House Mountain Partners

copper

The Wall of Worry in Battery Metals

Chris BerryComment

October 11, 2021

For a PDF version of this note, please click here.

Should investors be focusing on cost inflation along the supply chain rather stretched valuations?

With some lithium prices up over 200% in 2021, is it time to start to worry about an overextended run? Lithium pricing as per Benchmark Mineral Intelligence is at an all-time high on a nominal basis. The last time lithium prices were this high (2018), the adage of “taking the stairway up and the elevator down” became all too real and reminded us of just how violently cyclical and unforgiving dynamic markets such as lithium can be.

Five Questions on Supply Chains Against the COVID-19 Backdrop

Chris BerryComment

By Chris Berry (@cberry1)

With events moving faster than ever, many questions are raised which most are ill equipped to answer in the sense that many have never lived through a simultaneous social, economic, and financial crisis. This confluence of events seems likely to intensify barring a miracle from both Central Banks and mother nature.

I have worked through the dot com bust in 2001, the global financial crisis (GFC) in 2008, and the commodity bust in 2012. All were unique, but at the end of the day were financial and economic in their composition. At risk of simplifying greatly, both fiscal and monetary policies helped to get the global economy back on its feet after each bubble had popped. The effects on all of us of COVID-19 are hard to fathom as the virus threatens economic activity through both a supply and demand shock of indeterminant proportions. The light at the end of the tunnel is that this will blow over eventually, but what we thought the future was going to look like may change markedly. As such, you owe it to yourself to ask tough questions and challenge your beliefs as the external environment we operate in continues to evolve.

Every day seems to bring more and more questions on the path forward. Equity market valuations, gold prices, and bond yields which go parabolic one day and collapse the next do investors no favors in terms of holding fast to a long-term vision…..and that long-term vision is important.  

In that vein, I thought I’d take the next few weeks and lay out some of the questions I’m wrestling with and in the interest of information-sharing, layout my own ideas on navigating a path forward around supply chain issues. This is arguably a therapeutic exercise for me, but hopefully can challenge your own views and thoughts on both the macro and micro with Energy Metals supply chains. I readily admit I don’t have the answers, but hopefully 25 years of successes failures and everything in between can stimulate debate as we navigate through this truly historic and uncharted time in history.

The questions or issues to be debated in the coming weeks are:

·      How does COVID-19 affect the thematic of de-globalization and supply chain regionalization? Is the result inherently inflationary or deflationary?

·      How does COVID-19 affect the cost structure of the lithium ion supply chain and what is the true cost of the “marginal molecule” (h/t to Deep Basin Capital)?

·      Does the collapse in oil pricing and a race to the bottom in global interest rates slow down or accelerate the transition towards electrification?

·      What will raw material producers need to do in order to ensure the viability of their businesses going forward (from juniors to producers)? What is the optimal capital structure and what do companies do to manage costs with ESG pressures only set to increase?

There are no doubt more issues to be debated and thought through and I’ll be sure to address them as necessary.

Stay tuned for the first piece early next week.

China Outflanks Freeport To Further Consolidate The Lithium Ion Battery Business

Chris BerryComment

By Chris Berry (@cberry1)

For a PDF version of this note, please click here.

 

 

Earlier this week, the deal in which China Molybdenum Co. (603993:SHA) agreed to pay Freeport McMoRan (FCX:NYSE) $2.65 billion for FCX’s African copper assets reaffirms our view that asset shedding from the FCX project portfolio must continue (See the press release here).

FCX, with a $13B market capitalization, made a bad bet in diversifying into the oil business at the cyclical peak and now must reckon with roughly $20B in debt on their balance sheet. The debt maturity profile of the company is shown below:

Cobalt as a Case Study in a Wobbly Global Economy

Chris BerryComment

By Chris Berry (@cberry1)

For a PDF version of this note, please click here. 

 

Regular readers will know of my optimism regarding cobalt. The fundamentals look sound in a metals market that, already under pressure, appears headed lower. To wit:

·         Cobalt demand is growing by 6% overall with demand in the battery supply chain growing by some estimates at a CAGR of 10% out to 2020 - a good chink of the overall market. Current estimates for battery usage put the actual tonnage demanded at between 35,000 and 40,000 tpy. This is driven almost exclusively by cobalt’s use in the cathode of the lithium ion battery.  

