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, 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.
To wit, the Wall Street Journal recently reported that Boeing (BA:NYSE) and United Technologies (UTX:NYSE) have been stockpiling titanium since March of this year in response to escalating hostilities in Ukraine. According to the WSJ, four companies provide 90% of the 120 million pounds of titanium used each year in the aerospace industry. The largest producer of titanium in the world is VSMPO-AVISMA (VSMP:MCX). The main issue here is the source of the titanium: Ukraine.
From the WSJ:
“The potential impact of the Ukraine crisis on the titanium supply chain is further complicated by the fact that Ukraine provides almost all of the titanium concentrates needed by VSMPO for raw titanium production. That Ukrainian titanium supply to Russia hasn't been disrupted so far. VSMPO said in June it holds a regular stockpile of Ukrainian titanium concentrates by filling its warehouses.”
You can read the full article here (subscription req’d.).
I'm not trying to fear monger, but to draw attention to how quickly attention spans can shift when geopolitical or economic black swans occur. For those that think that the relative small size of these metals markets doesn’t warrant your attention, I would suggest companies like Boeing believe otherwise.
We have discussed Scandium in recent years and also maintain a positive outlook for forward demand. EMC Metals (EMC:TSXV) continues to perform, up 400% year-to-date, albeit from a low base. The company recently strengthened its Board of Directors and has initiated a Preliminary Economic Assessment (PEA) to be completed by the end of 2014 which will shed light on what I think will be strong project economics. I still own shares in EMC.
Another junior mining company involved in scandium exploration, Platina Resources (PGM:ASX) has made huge waves in the space recently, entering into a Heads of Agreement (HoA) with Inner Mongolia Honfine Zirconium Industry Co Ltd. to negotiate an off take and marketing arrangement for 15 tonnes of scandium oxide at a 99.9% purity grade and commercially acceptable price. This would double current global scandium demand.
Clearly there is a great deal of detail to be worked through here (What is a “commercially acceptable” price? Acceptable to whom?) but the fact that large players are in the market and interested in long-term supply arrangements is a positive one.
The solid oxide fuel cell (SOFC) business – crucial for scandium demand growth – continues to remain in the headlines, most recently with General Electric (GE:NYSE) announcing the launch of an internal start up to produce SOFCs. With GE entering the race to produce SOFCs (a market growing at double digit rates), clearly this market is large enough to make a meaningful contribution to the company’s bottom line.
Lithium continues to consolidate with the recent merger between Albemarle Corp. (ALB:NYSE) and Rockwood Holdings (ROC:NYSE) for slightly over $6 billion in cash and stock. Add to this ROC’s acquisition of 49% of Talison Lithium and the sector remains an oligopoly. As this deal only solidifies that market structure, I still believe focusing on those lithium junior mining plays with a competitive or disruptive advantage as the optimal opportunities. I’ll be writing more on this in the near future.
In their most recent quarterly earnings conference call, ROC CEO Bob Zatta talked about some of the strengths in their lithium business specifically mentioning strong EBITDA margins due to battery grade lithium demand and operations running at full capacity. With ROC maintaining its position as the number one producer of lithium compounds in the world and expansion plans underway in Chile and North Carolina, it would appear that ALB struck a great deal.
Shown below are year-to-date EV sales in the US. This is still a blip relative to the overall automotive market, but viewed sequentially, demand appears to be accelerating.
I won’t discuss Tesla Motors (TSLA:NASDAQ) and the possible increases in raw material demand as I have done so previously, but with or without this additional demand from the Gigafactory, lithium remains an attractive commodity going forward.
Rare Earth Elements (REEs) have found themselves back in the news recently if not on investor’s radar. The World Trade Organization (WTO) recently ruled against China’s appeal of their export quotas, and so something must change.
Recent reports of Chinese stockpiling 10,000 tonnes of REEs and the Chinese government approving the formation of two REE monopolies to consolidate the industry are credible signs that change is finally coming to the REE space.
Molycorp (MCP:NYSE) continues to lose money (for the 10th straight quarter) but was thrown a lifeline this week from Oaktree Capital Management in the form of a financing arrangement for up to $400 million with $250 million available imminently. I have said, and continue to believe, that higher REE prices will resuscitate this industry outside of China and it’s possible that recent Chinese moves are the precursor here. Not yet, though. Until I can get confirmation of this, I’m continuing to watch the REE industry from the sidelines.
Finally, the Cobalt price has quietly continued to gain strength, but this hasn’t transferred over to broad share price appreciation as it has with lithium or graphite. While there are likely many reasons for this, with much of cobalt production and refining occurring in countries like the DRC, Russia, and China, the geopolitical realities of security of supply of this critical metal will reassert themselves. Reports of China stockpiling cobalt are no secret.
Source: LME.com
When the dust settles from the Gigafactory hype, I think it will be cobalt – not lithium, not graphite, not nickel, that will see the biggest gains. This is clearly the most overlooked of the Energy Metals I follow currently.
Takeaways
The key with the Energy Metals at this stage of the cycle isn’t necessarily to focus on supply and demand but instead to focus on where that supply originates. Geopolitical realities appear set to dictate the direction of the metals market for the foreseeable future. A mixture of geopolitics, technological advancement, the desire for human progress, and desire for high rates of return on investment all dictate strongly, in my opinion, for your close examination of the Energy Metals space. This isn’t going away anytime soon.
I think Marc Andreessen, the American entrepreneur and co-founder of Netscape Communications, recently summed up the argument for Energy Metals best when he posted a tweet asking the question (I’m paraphrasing) “How can we all live upper middle class American lifestyles without destroying the planet?” The answer – in part – rests with reliable access to Energy Metals.
Source: LME
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