The Mining Report: Chris,
on your travels, what are you seeing in Europe and Asia regarding supply and
demand in the commodity markets?
Chris Berry: Sentiment varies depending
on location. In Hong Kong the institutional community is generally optimistic
and really favored gold, nickel, and aluminum heading into 2015, with a more
bearish stance on coal and iron ore. While there are serious structural
headwinds facing the global economy including the threat of deflation and a
slowing China, the general consensus was that we're at the bottom of the
cycle.
In
Germany and Switzerland, the outlook is much more somber. In Germany, the
call for higher gold prices based on market manipulation was in full force as
it perpetually seems to be. The failure of gold to increase in price in the
wake of the end of quantitative easing in the U.S. and the almost immediate
continuation on the part of the Bank of Japan has many people scratching
their heads. Clearly, the lack of inflationary pressure has stunted gains in
gold or gold shares.
Switzerland
was an interesting place to be, as I was there two weeks before the
referendum voting on whether or not the Swiss National Bank would be required
to hold 20% of its reserves in gold. Most people I asked had no opinion or
didn't think the referendum would pass, but the fact that over 75% of voters
voted against it was a real surprise. That the Swiss would rather have their
national bank hold fiat currency in reserve rather than gold says a great
deal about how gold is viewed in the financial markets these days.
My
message to the institutional groups I spoke with was simple: If all you do is
turn on the TV and listen to commentators rail about the falling price of
gold and oil and you think that all commodities are faring the same, you're
going to miss out on a host of opportunities. Not all commodities are in
trouble. The outlook for lithium, cobalt or aluminum, for example, is
positive, and this is where I see a number of opportunities going forward.
TMR: What is the collective opinion on
the price of oil and what roles are Russia, OPEC and the U.S. playing in the
era of fracking?
CB: With the price of a barrel of oil
down close to 50% this year from its highs, I think everyone is in a
collective state of shock. Fracking in the U.S. has led to a glut of oil on global
markets. That and soft global aggregate demand are the primary forces
responsible for the collapse in the oil market. The implications are positive
or negative depending on which side of the investing coin you're on.
Consumers
in the U.S. will presumably benefit as low oil prices give them a giant tax
cut. What they choose to do with this—pay bills or spend on goods—is another
story. I filled up my car yesterday for just $38. I cannot remember the last
time I did that for less than $50.
Ultimately,
low oil prices could end up hurting the mining industry in the near term as
cheaper energy encourages increased production into many oversupplied
markets. This remains to be seen, however.
TMR: What is your prediction for the
price of oil going into 2015?
CB: It's not my area of expertise but it
seems that the price of oil will continue to fall and may not bottom until
mid-2015. In June 2014, West Texas Intermediate oil (WTI) was $108/barrel
($108/bbl). Today it's near $56/bbl. Wells that are currently producing oil
can continue to do so until they run dry, as the costs are largely sunk.
We're likely looking at another six months of oil prices in the current
range.
Longer
term, my sense is that the equilibrium price for WTI crude oil will be
$70–80/bbl. That level still hurts a number of OPEC members and Russia; they
need a higher oil price to balance their budgets. It would appear that OPEC
is backed into a corner and will continue to suffer regardless of the final
new equilibrium for oil prices.
In the
U.S., we're reading a lot about how the fracking industry is exposed to
high-yield debt. The Saudi Arabians know this and it's one of the main
reasons they won't allow OPEC to cut production to support the price of oil.
The goal is to push the marginal players in the U.S. shale industry out of
business.
TMR: With such low prices, are energy
investors doubling down and investing in companies while they're at their
historic lows or are they waiting to see what comes next?
CB: Almost universally, in both the institutional
and retail sectors, energy investors are waiting and are pursuing higher
returns elsewhere. This is a classic falling knife scenario where many
commodities have fallen hard consistently and nobody wants to be the first
person back in the market for fear of incurring additional losses. It seems
that this is a market where you find out if you're a true contrarian or not.
Instances
like this strengthen my belief that deflation, rather than inflation, is the
more pressing economic issue to tackle.
TMR: Let's talk about some of those other
commodities. You've written a lot about the impact of increasing battery
demand on commodities. What's your outlook for lithium?
CB: Lithium is one of my top picks going
forward. Despite the large amount of press lithium receives, it really is a
small industry. The combined market capitalization of all lithium mining
companies I'm tracking amounts to about US$18 billion (US$18B). When you
strip out the established lithium producers, that market cap number plummets to
about $550 million ($550M). For the sake of comparison, Apple, a major
lithium-ion battery customer, has a market cap of $653B, over 36 times larger
than the entire lithium industry.
