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We pinned our thesis on four main points: 1/ Commodities are cyclical, and
the timing is right to be invested; 2/ The US dollar is likely to fall or be
range-bound during 2019; 3/ A looser monetary policy by the Federal Reserve
would weigh on the dollar and be good for commodities; 4/ The need for
infrastructure spending is not going to let up. Despite the Chinese economy
weakening, Beijing will continue to demand iron ore and base metals for its
Belt and Road Initiative and other ambitious megaprojects. India and other
developing nations are also in the mix.
A key message in our article was the global shift towards the
electrification of the transportation system (cars, trucks, buses, trains)
involves moving from an oil-based economy to one grounded on electric
vehicles and sources of energy that emit fewer to no greenhouse gas
emissions.
The electrification trend calls for a slew of battery metals - lithium,
graphite, nickel and cobalt - along with tonnes of rare earths and copper.
The first three are crucial to this global transportation shift, because
they all go into electric vehicles. Lithium is used in the different
configurations of EV batteries (eg. NCA = nickel-cobalt-aluminum, NMC =
nickel-manganese-cobalt) where lithium is the dominant metal in the battery.
Copper has under-performed this year, but we see this as a blip in a
long-term trend that supports prices due to a pending supply shortage. Output
at some major mines (eg. Escondida, Las Bambas) is falling, as are
ore grades.
We continue to believe in gold because a/ it’s smart to have gold as a
portion of your portfolio (most managers say 10% minimum); b/ low global
growth has pushed many central banks to cut interest rates and stimulate
their economies with bond-buying, a very bullish signal for the gold price;
c/ appetite for gold has soared due to negative yields and slowing economic
growth; and d/ now is an excellent
time to own physical gold or gold stocks. Central
bank gold buyingis at a record high as some countries move
further towards de-dollarization.
Silver is also on our radar due mostly to the gold-silver
ratio falling, presaging an upside for the white metal.
It turns out our contrarian position on commodities was
forward-thinking and bang on. A half-year into 2019, we see major commodities
indices up significantly.
The S&P GSCI Commodity-Indexed Trust (NYSEArca:GSG) had one of its
best performing half-years, gaining 13% as of June 30. Crude oil was the
top-performing commodity in H1, followed by palladium, states
Safehaven.
After a couple of down months, seven of 10 Monthly Metal Indices (MMI)
increased for July, MetalMiner
reports. The only index to fall was steel, due to weak US steel prices,
with aluminum and construction MMIs trading flat.
This week we’re taking a run through the metals we’re bullish on, and
invested in. The company following each commodity write-up is an exclusive
AOTH stock pick. Click on the company’s name to find out more,
and scan my front page for in-depth articles on the commodity markets
we’re covering.
Palladium
MetalMiner also notes the spread between palladium and platinum
prices widened this past month. As of July 19, palladium closed at $1,505.50
an ounce versus $843.50/oz for platinum. Readers will notice that’s higher
than the gold price which is trading around $1,425/oz. In
January palladium raced past gold for the first time since 2002. Twice this
year it’s broken the $1,600 an ounce mark.
Palladium is surging because of supply challenges and tougher
emissions standards revving up demand for gas-powered vehicles, which use
palladium in their catalytic converters, and hybrid vehicles.
By comparison platinum use is falling because the precious metal is used
in the autocatalysts of on-the-way-out polluting diesel vehicles.
A recent
Reuters article reports that The auto industry has all but
stopped developing next-generation combustion engines as limited resources
are directed towards building electric and self-driving cars.
Concerns over air pollution led the EU to set a target of cutting
emissions by at least 40% by 2030, from 1990 levels. China, whose major
cities are often blanketed with thick air pollution, has also begun to
implement tougher vehicle emissions standards. The country is targeting a
reduction of between 26 and 28% of emissions from 2005 levels by 2030.
According to Norilsk Nickel, which controls 40% of the world’s palladium
production, palladium demand is intensifying. Bloomberg
says a market analyst at the Russian miner is forecasting that
combined palladium use in hybrids (HEVs) and plug-in hybrids (PHEVs) next
year will be nearly triple that of 2016. JP Morgan & Chase is equally
bullish on the precious metal. In a report,
the investment bank predicts by 2025, hybrids will represent over 25 million
vehicles, close to a quarter of all vehicle sales, compared to just 3% in
2016.
Not only has demand bounced up, palladium is also facing constricted
supply. 2018 was the seventh year in a row that palladium was in deficit
because of strong vehicle sales. The way things are going, 2019 will be the
eighth year.
According to a report from Sprott Asset Management, “Supply
shortages continue to support palladium’s performance, with strong multi-year
growth in palladium demand now straining a fixed supply.” Citigroup said in
December that production is expected to trail consumption by 545,000 ounces
this year.
Indeed, there is limited scope for producers to increase supply, in the
near term.
South African palladium is a by-product of platinum mining and palladium
from Russia is a by-product of nickel. Between them, the two countries
control 75% of the palladium market.
Safehaven notes that labor tensions are heating up in South Africa,
with the Association of Mineworkers and Construction Union (AMCU), calling
for a 48% rise in the minimum wage.
Platinum mining in South Africa is frequently interrupted by labour
unrest. The country’s platinum miners are under constant pressure to contain
costs, because their mines are some of the deepest and most labor-intensive
in the world. High temperatures are also a serious issue. Platinum is being
mined in reefs up to two kilometers deep, where virgin rock temperatures have
been measured at 70 degrees C.
