By Chris Berry (@cberry1)
For a PDF version of this note, please click here.
This note will be shorter than usual as my travel schedule seems to have gotten the best of me. I recently returned from Costa Rica and am off to Europe tomorrow with Zimtu Capital to join them in Frankfurt (Nov 6th), Munich (Nov 8th), Zurich (Nov 10th), and Geneva (Nov 12th) as a keynote speaker on their annual bus tour. If you’d like to attend any of the presentations (numerous TSXV and CSX companies will be presenting as well) please let me know and I can get your name on the invite list.
The recent swoon in the metals markets likely has all of us questioning our faith and resolve. Personally, I see no reason why gold and silver, in particular, can’t go much lower and stay there indefinitely. Ultimately, supply and demand always equilibrate, but it can be painful waiting for this to happen. The perception of increasing economic strength in the US with a recent 3.5% GDP growth print plus continued US Dollar strength are outweighing the continued reports of gold and silver consumption in the Emerging World.
By Chris Berry (@cberry1)
For a PDF version of this note, click here.
I have recently returned from Hong Kong where I was privileged to deliver a keynote address at the 121 Mining Investment Forum. In an environment which is crying out for a new conference model, the founders at 121 are on to something. There is an institutional appetite in Asia for mining deals despite the cyclical and structural disinflationary headwinds that appear to be intensifying.
My motive in attending the conference, aside from networking, was to get a feel for how Asia-based investors viewed the metals markets and what sort of questions they were asking.
By Chris Berry
It’s interesting to note that on the same day the International Monetary Fund released their annual World Economic Outlook which lowered expectations for global growth (yet again), that several potentially large mining deals were either launched or mooted.
While the talk of the potential deal for a merger between Glencore (GLEN:LN) and Rio Tinto (RIO:LN, RIO:NYSE) dominated the headlines, two (relatively) smaller deals were also announced recently.
Anglo American (AAL:LN) will reportedly commence with a sale of up to $1 billion worth of copper assets in Chile including the Mantos Blancos and Mantoverde mines, along with AAL’s 50.1 percent stakes in the El Soldado mine and Chagres smelter according to Bloomberg. These assets are small relative to others in AAL’s portfolio, but a willingness to part with them says a great deal about the company’s thoughts on the need to generate returns in the current macroeconomic environment.
By Chris Berry
For a PDF version of this note, click here.
- To call Q3 “challenging” is an understatement. Growth momentum is increasingly absent.
- Most metals were relentlessly forced downwards in Q3. Gold declined .13% (almost wiping out its gains YTD), silver fell .11% (down 13% YTD), and copper swooned 4.96% (down 9.42%YTD).
- Rather than pinpoint an “elephant in the room”, there are multiple negative catalysts including slower growth in China, a relentlessly stronger US Dollar, and excess commodity supply.
- Geopolitical events including the downing of Malaysian airline’s MH17, the potential spread of the Ebola epidemic, and the “rise” of ISIS have not had a significant effect on metals prices. The “metals” disconnect has many analysts, myself included, puzzled.
- It raises the question of whether or not the current downturn is structural rather than a “normal” cyclical downturn from which we always expect to recover.
- Q4 themes and catalysts may include a stimulus package in China aimed at boosting consumption, continued US Dollar strength (negative for gold and a deflationary precursor) , an announcement of QE in the Euro Zone, and the end of QE in the US.
In Deflation’s Grasp?
We have discussed the inflation/deflation debate many times in the past. It now seems clear that deflationary forces are predominant. Falling commodity prices, sparked by excess global supply and muted demand, aging societies, a stagnant velocity of money, and the ubiquity of technology continue to conspire to suppress and overwhelm the Federal Reserve’s attempts to stoke inflation.
By Chris Berry
If you’ve been watching financial news at all over the past week or looked at your portfolio, you’ll know that something is amiss in the commodities world. By most accounts, commodity prices are at five year lows. Almost everything, from gold to silver to iron ore to wheat to corn is falling – hard.
By Chris Berry (@cberry1)
Introduction
I have been optimistic on lithium demand since we first started covering the space through Salares Lithium and its merger with Talison Lithium in 2010. My investment thesis revolves around the fact that though lithium is plentiful and the market structure resembles an oligopoly, there is “room at the top” for select lithium development plays that possess a distinct disruptive advantage which lowers their overall cost of production and allows them to sustain operations and thrive.
Demand for lightweight electronic devices and mobility that is reliable and cost effective ensures robust lithium demand in an electrified future. There simply is no readily available substitute to the lithium ion battery and the double digit growth rates in battery use in recent years confirms this.
One company that I believe holds promise to join the ranks of production companies is Lithium Americas (LAC:TSX, LHMAF:OTCBB). I have discussed the company in video interviews previously. This is the first time I have discussed it in depth in print.
There are several reasons for LAC’s unique value proposition. The company’s new management, strengthened balance sheet, superior asset, and important cooperation agreement with POSCO (PKX:NYSE, 005490:KRX), rank it among the top near-term lithium production stories.
The agreement LAC has in place with POSCO has the potential to transform the production dynamics of the industry and render the age old debate about which lithium production method is better – brine or hard rock - irrelevant.
LAC appears to be at an inflection point and is the focus of the following report.
In July 2008, then Treasury Secretary Henry Paulson touched off the greatest banking crisis of our generation stretching back to the 1930’s. On Sunday, July 20th 2008 before the markets opened in Asia, the Treasury Secretary of the United States stepped in to guarantee the US bond portfolio owned by China. Earlier that same day he had commented on national TV,
“I think it's going to be months that we're working our way through this period, clearly months. Of course the list [of difficulties] is going to grow longer given the stresses we have in the marketplace, given the housing correction - but again, it's a safe banking system, a sound banking system. Our regulators are on top of it. This is a very manageable situation.”
We have now spent 72 months - or 6 years - in the economic malaise that followed the US housing bubble’s implosion.
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.
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.