Currently,
just about all metals are suffering from excess capacity that built up during
the first leg of the commodity super cycle between 2002 and 2011. Lithium is
no exception. That said, there are two primary reasons I'm optimistic about
lithium in the coming years.
First,
overall demand for lithium is growing at about 8% annually. I can't think of
another metal I'm tracking with that same growth trajectory. Compare that to
global GDP growth at about 3%. Even if lithium demand falls to 6%, it's still
growing at double global GDP. This provides some insulation.
Second,
lithium has multiple avenues of demand. "Current day" uses include
ceramics or pharmaceuticals. The next generation of use is the battery
business, which is growing at healthy double digit rates. Vehicle
electrification and energy storage are key drivers for lithium going forward.
Almost any major auto manufacturer is either producing or working on some
sort of a vehicle with an electric drive train, and with so much R&D
funding focused on building more powerful and cheaper lithium-ion batteries,
I'm confident that breakthroughs with energy density can occur, but will take
time to be commercialized.
I'm
paying particular attention to how companies like Panasonic, LG Chem, or
Sumitomo are positioning themselves in the industry.
TMR: Which lithium companies could be
ready to go by the time demand picks up?
CB: Lithium
Americas Corp. (LAC:TSX; LHMAF:OTCQX) is a unique story with an advantage
in its partnership with POSCO (PKX:NYSE), one of the largest steel producers
in the world. POSCO has partnered with Lithium Americas at its
Cauchari-Olaroz salar in Argentina to implement technology that POSCO has
patented. The technology allows for lithium from brines to be produced at a
much faster rate than is traditionally possible. Right now, it can take 18
months to produce lithium from brines and you have to contend with adverse
weather and chemistry-related issues. POSCO, albeit on a small scale, has
reportedly been able to reduce that production time to one month.
Second,
POSCO's process shrinks the environmental footprint of a brine operation and
increases the recovery rate. This should lower capital and operating
expenditures, making lithium from brines an increasingly attractive option.
This is exactly the type of transformative or disruptive technology I think
the mining industry needs to embrace to survive and thrive in the current
structural downturn. The lowest-cost producer always wins, and Lithium
Americas, with this partnership, has the opportunity to do just that.
The
pilot plant was just inaugurated last week and is positioned to produce
several hundred tonnes of lithium per year, so we should know more details
soon. 2015 will be a key year for Lithium Americas.
TMR: When will Lithium Americas be in
production?
CB: I think production is still a few
years down the road. While lithium demand is healthy, I don't expect it to
really ramp until 2017 at the earliest, so the companies that are positioning
themselves now should be able to ride the ensuing tailwind.
TMR: What other lithium projects should
we be following?
CB: Nemaska
Lithium Inc. (NMX:TSX.V; NMKEF:OTCQX) is a hard-rock project in Québec
I'm monitoring. The company is focusing on the lithium hydroxide market and
less on the lithium carbonate market due to favorable economics.
Additionally, with the majority of lithium hydroxide being produced in China,
the ability to offer a secure source of battery-grade material to the
automotive industry is a key advantage Nemaska is looking to obtain.
As with
Lithium Americas, 2015 is a pivotal year for Nemaska. The company is aiming
to construct a small-scale pilot plant with the capacity for 500 tonnes per
year (500 tpa) each of lithium carbonate and lithium hydroxide. The total
cost is estimated at $38M and the company is currently working on arranging
the financing. The goal is to prove to larger potential offtake partners that
its process works and can produce a lithium product that can be scaled into
existing supply chains.
At full
production (slated by 2017), the company hopes to produce 28,000 tpa of
lithium hydroxide and 3,250 tpa of lithium carbonate. This is an aggressive
goal, but I think this diversification of end products is a wise move and
offers the company optionality in its product mix. We know a great deal about
the potential economics of Nemaska's production plans and 2015 will be the
year that the company starts to solidify them.
TMR: You also need cobalt to make
batteries. What is its supply and demand picture?
CB: If there is a pain point where the
grandiose plans for North America-based lithium-ion battery supply chains
could come unraveled, it would be with cobalt procurement. Battery
chemistries can differ but cobalt is typically the most expensive raw
material or component in the batteries. It also originates from challenging
investment locales such as the Democratic Republic of Congo or Russia, with
much of the refining taking place in China. The cobalt price on the London
Metals Exchange is up about 8% in 2014, in stark contrast to just about all
other metals, indicating that demand is healthy. The overall demand picture
looks reasonably strong, with a 6–7% annual growth rate, primarily coming
from the battery and aerospace industries.
