Disruptive Discoveries Journal

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.  

Disruption Is On its Way To Solar Panel Manufacturing: A Case Study of Aurora Control Technologies (ACU:TSXV, AACTF:OTCBB)

Chris Berry

By Chris Berry

 

Introduction

After a recent slump, solar power has shown tremendous growth. Global photovoltaic (PV) capacity is 139 Gigawatts (GW) as of the end of 2013 and another 44.5 GW is forecast to be added in 2014. One GW is enough electricity to power between 750,000 and 1,000,000 US homes. The 44.5 GW mentioned above is almost a 21% increase y-o-y and equals the output of 10 nuclear reactors, according to Bloomberg. 

Overcapacity has resulted from government subsidies and has served to push panel prices down, helping to make solar more cost competitive with other fossil-fuel based sources of electricity. Dozens of panel makers still exist which implies further consolidation in the industry despite the projections mentioned above.

We are focused on finding value along supply chains across an entire industry and to that end the solar panel manufacturing business offers an interesting case study in finding value in a global “low growth” or “slow growth” environment. One of the key questions for market participants is “how will a panel manufacturer compete and thrive in a hyper competitive industry despite the rosy growth prospects?” Price declines and competition will hurt margins which in turn have the potential to impact investment returns.

The key is solar cell efficiency. 

Case Study of a Growth Driver - Silver Use in Solar

Chris Berry

By Chris Berry

 

Since the beginning of the commodity downturn in 2011-2012, I have been vocal on the need to analyze each metal or mineral individually as they aren’t all created equal. You run the risk of throwing out the “baby with the bath water” and missing investment opportunities.

The same argument holds true when you look at individual demand components for a given metal or mineral. With that in mind, recent research I’ve done on the solar photovoltaic (PV) manufacturing industry has shed light on some astounding growth rates for one metal in particular: silver.

Solar Backgrounder

I don’t intend to enter into the debate about the economics of renewable energy here, but do believe that solar power is going to continue to become more and more mainstream as costs along the entire value chain continue to plummet. A good primer on how PVs work can be found here

2014 Q2 Economic and Energy Metals Review & Second Half Outlook – Part I

Chris Berry

By Chris Berry
 

  • During the second quarter of 2014, many share prices of energy metals companies struggled for direction after the dust settled from the Tesla (TSLA: NYSE) Gigafactory announcement.                                                     

  • Our theme of viewing the supply and demand dynamics of each energy metal individually continues to be the best course of action as the trajectories of each metal may differ. For example, lithium carbonate prices remained healthy while uranium prices fell by 8% in Q2 and are down 21% YTD.                                   

  • The recent precious metals price spike did not transfer over into the industrial or base metals sector.

  • Though economic data continues to improve selectively, there are still too many economic headwinds in place. Therefore only those resource investments that demonstrate the ability to produce at lowest-cost quartile costs or those that have a disruptive competitive advantage should be considered at this time.          

  • Despite nascent inflationary pressures, we are still inclined to believe that deflation (or disinflation) is the predominant threat to growth. The recent US Q1 GDP print of a 2.9% decline has many concerned that this was due to more than “the weather”.                   

  • We think that the second half of 2014 will be just as challenging as the first half for reasons we outline below.

 

Different Quarter, Different Catalysts

When Elon Musk announced plans to build a Gigafactory in the Western US (and has since discussed building multiple facilities), this sent select energy metals share prices into the stratosphere. Many believed this was the “turn.” The dust has since settled.....

Company Update: EMC Metals Attains a Major Financing Milestone

Chris Berry

By Chris Berry

 

 

A Major Hurdle Cleared

When I wrote about EMC Metals (EMC:TSXV, EMMCF:OTCBB) last month, the main issue facing the company was clear: raise approximately $2.6 million by the end of June or risk losing control of the Nyngan scandium deposit. This $2.6 million was broken down in two pieces: AUD $1.4 million was due to EMC's former JV partner to complete the buyout of the JV and award EMC 100% ownership of the Nyngan deposit. In addition to this, $1.2 million was outstanding on a promissory note held by investors close to the company which was due at the end of this month and used Nyngan as collateral. Should EMC fail to raise sufficient funds, they risked losing control of Nyngan.

This would have been significant for a number of reasons including the fact that the deposit is truly world class - a phrase I despise, but I can't think of another way to describe it. 

Is This the Turn in the Metals Markets?

Chris Berry

By Chris Berry

  

 

 

  • Precious metals roared higher yesterday.
  • This was presumably due to a confluence of events including Iraq dissolving into civil war, more unrest in the Ukraine, and Fed Chair Yellen's dovish remarks regarding keeping rates low for an extended period.
  • Lest we get too excited, base metals were left in the dust and bond yields fell precipitously.
  • These two reliable indicators of growth (and inflationary expectations) lead us to believe that what happened yesterday was either short covering or a profit taking opportunity and nothing more.

 

Plus Ca Change…..

I'll admit to being surprised at the move in gold and silver yesterday. It's almost as if people were looking for an excuse to take metals prices higher.