- Despite the beating investors have endured over the past 18 months investing in energy metals, I believe we have reached the bottom and numerous opportunities are in place
- What follows is a rough transcription of my recent remarks at the Cambridge House Vancouver Resource Conference
- I present a balanced case for optimism, the metals I am focused on, the strategy I am employing, and some of the metrics I rely on to gauge value
Is the Worst Behind Us?
If you’re like me, and have invested in the junior markets over the past 18 to 24 months, you’ve likely felt like this:
Events could spiral out of control at any time. The wreckage hasn’t just been centered on one metal either. Here is the one year price performance for a broad basket of rare earth exploration and mining companies that I track measured against major indices:
Late last year, I highlighted phosphate as one of the critical natural resources we will focus on in 2014
- The phosphate story is the story of security of supply because much of global phosphate supply originates from geopolitically unstable regions of the world
- The key to success is secure access to low cost phosphate rock. Supply of this resource will become increasingly constrained if current consumption trends continue into the future
A Long Term Play on Food Security
With net global population set to rise due to an emerging middle class and shrinking arable farm land, a closer investment look at agricultural efficiencies and fertilizers is warranted. The essential need for fertilizers in ensuring the healthy growth of crops is not a secret, but the fertilizer story seems to have been lost in the broader critical minerals story. Many entities, NGOs, investment banks, and think tanks are projecting a global population of between 9 and 9.5 billion inhabitants by 2050. This is a 30% increase from just over 7 billion today.
- Inflationary expectations, as measured by the spread between US 10-Year Notes and Treasury Inflation Protected Securities (TIPS), have recently increased to the highest level since August 2013
- Jobs numbers in the US as measured by the ADP survey and the non-farm payroll data are showing continued strength
- A plethora of additional data including consumer confidence ISM and PMI surveys seem to echo the theme of a strengthening US economy
- This is welcome news, but is it enough to overcome the strong disinflationary forces that we have written about?
Has the Tide Turned?
For the last six months, I have been writing and speaking on the tug of war between inflation and deflation. This is a battle with no clear winner - yet. Recent economic data from the United States has most wondering if we have finally “turned the corner” and are now on the path of sustainable economic growth.
Earlier this week, the ADP Private Employment Report surprised to the upside with 238,000 jobs created in December 2013. This was in excess of the initial estimate of 205,000 – a very strong number in and of itself. Further, the previous month’s jobs number was also revised higher (a final print of 229,000 new jobs).
- Seemingly out of nowhere, legitimate rare earth plays exploded higher late last week
- Like the prices of many other commodities, rare earth prices have firmed (both inside and outside China), but a convincing move upwards is still lacking
- This raises two questions: Why did many of the stocks move higher last week and is this a sign of a turn or just end of year positioning to benefit from the January Effect?
Finally Some Good News
One of the most interesting things about the rare earth element (REE) sector is that the narrative that put REEs on investor radar in the first place is still firmly intact. However, nobody seems to care anymore. Shown below is the 1 year price performance of an equally weighted basket of REE exploration and production companies versus the Dow Jones Industrial Average, S&P 500, and Nasdaq.
