Disruptive Discoveries Journal

energy metals

Strategic Overview of the Cobalt Market

Chris BerryComment

It's been a busy few months and I'm pleased to announce that I've completed a thorough review of the cobalt market which is available for purchase. 

The report covers all aspects of the cobalt supply chain from mining, to refining, to end uses with supply and demand forecasts as well. 

I'm offering the Executive Summary and a portion of the Introduction for free. You can download a PDF version here. The cost of the full report is $500 USD which can be paid through PayPal (or we can make arrangements for a wire if necessary). As an added bonus, I'll give the first 20 people to purchase the report an opportunity for a 20 minute phone call to ask any question they want regarding the outlook for the cobalt market. 

To be clear, this is not a "stockpicking" report and so you won't find any "flavor of the month" stock picks here. What you will find is in depth data and insights into the cobalt supply chain and how the companies along it are shifting their business to capture the anticipated high growth of downstream industries. 

For more info on purchasing the report, please email me at info@house-mountain.com.

Thanks,

Chris

Macro Strategy Note: The Case For Energy Metals (Revisited)

Chris Berry2 Comments

By Chris Berry (@cberry1)

For a PDF copy of this note, please click here

 

In reading the Berkshire Hathaway annual letter this weekend, I was reminded of a response Charlie Munger gave to an investor on how he tests the validity of his investment thesis. Munger’s response was, “Invert. Always invert.” The meaning here is to consciously take the other side of your thesis and try and disprove your beliefs/biases.

I’ve spent the past month or so on the road at conferences and meeting with investors to take a temperature check and “invert” our investment philosophy. We’ve also witnessed a huge increase in our subscriber base in recent weeks and so an outline of our view of the world and how we’re positioning is in order and likely overdue.

While the content here may be repetitive for long-time readers, I welcome any (constructive) comments as they can only help refine and strengthen our outlook.

Despite the overwhelming complexity of the global economy, we see a huge struggle against two headwinds. Though we’ve been involved in commodity investment for over a decade, we view the commodity super cycle (2001 – 2011) as definitively over. The end of the super cycle has left the economy with additional supply of commodities now coming on stream just as demand continues to soften.

Forecasting Lithium in 2016: What are the Salient Issues?

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By Chris Berry (@cberry1) 

For a PDF copy of this note, please click here

 

If recent mainstream media, sell side, and newsletter writer coverage wasn’t enough to convince you, it is all but obvious that lithium has emerged as an investible asset class for 2016 and beyond as the broader commodity sector continues to struggle with overcapacity and slack demand. While the excitement is born of strong growth in technologies requiring lithium (mainly electric vehicles and energy storage), the real reason for investor excitement boils down to one issue: price.

As The Economist shows, the lithium carbonate spot price has gone parabolic.

Is this the Final Leg Down in the Commodity Cycle? How Much Lower for How Much Longer?

Chris Berry2 Comments

By Chris Berry (@cberry1)

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

 

If anything is clear after the start of 2016, the global economic rebalancing that central banks around the world are trying to engineer is not proceeding according to plan. The circuit breaker fiasco in the Chinese equity markets is the latest example giving investors pause with respect to what is truly “going on” in China. The Shanghai composite equity index has lost almost 15% of its value YTD and few see good reason for this slide to halt aside from intense government support and RMB devaluation. Money continues to flow out of China as we speak.

Does the Berkshire Hathaway Model Work in Energy Metals?

Chris BerryComment

By Chris Berry (@cberry1)

For a PDF copy of this note, please click here

 

 

If anything has become clear in the resource space in recent years, sustained value creation is hard to come by. The reasons for this are manifold. Last week I discussed the likelihood of M&A in the Energy Metals space but didn’t allude to how this is likely to happen. There are a multitude of ways for these arrangements to occur, but one in particular seems absent from the discussion. Given oversupply and the great engine of commodity demand (China) slowing, perhaps the time is right for a Berkshire Hathaway-style model in the Energy Metals space.

Berry's Big Seven: Questions To Ask Energy Metals Companies This Earnings Season

Chris BerryComment

By Chris Berry (@cberry1)

 

Please click here for a PDF of this note.

 

Investors in the small cap mining sector are well aware of the “end game” for the junior mining plays - either a take out by a larger company or the mythical “get into production” (which few achieve successfully). Significant structural barriers including strong deflationary headwinds and traditional cyclical issues have altered this line of thinking. I think this mandates that we evaluate the natural resource sector differently.

This is why I continue to believe that those companies with a competitive and disruptive advantage are better placed to survive the current commodity collapse and emerge when global supply and demand forces eventually equilibrate in the future.

That said, if every crisis provides opportunities, the current metals landscape demonstrates significant pockets of value. If that is the case, there are two questions to consider:

Where is the value? And….

What are the catalysts to unlock it? The answer to the first question is subjective; the second is more objective.

Since the end of the current iteration of the commodity super cycle in late-2011, one of the ways I have addressed these questions is through more detailed focus on larger market capitalization companies mainly through dissecting their quarterly earnings calls. Everyone has their due diligence “list” when reviewing companies (management experience, balance sheet strength, sustainability, etc), but listening to what publicly traded commodity producers and users have to say is not as prevalent.

Productivity and Energy Metals: You Can't Have One Without The Other

Chris BerryComment

By Chris Berry (@cberry1) 

For a PDF of this note, please click here

 

“Love and marriage, love and marriage,

Go together like a horse and carriage.

This I tell ya, brother, you can’t have one without the other.”

– Frank Sinatra

 

Ol’ Blue Eyes Was Right

With structural challenges still facing the metals sector as we head into 2015, finding a way to lower production costs is a must. A company’s sustainability (regardless of where it sits on the value chain) is arguably the most important issue for investors to consider. Lowering costs through either reducing operating or capital expenditures is the most obvious and easiest method, but this doesn’t create lasting value. The key is enhancing productivity through investment. It’s paradoxical to think that increasing investment can lead to lower costs in the long run, but this has been proven again and again many times.

Increased investment implies increased commodity intensity and this is why I used the Frank Sinatra quote above. Productivity goes hand-in-hand with increased investment and commodity use. In other words – you can’t have one (productivity or growth) without the other (increased metals use).

 To be sure, there are other ways to drive productivity. In his excellent book Capital in the 21st CenturyThomas Piketty argues that favorable demographics – specifically population growth – can, in part, spur overall economic growth and the productivity gains which go along with it. The challenge here is that it takes decades for this phenomenon to play out.

Consolidation Amongst Miners Picks Up As Growth Slows

Chris BerryComment

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.

Q3 2014 Energy Metals and Economic Review

Chris BerryComment

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.