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Is the commodities shortage more a mirage than reality?

Samso seeks to help clients with business development and public investor/relation needs. Samso has over 30 years of experience in developing business ideas and concepts in the Australasian region.
Mirage
Mirages can be a good thing - they can hide and promote at the same time

For the moment you can be forgiven in thinking that the much-anticipated depletion or commodities shortage is more a mirage than a reality.

The situation feels like someone copying a famous quote and then not crediting the author. The phrase ‘Commodities Shortage’ seems to resonate excitement and fear in the market, but there does not appear to be any substance, for now. It is a case of ‘Missing In Action’.

The lithium and cobalt space was a great fanfare in the last two years. However, when you look at the market conditions now, you have to think that the lithium and cobalt market has come to some equilibrium.

I do not feel that demand so much these days. All the content on the subject has been taken off the screen.

Recently, I heard a very respected resource group say that one should not bother with cobalt because the DRC can now turn that on and off - go chase nickel. I am fully on board with that thought as I have stated many times already.

Photo by Jamie Street on Unsplash.

According to Reuters, Tesla is trying to cut its use of cobalt. The US electric carmaker said that it needs more nickel.

For those that have read my earlier Insights, they would have remembered that I am a big fan of nickel, copper and zinc. Although, I am losing faith with zinc only because I kind of think that the present stream of suppliers may fill any future shortages.

Nickel and copper, on the other hand, have been the main components of human civilisation, and they will continue to fill that role. You can have an electric or a hydrogen vehicle and not have or have very little lithium and cobalt, but you cannot have no or little nickel and copper.

Copper

Copper pricing is just coming to its 50% retracement from 2015, and it will be interesting to see if it takes off positively from here. The bottom was in 2016, so it has only been less than three years of recovery.

May 2019 has not been a good month, with copper dropping from US$6,400 to almost US$6,000. It has since recovered, but I think there will be some weakness still to come.

There is no doubt that the trade war noise is creating headaches on both sides. Trump is doing what most bullies do with lots of noise and China is doing what people who know they have absolute power would do. The stand-off will remain, and the markets will keep reacting to every word.

Photo by Scott Webb on Unsplash.

People talk about LME decline and deficit in supply, but what I see in the market is weakness and steady growth in pricing when it is recovering. There are no signs of a deficit issue nor a shortage of supply issue.

Like the iron-ore pricing, some people would say the pricing surge is more to do with a supply issue than a demand resurgence. I wrote an article recently, Shortage In Metals and I could not explain the rapid decline in supply but only a rather slow and half-hearted rise in pricing. Now I think that may be more to do with a lack of demand more so than a shortage in supply. I guess time will tell the whole story.

Figure 1: Copper pricing from 2010 to 2019. (source: LME).

According to Reuters,

  • Copper stocks: The latest data showed copper inventories in warehouses approved by the London Metal Exchange (LME) MCUSTX-TOTAL on Friday hit 203,750 tonnes, its lowest since April 25.
  • Copper deficit: The copper market should see a deficit of 189,000 tonnes this year, widening to 250,000 tonnes in 2020, the International Copper Study Group said on Monday.

These projections are compelling, but my issue is the slow counter-reaction by the price.

1999 Lincoln Cent Penny – 1oz.999 Copper (Source: www.cheapestdinar.com).

Copper producers

The copper producers are very dull. They are all the big players and they are either in Latin America or Africa.

In regard to the smaller producers, you have Sandfire Resources NL (ASX:SFR). The issue is that SFR is a copper and gold miner with mine life now limited. 

Then there is OZ Minerals Limited (ASX:OZL) which is a large company with big mines. There is probably not too much upside in capital growth, but it is still a good investment for steady growth.

Apart from those two companies, I can’t think of anyone else. There is BHP, but they are boring.

To me, copper seems to be monopolised by big expensive mines.