The
challenge with cobalt is the lack of near-term production stories in reliable
geopolitical jurisdictions. End users trying to find sustainable, secure
sources of cobalt have a real problem. I'm not sure what the answer is, but
it's a real potential flashpoint for the supply chains.
TMR: Are you watching any companies that
could eventually fulfill demand for cobalt?
CB: Typically, the cobalt business has
been dominated by larger companies such as Glencore International Plc
(GLEN:LSE) or Sumitomo Corp.
In the
junior space, Global
Cobalt Corp. (GCO:TSX.V) and Fortune Minerals
Ltd. (FT:TSX) stand out as long-term opportunities. Global Cobalt is
currently at work on producing an NI 43-101 resource on its newly acquired
Werner Lake cobalt project in Ontario. This is a past-producing asset with a
great deal of historical data already available. It's too early to speculate
on production possibilities, but the fact that the company is working to
derisk a North American supply of cobalt should be of interest to investors
focused on strategic metals.
Fortune
Minerals has recently begun operation of the Revenue silver mine in Colorado,
but is also pushing forward with development of its NICO project in the
Northwest Territories. This project includes, copper, gold, bismuth and
cobalt and the company's current focus includes establishing offtake partners
to help with project financing.
TMR: What about nickel and graphite?
CB: Nickel has been hogging the headlines
lately and rightfully so.
A lot
of the interest in nickel was due to the Indonesian government's actions
shutting off exports of raw nickel ore. The goal of the government is to
build its domestic supply chains and export higher-value products. I think
the real keys to watch regarding nickel in 2015 are the inventory levels on
the London Metals Exchange (LME), nickel production in the Philippines, and
also nickel stocks in China.
As for
graphite, it has a different story. Of the metals and minerals I cover,
graphite is among the most difficult to reliably forecast. The market is
incredibly fragmented and there are dozens of end products, making an overall
forecast challenging, to say the least. China's relative dominance in the
market is another factor adding a layer of opacity to the supply and demand
picture.
A main
difference between graphite and other metals and minerals is that graphite
has a substitute in synthetic graphite. This product is also already
integrated into global supply chains. Even though synthetic graphite is more
expensive to produce than natural graphite, end users know exactly how it
will fit into their supply chains.
Substituting
natural graphite for synthetic is a sizable risk. That said, with so many
potential uses for graphite being discovered in labs, the future for
graphite, both synthetic and natural, remains positive. I think the optimal
junior mining graphite opportunities going forward will be those that have
worked to establish their own supply chains, such as Focus Graphite
Inc. (FMS:TSX.V; FCSMF:OTCQX; FKC:FSE), or have established patented
production technologies, as Northern Graphite Corporation (NGC:TSX.V; NGPHF:OTCQX)
has. In an era of excess supply and muted demand, increased productivity is
crucial for sustainability.
TMR: What other commodities are playing
disruptive roles right now?
CB: It's less about the commodities and
more about which companies are employing unique technologies to reduce costs
and compete in oligopolistic markets with high barriers to entry. An example
is the titanium dioxide market, which is currently well-supplied. Titanium
dioxide is a $15B per year market and is mainly used in the paint business.
Recent production figures peg the size of the market at 5 million tons. It's
dominated by the Chinese and by companies like DuPont.
Argex Titanium
Inc. (RGX:TSX.V) is more of a chemical production story than a mining
story. Argex, through ownership of a patented technology, has the capability
to produce high-purity titanium dioxide from ilmenite waste. The company has
been producing product on a pilot scale since 2012 and has proven that its
costs are competitive with the major players in the industry.
Given
that the company wants to start small with 50,000 tpa of production, with its
low cost profile, I think it can survive and thrive. The key will be the
ability to deploy the production technology and scale it up as demand
warrants. Argex can produce a product that the market needs and at a cost
that is competitive with the lowest cost producers in the world.
TMR: How soon could Argex be in
production?
CB: This is dependent upon successful
financing and build out of its first production plant in Quebec. Management
needs to raise about $300M and this is its main focus. My guess is that Argex
could be in production by 2016–2017, subject to a successful financing.
TMR: Like Argex, rare earths (REEs) often
come down to the processing. You've talked about the long-term picture for
REEs outside of China. What companies are you watching there?
