Disruptive Discoveries Journal

Formerly Morning Notes

Emerging Markets Come Back

Chris Berry

 

  •  Despite the Fed continuing to taper the pace of asset purchases, it appears that Emerging Markets (EMs) have rebounded from their initial sell off.
  •  Has the crisis “vanished” as Bloomberg recently claimed or is this a lull in a secular downtrend?
  •  There are a number of indicators we can look at, but none are more telling than the direction of currencies and interest rates – higher rates will hurt growth prospects.
  •  Regardless of the “crisis talk”, EMs will continue to lead global growth, albeit at a slower pace than many would like.
  •  Does this, coupled with slow and presumably steady growth in the West augur for higher interest rates going forward? This is anathema to Central Bankers.

 

Are We Out of the Woods Yet?

In May of 2013 when then-Chairman Ben Bernanke announced his intention to eventually start tapering asset purchases in the United States, Emerging Market equities and currencies were the first, unwitting victims. 

The thinking goes as follows:

 

Q1 2014 Economic and Energy Metals Review

Chris Berry

In accordance with the roll out of our new journal offering next week, and our goal of increasing your “value added,” we will begin publishing a quarterly review of the Discovery space.  Specifically, today we will analyze the overall macroeconomic picture and how it has affected select Energy Metals.  We'll highlight the key themes which have driven many of the companies involved in exploration, development, and production to double digit returns YTD.

 

As the West Sputters Along…..

In mid 2013, it appeared as if the US and Euro Zone economies were picking up steam based on accelerating PMI readings and falling unemployment.

Profit Taking in Uranium

Chris Berry

There's no denying it - uranium companies are off to a solid start in 2014. An equally weighted basket of uranium names I am tracking is up over 22% YTD easily outpacing the TSX and TSXV indices which are up 4.82% and 9.36% respectively. Consolidation continues apace with the most recent example being the proposed Denison Mines (DNN:NYSE, DML:TSX) take out of International Enexco (IEC:TSXV, IEXCF:OTCBB) for its share of the Mann Lake Deposit in the Athabasca Basin. Exploration success is also evident with Fission Uranium's (FCU:TSXV, FCUUF:OTCBB) continued impressive off scale results at its Patterson Lake South property.

For all the positives, the spot price of U3O8 still hasn't "turned". In fact, the price seems relatively directionless. I have written before that the reasons for the stalled uranium renaissance include the delay of the Japanese reactor re-starts as well as other lesser-known factors like the U.S. Department of Energy slowly releasing its stockpile of uranium into the US domestic market, keeping a lid on prices.

This lack of a turn has only been reinforced when you consider that the recent spot price of U3O8 has now fallen to $34.63 per pound well below the price necessary to incentivize further exploration or project expansion.

What Tesla's Gigafactory Means for the Juniors

Chris Berry
  • Tesla Motors (TSLA:NYSE) recent announcement to build its own vertically integrated lithium ion battery factory (dubbed the Gigafactory) sent the share prices of many junior mining companies into the stratosphere

  • There are a number of questions to consider behind TSLA’s strategy, but with respect to the junior mining sector, one wonders if this is a lifeline or a false dawn

  • Though lithium and graphite plays have benefited the most from the TSLA announcement, there are a host of metals which will be required to manufacture the specific battery chemistry

  •  It was interesting to note that cobalt or nickel plays didn’t react in the same way lithium plays did after the announcement

  •  It is dangerous for a junior mining company (or an investor) to assume that a major manufacturer like TSLA will rely on a junior not yet in production to feed the eventual Gigafactory supply chain

  • The success or failure of the Gigafactory rests less with a secure supply of raw materials and more with the long term price of a gallon of gas

Did the Uranium Market Just Get Shocked Back to Life?

Chris Berry
  •  No sooner had I penned a note on the state of the uranium market than news out of Japan has helped to shift sentiment in a positive direction

  • In its first draft energy policy since 2011, the government of Japan has committed to maintain nuclear energy as a key source of base load power

  • Uranium producers, development plays, and explorers all rocketed higher on the news, but…..

  • The key metric - the price of U3O8, hasn't moved off its lows

  • With U3O8 prices still in the dumps, my investment strategy with respect to uranium hasn't changed - specifically, take profits on any company specific or industry specific good news

Why Tin is on a Tear

Shelley Chen
  • We first wrote about tin in September 2013. Since then the price of tin has strengthened markedly 
  • Tin remains in backwardation in the futures markets implying a need for more supply – now 
  • Factors such as falling grades in existing mines, increasing use of tin in technological applications, and increasing cost inflation are all coalescing to paint this rosy picture 
  • However, the main culprit for the supply squeeze and subsequent price spike is the Indonesian Government 
  • A looming supply crisis for tin is still very much a possibility out to 2015-2016 

So Far, So Good 

Late last year, I presented the investment case for tin as a metal to watch in 2014. Thus far, this has proven to be a prescient move and there appears to be little reason to shift focus. With the growth slowdown in Emerging Markets and renewed economic uncertainty in the developed world, one would think industrial metals such as tin would be trending solidly downwards. As the chart below from the LME shows, this has not been the case, with tin up over 3% year-to-date.