- 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.
Despite numerous statements by market commentators (myself included) on the looming “nuclear renaissance”, the uranium market remains stuck in neutral:
- The real catalyst for higher uranium prices is the restart of a portion of the Japanese reactor fleet.
- Recent elections in Tokyo hint that the political ruling class is in favor of nuclear reactor restarts – but when?
- Cameco (CCJ:NYSE, CCO:TSX) held their quarterly and year end results conference call on Monday and announced a scrapping of their plan to produce 36M lbs of U3O8 by 2018.
- This is not positive news for the uranium sector in the intermediate-term and has us sticking to the belief that focusing on near-term in-situ production stories in reliable political jurisdictions is the most sensible “investment” over the long-term with high grade hard rock discoveries in the Athabasca Basin serving as a good “trade.”
Grinding The Gears
I want to start today’s Note out with a clear statement of whom or what the culprit is for uranium’s relative underperformance. This is the lack of Japanese reactor restarts (but by no means the only culprit). Many market commentators (me included) had anticipated at least some of the reactors coming back on line at this point. This was one of the mistakes I made in 2013.While it’s also clear that the ENTIRE Japanese fleet will never come back online, anywhere from 20 to 30 reactors are anticipated to restart in the coming years. The thinking here is that once some of the Japanese reactors come back on line, this will breathe life into the uranium price and, coupled with the emerging market embrace of nuclear power, push spot and term uranium prices higher, enticing more exploration and production.
- Recent volatility in emerging markets has many worried that this is the start of a global correction
- We do not necessarily agree and believe that new concerns about emerging markets are overblown
- The culprit may be the lax monetary policies of central bankers that have bred complacency
- The key to interpreting the potential for emerging markets mirrors our strategy for interpreting opportunities in the metals space – selectivity
- Several emerging market economies are in better shape with respect to fiscal and monetary policy than the “recovering” developed world economies
- Frontier Markets are the new game in town
The Luck Of The Draw
I’m always the first to admit how fortunate I’ve been in life. I’ve had numerous opportunities to travel to other countries throughout the world, talk to people in all walks of life, and see the world through a non-US prism. Viewing different (and mostly) lower standards of living sparked my interest in the emerging markets and the well known idea of convergence. See Nobel Laureate Michael Spence’s book titled “The Next Convergence”.
Economic growth in the developed world is slow and volatile, well below “escape velocity” for 62 months. The most recent example is sluggish jobs numbers in the US last Friday (only 113,000 jobs created).
The Institute of Supply Management released its January 2014 survey yesterday.
- While the survey still indicated growth in the US Manufacturing sector (at a reading of 51.3), the consensus estimate called for a reading of 56.
- This was a substantial “miss” and equity markets collapsed with the Dow falling 326 points, or over 2%.
- The ISM reading, coupled with increased volatility in emerging markets such as Argentina and Turkey, have many thinking that the long awaited correction and rebalancing of growth in financial markets is upon us.
- Two questions remain – First, have the Emerging Markets entered a crisis phase or is slowing growth in the developed world a bigger issue? Second, Can the Fed continue to taper asset purchases in the wake of this volatility and possible economic weakness in the US?
Significance of the ISM
Regular readers of Morning Notes will know of my preference for ISM and PMI data as a gauge of industrial demand. If industrial demand is increasing and economic expansion is occurring, this is ultimately bullish for the base and energy metals complexes.
Since last summer, the ISM numbers in the developed world (the US and Europe) have ticked up and lent credence to the idea of a slow, possibly sustainable, economic recovery.
- 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.
