Disruptive Discoveries Journal

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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.

Is it Different This Time? - Separating Hype from Reality in the Lithium Ion Boom

Chris BerryComment

Here is the link for my recent remarks at PDAC regarding how to interpret the lithium market. The presentation is "picture heavy" as I generally hate powerpoint and minimize words in favor of images.

Nonetheless, reach out to me if you'd like a deeper discussion on these issues.

The presentation looks at the reasons why the lithium ion battery is increasingly important in our daily lives and offers a few thoughts on what to look for and avoid as you start to understand an increasingly interesting and pivotal space. 

2016: There's Something in the Air

Chris Berry2 Comments

By Chris Berry (@cberry1)

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

As is the case this time of year, we start to close the books on 2015 and position for 2016. While we have effectively and indefinitely moved “to the sidelines” with respect to stock picking in the junior mining space, there were some notable successes, in particular with the merger between Western Lithium (WLC:TSXV) and Lithium Americas. This combination positions the new company in a unique strategic light as electrification, underpinned by the lithium ion battery, gathers steam in 2016. Galaxy Lithium’s (GXY:ASX) restructuring is another positive development. We’ll be watching the developments with these two companies closely.

In 2015, there was very little to be cheerful about in the metals markets and to be blunt, we expect this malaise to continue into 2016. China’s RMB devaluation last summer...

Q2 Lithium Results: Full Steam Ahead, but Watch Where You Step

Chris BerryComment

By Chris Berry (@cberry1)

 

For a PDF of this note, please click here

 

 

In keeping with tradition, each quarter I take a look at earnings announcements of select companies involved in Energy Metals value chains. Today I look at lithium. The thinking here is that dissecting financial results of companies involved in lithium production or use can give clearer guidance on the narrative of looming electrification (and growing materials demand to underpin this sea change). While it is true that all financials can be twisted or manipulated to spin a story, the ability to analyze financial statements can give reasonable insights into trends of this relatively small but growing business. The devil is always in the details.

Confronting Dislocation in the Graphite Market

Chris Berry5 Comments

Co-authored by Chris Berry and Jonathan Lee

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

 

It’s been awhile since I’ve commented on the graphite capital markets. Financing difficulties, slack demand, economic uncertainty, and investor apathy (issues facing much of the commodity complex) are also at play in the graphite space. Nevertheless, graphite will remain an important piece of current and next generation supply chains and so a sober look at the sector is warranted.

In order to take a “deeper” analytical dive, I’ve asked Jonathan Lee, an institutional mining analyst and President of JGL Partners, to assist with this piece. Investors have shied away from the niche products like graphite due to opaque pricing and the transactional nature of the business. With no futures market, price discovery is tantamount to guess work unless you are in the business. This is generally true across the value chain from juniors to integrated producers.

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.

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.

The Wall Street Journal Gets It (Mostly) Right on Commodities

Chris BerryComment

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.

Tesla Motors (TSLA:NASDAQ) - On The Verge of Changing Everything, But Questions Remain

Chris BerryComment

By Chris Berry

 

Charging Ahead

Last week, TSLA released its Q2 2014 earnings. As a proponent of disruptive business models and the raw materials necessary to enable the upheaval, I always listen with rapt attention. The earnings of $0.11 per share on net income of $16 million (non-GAAP), and a loss of $0.50 per share on net income of $62 million (GAAP) were enough to satisfy the market and after a brief dip in after hours trading, the share price rebounded strongly.

As is the case with many of the early-stage companies I follow, I’m more interested in production metrics, though revenue here is accelerating, indicating that TSLA is having no problem selling its cars. I’m willing to tolerate negative earnings and cash flow as long as the company is investing in future growth and increasing sales.

This is clearly the case with TSLA which reported record production (8,763 Model S) and deliveries (7,579 Model S) in Q2 and is on track for more than 35,000 deliveries in 2014 with the stated goal of 100,000 deliveries by the end of 2015. Additionally, with a Cap Ex guidance of $850 million, TSLA has a Cap Ex/Sales ratio of over 20% - unparalleled in the automotive business according to the FT. The next closest is Jaguar at 12%. TSLA is clearly a company in its early growth phase.

Rather than dissect the numbers here, I think it’s important to look at the main takeaways from the call and consider any questions that arise for the company as they continue on an exciting journey to revolutionize the automotive and energy storage businesses.