JGL Partners, to assist with this piece. Investors have shied away from the niche products like graphite due to opaque pricing and the transactional nature of the business. With no futures market, price discovery is tantamount to guess work unless you are in the business. This is generally true across the value chain from juniors to integrated producers.

The Key To The Way Forward In The Mining Sector

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By Chris Berry (@cberry1)

 

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·       The mining sector remains challenged by multiple headwinds including a lack of investment, currency headwinds, slower productivity, excess capacity, and deficient global demand.

·       Debt overhangs and slowing emerging markets – specifically China – appear to be the culprits behind slack demand. These forces must be reckoned with.

·       Longer-term, however, innovation, sustainability, and urbanization are legitimate drivers of growth and help promulgate “good” deflation which enhances productivity and can drive returns.

·       This note examines these phenomena and which sector(s) of the mining industry may benefit.

 

Groundhog Day

After three-plus years of a dismal mining investment environment and the potential for it to continue for some time, a number of questions arise from the soul searching many of us have done to try and make sense of this. According to Bloomberg, the value of the TSXV has fallen from its peak by almost 72%. This market environment necessitates a different method of thinking and evaluation about publicly traded mining companies. The good news is that it appears that many metals prices have bottomed, though this doesn’t mean that the cycle has definitively turned. The bad news is that the global economy still appears to be struggling with excess capacity AND muted demand. China, the seemingly endless engine of metals demand is unquestionably altering its paradigm for economic growth from one of infrastructure build out and exports to one more focused on internal consumption. With China’s debt to GDP ratio of 282% according to McKinsey, this move to a new growth model is absolutely necessary to maintain a sustainable growth rate, but there is no overnight fix to achieve this type of change. The success of this transition won’t be known for years, though the effects are already being felt.

What's Not Being Said Amidst the Lithium Ion Battery Hype (Hint: It's a Double Edged Sword)

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By Chris Berry (@cberry1)

 

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Amid the Tesla-infused hype surrounding batteries a number of truths have become evident.

 First, battery costs are falling – fast. The overall cost of a lithium ion battery has fallen by over 90% since its commercial introduction in 1990 and the CAGR in the price decrease in recent years per kilowatt hour (kWh) is roughly 14%. Should this rate of decline continue, electric vehicles should be able to compete on total cost of ownership (TCO) with traditional internal combustion engine vehicles within five years. 

Cobalt: The Great Enabler

Chris BerryComment

Originally published on April 15, 2015

 

By Chris Berry (@cberry1)

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With an increasing amount of attention focused on metals used in technology, several issues have become clear. First, some are more important than others. Second, the amount of a metal used in an application isn’t as important as is the cost to procure it. Third, a general lack of transparency in pricing clouds the overall potential opportunities.

Given these challenges, it’s a wonder anyone would care at all about the Energy Metals, but it has become increasingly clear that the demand is there. One metal in particular which offers interesting answers to the above issues and deserves more careful study is cobalt.