·         Cobalt is mainly a by-product, produced as a consequence of nickel and copper mining rendering cobalt production hostage to the bullish or bearish tendencies of these other metals.

Emerging Markets at Stall Speed and the Silver Lining in Metals

Chris BerryComment

By Chris Berry (@cberry1)

For a PDF version of this note, please click here. 

 

 

As China’s equity markets continue to sink, calling into question the ability of Chinese officials to prop up the market (and maybe the economy), it appears that collateral damage has already begun.

Both Kazakhstan and Viet Nam have devalued their currencies by 4.4% and 1% respectively in a bid to remain competitive with their Asian neighbors. The MSCI Emerging Markets Index has entered a bear market and a gauge tracking 20 currencies is in its longest slump since 2000, according to Bloomberg. Emerging markets as a whole are dealing with a major slowdown in global trade and collapsing commodity prices and must confront the cheaper Chinese Renminbi as a threat to their balance of payments in the absence of structural reform. The performance various currencies from last week is shown below: 

A Key Question in the Commodity Rout

Chris Berry2 Comments

By Chris Berry (@cberry1)

For a PDF of this note, please click here.

 

To anyone involved in commodity markets, the events of the past two weeks should make one thing abundantly clear: a new paradigm in commodity investing is in play. The most recent iteration of the commodity super cycle (2001-2011) was unlike anything many of us had ever seen. Unfortunately, the aftermath (2011-????) and subsequent correction may also be unlike anything we’ve ever seen (at least in terms of duration and intensity). I’m fully aware of the cyclical nature of the commodities business, but clearly the greater the bull market, the more severe the bear market.

Here is the Bloomberg Commodity Index since 2011, down 28% over the past year alone:

The Collapse in Commodities: Miners at a Financial Crossroads

Chris BerryComment

By Chris Berry (@cberry1)

For a PDF copy of this note, please click here.

 

The implosions of the Greek economy and China’s stock market have brought the mining sector to the crossroads that it desperately needs to face. We’ve discussed the need for this reckoning often over the past three years and believe we may be at the beginning of a correction in the equity markets that will further depress metals prices as the twin headwinds of excess supply and slack demand begin to dominate. The need for global debt deleveraging also looms on the horizon much to the chagrin of politicians everywhere – not only in Greece.

The precipitous decline in China’s equity markets with $3.2 trillion in value evaporating in three weeks has quite simply demolished the metals with gold, copper, iron ore, and oil serving as the unwitting poster children for what happens when things don’t go “as planned” in a centrally planned economy.  

The Key To The Way Forward In The Mining Sector

Chris Berry1 Comment

By Chris Berry (@cberry1)

 

For a PDF version of this note, please click here.  

 

·       The mining sector remains challenged by multiple headwinds including a lack of investment, currency headwinds, slower productivity, excess capacity, and deficient global demand.

·       Debt overhangs and slowing emerging markets – specifically China – appear to be the culprits behind slack demand. These forces must be reckoned with.

·       Longer-term, however, innovation, sustainability, and urbanization are legitimate drivers of growth and help promulgate “good” deflation which enhances productivity and can drive returns.

·       This note examines these phenomena and which sector(s) of the mining industry may benefit.

 

Groundhog Day

After three-plus years of a dismal mining investment environment and the potential for it to continue for some time, a number of questions arise from the soul searching many of us have done to try and make sense of this. According to Bloomberg, the value of the TSXV has fallen from its peak by almost 72%. This market environment necessitates a different method of thinking and evaluation about publicly traded mining companies. The good news is that it appears that many metals prices have bottomed, though this doesn’t mean that the cycle has definitively turned. The bad news is that the global economy still appears to be struggling with excess capacity AND muted demand. China, the seemingly endless engine of metals demand is unquestionably altering its paradigm for economic growth from one of infrastructure build out and exports to one more focused on internal consumption. With China’s debt to GDP ratio of 282% according to McKinsey, this move to a new growth model is absolutely necessary to maintain a sustainable growth rate, but there is no overnight fix to achieve this type of change. The success of this transition won’t be known for years, though the effects are already being felt.