Copper explorers

I don’t see too many of these copper explorers as exciting. As I said, when you look at all the copper mines, they are big and all discovered from deep drilling stuff. The Olympic Dam story is one that comes to mind. 

Some explorers could have a good chance, such as Ausmex Mining Group Ltd (ASX:AMG) of which I am a shareholder. I am hoping for big things with this company, but I will say that the exit from that stock will be when they hit excellent grades and the share price blossom. The other exit possibility is that a big brother comes over and says thank you very much.

Nickel

The nickel price chart is also not so exciting. What I do see is a break in the downward trend but a slow movement up. I guess that is a good sign as recovery is quiet, and a good base building exercise is always a good thing.

I like nickel as a commodity more so than copper because nickel sulphide (NiS) is harder to find than your average copper deposit.

One could say that Latin American projects are always pretty copper-related. If the market supply does get tight, some of those projects will quickly reach the green light. Don’t forget the African projects as there are a few there that will become a player once the price allows it to happen.

Figure 2: Nickel pricing from 2010 to 2019. (source: LME).

For nickel, in my opinion, the best and most exciting projects are the nickel sulphide variety, and there are not too many of those laying around in the paddocks. NiS deposits are hard to find and even harder to make economical. There are plenty of nickel lateritic styles, but when the pricing crunch came along, their margins got squeezed, they became very hard to make money and became very uneconomical.

During the recent nickel pricing ‘crises’, the projects that held together were the high-grade NiS plays.

This brings me to the town of Kambalda in Western Australia, which is synonymous with the name nickel. It was here where the birth of the Komatiite nickel phenomenon took roots. I remember learning this in university, but as I was not such a great student ( I wish I were), I got lost with all the terminologies … etc.

Anyway, my point is that NiS is the prize. The Kambalda and Forrestania stories were great discoveries. They are what the likes of St George Mining Ltd (ASX:SGQ) and Artemis Resources Ltd (ASX:ARV) should be looking to discover in their respective regions.

Last year, I was looking at Rox Resources Limited (ASX:ROX), but they seem to have taken a strange turn to go into Youanmi Gold mine. I think this is an interesting move as my thoughts of the Youanmi project are refractory and isolation. There are some oxides, but that is going to make it worst as you have a bag of two ore types.

Unless you are flush with cash, you want to be one or the other. They have seemed to have taken the focus away from the Mt Fisher project. I think that is a mistake as I do believe that the demand for nickel is going to come.

(Source: Nickel-Japan.com.)

The lateritic nickel game is just too big. Indonesia and the Philipines are significant sources of these type of deposits. The downside for them is that they are always plagued with issues, such as political, local corruption, greed, you name it.

During the cobalt rush, the interest in this sector took a turn for the positive as all of these deposits have some cobalt. Some deposits have more, and when the cobalt price was running, they became cobalt and not a nickel project. Since the demise of the cobalt price, you don’t hear too much about that anymore.

Nickel producers

The main stayers are:

  • Western Areas Ltd (ASX:WSA) – two of the highest-grade underground nickel mines in the world, Flying Fox and Spotted Quoll mines, near Forrestania;
  • Mincor Resources NL (ASX:MCR) –  several ex-WMC mines, all near Kambalda;
  • Panoramic Resources Ltd (ASX:PAN) – Savannah (East Kimberley), Lanfranchi, Gidgee and Copernicus mines;
  • Independence Group NL (ASX:IGO) – Long Nickel mine (ex-WMC) near Kambalda;
  • MMC Norilsk Nickel (not listed on the ASX) –  Emily Ann and Maggie Hays nickel mines;
  • BHP Group Ltd (ASX:BHP) –  Mount Keith Mine and Leinster Nickel Mine;
  • Minara Resources/Glencore PLC (LON:GLEN) – Murrin Murrin Joint Venture;
  • First Quantum Minerals Limited (TSE:FM) (took over from BHP Billiton in 2009) – Ravensthorpe Nickel Mine; and
  • Poseidon Nickel Ltd (ASX:POS) – Windara Nickel Project (currently under care and maintenance).