CB: I'm focused on four companies: Tasman Metals
Ltd. (TSM:TSX.V; TAS:NYSE.MKT; TASXF:OTCPK; T61:FSE), Commerce
Resources Corp. (CCE:TSX.V; D7H:FSE; CMRZF:OTCQX), Namibia Rare
Earths Inc. (NRE:TSX, NMREF:OTCQX) and Ucore Rare
Metals Inc. (UCU:TSX.V; UURAF:OTCQX).
TMR: Commerce just released its
metallurgy report for the Ashram deposit. Did that show you that it could
actually make an economic product?
CB: That was one of the takeaways, yes.
But when you talk about Commerce, you need to think about the optionality
inherent in its business model. Commerce really is both an REE play and a
tantalum/niobium play. Based on initial economics, individually, both are
valuable and highly strategic assets.
We also
know a lot about the mineralogy with a majority of the Ashram REE deposit
hosted in monazite. This is an underappreciated positive as commercial
quantities of REEs have been produced from monazite (as well as bastnasite
and xenotime) in the past.
Another
point concerns Commerce's ability to raise money in a really terrible market
for juniors—specifically REE plays. Commerce has raised close to $11M in
2014. While some may decry the dilution, these funds allow the company to
push forward with its plans while many other juniors are struggling to
survive.
TMR: Namibia released its PEA for the
Lofdal project. What do you think of it?
CB: It was a very positive step forward.
The major host mineral is xenotime, which I mentioned above has been proven
to lend itself to commercial REE production. The PEA gives us a baseline to
measure Lofdal relative to other projects. At $162M, the capex is extremely
manageable and, just as important, the value of the concentrate the company
aims to produce is heavily slanted toward the most critical REEs, including
dysprosium and terbium. Namibia Rare Earths is a good example of a critical
metals story that slowly continues to derisk itself and impress in the
process. When sentiment in the space turns, it will be well positioned.
TMR: Ucore just released its heavy rare
earth (HREE) concentrate. Did the market like that news?
CB: The market didn't really react and I
think it was a positive step for the company. The use of the Molecular
Recognition Technology (MRT) to produce a high purity HREE concentrate opens
up the possibility for the company to now focus on establishing end-user
relationships. These results really set Ucore apart from much of the pack in
the REE space.
Overall,
I consider REEs to be a 2019 story. By that I mean it will be 2019 before any
realistic supply chain is constructed outside of China, and China will likely
still play a significant role in the market. That said, it is the junior
space that will provide the foundation for future supply chains and that's
where I see the most opportunity going forward. I think you can use REE
prices as a signal for where the market is going. Prices have collapsed and
seem to still be under pressure. It appears that we've bottomed right now,
but I haven't seen a sustained upturn, even in the face of a magnet business
that's growing at 10% per year and requires a host of rare earths.
CB: Uranium is definitely hated. It's
still my top contrarian pick. It's indispensable in our global energy nexus.
Nuclear energy supplies about 20% of global electricity today, and will
arguably provide about 20% into the future as the overall size of the energy
"pie" grows. Nuclear infrastructure is in place and, of course,
growing in countries like China and a lot of R&D is underway to make
nuclear power safer and more effective.
It's
been encouraging to see the uranium price increase this year. It was up about
50% off its lows this year, although it has backed off some.
Again,
the key is finding the lowest-cost near-term producers. I am still tracking Uranerz
Energy Corp. (URZ:TSX; URZ:NYSE.MKT), as an example. The company recently
achieved commercial production from its in situ projects in Wyoming and is
one of the few companies that can operate in the current low uranium price
environment.
With a
great deal of uranium production not economic at current prices and the
long-awaited restart of Japanese reactors looming, finding low-cost
production stories is the most realistic way to play the uranium market.
Exploration isn't getting rewarded, so I would argue that the greatest
leverage can be had by finding near-term production stories. I don't think
you'll see new supply incentivized until uranium reaches $70 per pound.
TMR: Any final advice for taking
advantage of disruptive technologies looking forward?
CB: One of the more powerful lessons I've
learned in investing is that when you hear people say, "This time it's
different," remember that it's never different. Disruption and
innovation are certainly clichés, but given that we are dealing not only with
cyclical challenges but structural challenges as well, including excess
capacity, structural challenges can be mitigated through applying technology
that can lower costs in a mining operation. Structural challenges take much
longer to work through before we can begin a new commodity cycle.
Technologies,
relationships and intangibles like those I described above can help companies
achieve low production costs.
I think
energy metals are set to outperform during the next metals cycle as
technology and higher living standards converge to demand a sustainable path
of growth going forward.
TMR: Chris, thank you for your time and
your insights.