In a world where the economic outlook is uncertain, and opinions diverge at best, depending on who you ask, where it is hard to pinpoint whether economies are at inflationary or deflationary inflection points, stabilising or destabilising, and where a host of investors have all but written off the mining andexploration and production industries for not providing financial returns in a low-price environment, the overarching trend of divergent lifestyles around the world is providing fuel for a new generation of critical-thinking miners that have undergone a paradigm shift in approaching the business in a much cleverer, even holistic, way.
While North Americans experience some of the highest-quality lifestyles in the world, it is not the case in places such as China, Indonesia and elsewhere in the developing world, New York-based Chris Berry, House Mountain Partnersfounder and co-author of The Disruptive Discoveries Journal, recently told resource investors in Vancouver.
But, they are gaining, and they are gaining fast.
According to him, the burgeoning global middle class and the inevitable economic growth it brings cannot be supported without reliable access to cheap commodities and cheap energy, which is opening up a brave new world for shareholders trying to find high-yield investment opportunities, when bond yields globally are at historic lows or, in many cases, negative.
Show Me the Value
According to Berry, a critical question frustrating many investors is:“Where is the value in the commodities sector?”
“One simply can’t have a sector ‘rolling in the mud’ for the past three years, that has been so beaten up, that there’s not tremendous value somewhere within it,” he stresses.
And this is why Berry’s belief in energy metals proves to be a differentiator from the traditional “big-four” metals – copper, gold, silver and iron-ore – which have since 2010 seen a significant run-up of prices coming out of the Great Recession, which then plateaued and, in recent months, in the case of iron-oreand copper, collapsed.
However, when you look at these metals prices in the year 2000 or 2005, they are still high on a historic basis, despite muted growth prospects in the medium term.
He defines an energy metal as one that is used in the generation or storage ofenergy or electricity. Because attaining a higher quality of life is so critically dependent on cheap energy and cheap commodities, the rank of commodities such as lithium, cobalt, rare earths and scandium has risen significantly in recent years. It is the affordability of energy which serves as the bedrock of middle class growth.
Berry argues that if the World Bank is right in saying the word economy will grow by 3% in 2015 and perhaps at the same rate in 2016, an investor would want to find a commodity where the demand growth is expected to average well above global gross domestic product (GDP) growth.
In addition, he likes commodities that have multiple “avenues of demand”. This high growth rate and various end-uses provide insulation in case one end-use of a commodity slows – then there are other uses which can serve to potentially “pick up the slack”.
Consider lithium, where demand is forecast to grow at about 8% a year, and cobalt, which is expected to grow at 6% to 7%. Growth in the demand for the commodities is significantly outpacing global GDP growth, offering potential for above-average investor returns.
He says there often is a lot of misunderstanding when it comes to these lesser-known commodities, as these minerals often comprise small markets, and investors do not really know how the value chains work.
“There are a lot of opportunities in the emerging end-markets for these minerals, which are driving demand,” he says.
Again Berry uses lithium as an example, where demand for the commodity’s traditional uses, such as in pharmaceuticals or glass manufacturing, has been growing at about an equal pace to that of the global GDP.
But it is the emerging opportunities – tomorrow’s uses for lithium, such as in batteries – where the exciting drivers for new demand and opportunity are really being overlooked by investors, he argues.
Other critical factors, such as security of global supply, geopolitical tension and resource nationalism, also influence the demand-supply dynamics of commodities, especially the specialised niche minerals. For instance, when the world’s main source of graphite, China, announced last year that it would becleaning up its ‘dirty’ mining sector, it sent reverberations through the graphite market, as fears of supply constraints gave the rest of the industry a bump in confidence.
Another significant commodity market influencer is China, which is the economy responsible for the bulk of mineral production and consumption in the world. Berry says it remains to be seen how quickly the country changes its growth paradigm from infrastructure investment to a consumer-driven economy. This is an absolutely critical issue to consider.
More for Less
For companies across the mining sector, from large to small, the critical challenge right now is to manage the cost side of the balance sheet.
Berry contends that demand for energy metals will continue to outpace growth in most other metals going forward, owing to the enduring effort to achieve improved productivity – the idea of getting more of the same end-product for the same amount of work – because productivity raises the quality of life.
He notes that productivity is what drives wealth creation, and the productivity leaps of the past three centuries or so would not have happened, and would not continue to happen, without reliable access to cheap energy metals, though there are other factors to consider as well
Post the Great Recession and the tumultuous financial and commodity markets of the past five years, the mining sector as a whole has renewed urgency to focus its operations on sustainability and strive for the lowest possible cost of production.
Berry points to uranium, noting that in situ recovery (ISR) production is typically more cost effective than the traditional hard-rock plays. With low uranium prices expected to remain in place over the next few years, uranium producers and developers are going to face serious existential questions if they are not adapting to embrace new technologies and methods to cut costs.
Other trends see companies exploiting inefficiencies in the current production chains of commodities and other juniors bringing vertical integration to the table from the outset.
“This is a bit of a sea change in traditional thinking. Juniors should enhance their strategies and consider vertical integration. Merely putting drills in the ground and reporting on the results have minimal to no impact on the share price these days. So, studying those mining companies embracing technology is a wise move,” he says.
Cases in Point
Posco, the fourth-largest steel producer in the world and based in South Korea, has made significant efforts in developing new lithium- extraction technologiesin recent years.
Berry asks: “Why would a steel company that has about $66-billion in sales a year be pouring so much research and development time and money into lithium, which only accounts for about $1-billion in sales across the whole industry? Obviously, this has to do with the significant upside potential of theproduct,” he says.
Posco has been working on lithium brine extraction technologies and secured specific patents that could decrease the environmental footprint of a lithium brine operation, help achieve lower production costs, and increase recovery rates, all of which will help achieve lower capital expenditure and operation expenditures.
Despite the company still working with Argentina-focused partner Lithium Americas to try to perfect this technology, Berry notes that it is an example of a potentially disruptive technological discovery that could change the future landscape of the industry.
Another example is Quebec-based Argex Titanium, which has a patent on a process to produce high-purity titanium dioxide pigment from ilmenite tailings. The company can capture the entire value chain and can do so at a cost competitive with the lowest-cost producers in the world, which represents a competitive threat in the future.
“You are mistaken if you believe that all commodities are underperforming at the moment. You must find those opportunities on a long-term growth trajectory well above global GDP with varied avenues of demand. It’s less about drill programmes and discovery holes, and more about creating sustainableopportunities in the sense that it can improve productivity and lower overall costs,” Berry says.
FRENCH VERSION