From the list above, my favourite is Western Areas. The geology is fantastic, and it was by far the best project I have ever seen in terms of grade and peer comparison. I still think the same. I was a shareholder for a while and traded out of that 12 months ago.

Explorers

As I have mentioned, I like St George Mining Ltd and Artemis Resources Ltd. The two companies have what I call a region that is known for nickel mineralisation. Nickel sulphide is hard to find, it is small and it’s like a pod and not continually mineralised continuously. Looking for a high-grade deposit is not easy, and it’s better to be in a known space rather than not, in a simplistic way of thinking.

What I don’t like about the Kambalda and Forrestania regions for new explorers is that Western Mining Corporation, which was taken over by BHP, would have looked at most of the low hanging fruit. The chances of finding are lower.

I agree that there are still holes and these holes are there, but it’s just that these holes would be less prevalent. WMC would have been very diligent and persistent in their search.

There are some other explorers, but I have not looked much at them so I can’t comment. Maybe I will do some research on them at a later date.

My thoughts

The shortage that people speak about in commodities does exist, in terms of stock levels. However, when you talk about world resource, there is plenty.

Copper is everywhere, and there is a good supply in the ground. The LME stock levels will change, but I don’t think it is a measure of availability. What the LME levels tell us is the demand from the market. China in the space of 30 years now dictates the way of the world. It dictates the world in the same way as to how when the Dow Jones sneezes,  the ASX catches a cold. When China is not buying the world commodity market goes back significantly.

The world market as we know it now, is not the same as the way of old. What economists love to do is to look back and then say that is how it is. Who would have known that little old China 30 years ago would today be a power in almost everything but speaking fluent English?

Listing what they are good at and not good at is now a waste of time. The domestic market in China is suffering and has been for at least three years and possibly five. The trade war is not making it any better. This trade war hurts everyone but Trump’s political and personal profile aspiration.

Mirages can be a good thing … you just need to figure out how to use it for your benefit.

It is absurd to think that the trading partners, the ‘allies’ of the US, are not hurting. The farmers that he claims he is protecting are suffering themselves. On the other end of the war, the Chinese are hurting … and the list goes on. The proposed demand rises that are being offered by the economists and promoters of companies are wrong.

All the so-called projections are off because domestic demand in China is down due to factors that are not market driven. Factors such as a need to meet environmental measures and in China, which is not a free market, businesses are ‘required’ to comply. If you don’t comply, you are out of business. There are no market forces to do this. When the subsidies are taken away to build your EV, manufacturing is going to be less profitable. You are going to use less of everything.

The good news to this is that you will get a premium on items such as high-grade coal and high-grade iron ore. These are environmentally better items. The other commodity that will come into demand soon will be uranium.

HIgh-grade coal is getting attention. I don’t think the photo is what I am trying to say, but it looks good. (Photo Jaco Pretorius on Unsplash )

The zinc story is classic. The supply crunch sort of never came. When you look at the LME chart, it is a supply issue. There are so many moving parts now that I feel contributing to the lack of visible signs. In some ways, it is confusing and complicating the market at the same time.

What I do see is opportunities to get into things that are not apparent. It feels like when people were looking at lithium when the obvious was not happening. I called that nickel would be the best flavour two years ago. I think this is still the case as the market is reequilibrating.

www.samso.com.au

Samso is primarily a consulting company that delivers digital information to the market in terms of creating organic content.

Samso provides bespoke research and presentation for clients to engage their customers or investors. Bespoke research is useful for clients who require a two-way flow of communication with their customer/investor base by utilising a social media strategy.

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Samso has nearly 30 years of experience in developing business ideas and concepts in the Australasian region. Samso has worked primarily in the mineral resources industry, capital markets and corporate finance. Noel Ong is the founder of Samso.

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