In 2014 workers at the country’s three major producers - Lonmin, Anglo
American Platinum and Impala Platinum - downed tools for five months
demanding that wages be doubled. The strike was the longest and most
expensive in South African history, shutting down about 40% of the world’s
platinum production.
Palladium One Mining Inc (TSX.V:PDM)
Palladium
is integral to global transportation, energy shift
Re-capitalized,
re-named Palladium One focused on mining-friendly Finland
Palladium,
darling of the PGEs, shifting into high gear
Zinc
In 2017 zinc enjoyed a spectacular run from $1.19 a pound to $1.61 within
only six months (+35%). Prices got a nice uplift from mine closures and an
expected long-term structural supply deficit. The metal’s hot hand had many
juniors roaming around with boots on the ground trying to find the next zinc
deposit.
The zinc market was in deficit in 2018. According to the USGS, despite new
zinc mines opening in Australia and Cuba in 2017, and increased production at
the Antamina mine in Peru, supply failed to keep up with
consumption. Some very large zinc mines have been depleted and shut down in
recent years, with not enough new mine supply to take their place.
MMG’s shuttered Century mine for example used to supply 4% of the world’s
zinc. Between the shutdown of the Lisheen mine in Ireland, Century,
and Glencore’s Brunswick and Perseverance mines in Canada, over a million
tonnes was ripped from global zinc production.
The closed mines represent an estimated 10 to 15% of the zinc market. On
the flip side, there have been few discoveries or big zinc projects planned.
This is setting the zinc market up for a supply shortage.
The International Lead and Zinc Study Group predicts the zinc
market will again be in a deficit
position of 72,000 tonnes in 2019.
Tighter environmental restrictions in China are lessening the amount
smelters can produce.
Antaike, a Chinese metals research firm, estimates national production of
refined zinc in 2018 fell to just 4.53 million tonnes, the sharpest downturn
since 2013, Reuters
said.
The result has been a record amount of zinc imported into the world’s
largest metals consumer, 715,355 tonnes of refined zinc in 2018. The high
demand in China has also pulled a lot of zinc out of LME warehouses.
In February zinc inventories fell to the point where there was less than
two days worth of global consumption locked in London Metal Exchange
warehouses. The paucity of the metal used to prevent rusting caused prices to
spike to the highest they’ve been since last June.
Zinc prices were US$2,845 a tonne or $1.29 a pound, after data showed LME
warehouses held just over 58,000 tonnes. Levels have since increased to
80,000 tonnes but are a long way off the 250,000t stockpiled a year ago.
According to the International Lead and Zinc Study Group, there was a deficit
of 123,000 tonnes for the first five months of this year.
Boreal Metals Corp
(TSX.V:BMX)
Boreal
hits more high-grade at Gumsberg’s South Discovery, Sweden
$2
trillion infrastructure plan will require mega metals
China’s
environmental crackdown buoys lead, zinc
Nickel
Once mined almost exclusively for its use in stainless steel, the
industrial metal has enjoyed something of a rebirth since battery-makers
started using it in electric vehicles. According to Adamas
Intelligence, which tracks battery metals, EV manufacturers deployed 57%
more nickel in EV batteries this past May, versus May 2018. MINING.com
reports the inroads nickel have been making are due mainly to an
industry shift towards “NCM 811” batteries which require over 50 kg of
nickel. (NCM 111 batteries have one part each nickel, cobalt and manganese).
The switch to NCM 811 could outpace the amount of nickel used for EVs,
compared to stainless steel, adding up to 900,000 tonnes annually, by 2030,
one analyst said.
On the supply side, solid stainless steel production, a supply
deficit and record-low warehouse inventories are contributing to the bullish
case for nickel. Nickel stocks in LME warehouses have fallen to a 6.5-month
low, from 450,000 tonnes in 2016 to just 147,942
tonnes, MetalMiner reports.
Another recent supply factor concerns Indonesia, a major nickel producer.
The country this week re-instated a ban on ore exports, starting in 2022, to
encourage the building of domestic smelters.
Nickel demanded for EV batteries and stainless steel, plus tight
supply has resulted in a nickel price spike. Two weeks of technical and
speculative buying hiked the metal to $15,115 a tonne on Thursday, the
highest in over a year, and 20% better than two weeks ago. Year
to date, nickel has been the star of the industrial metals complex, surging
an impressive 37%.
Palladium One Mining Inc
(TSX.V:PDM)
Cobalt
According
to Roskill, standard-grade cobalt prices started the year at $26 a pound
but have fallen in the first quarter, to $14 per pound in March. That’s a
fair distance from the $40/lb prices reached in April of 2018.
However, Roskill observes that “some restocking is taking
place” which should push cobalt prices back up after reaching a bottom of
$14/lb in March. The metals consultancy expects prices to recover in 2019.
Roskill attributed the price slide to oversupply, especially of cobalt
hydroxide, clashing with sluggish demand. Many buyers have stayed on the
sidelines, preferring to buy on the spot market. A lot of cobalt that was not
committed to long-term contracts last year added to
the glut, Roskill explained. Still, DRC cobalt production expanded
by 44% in 2018 to 106,439 tonnes. The African nation produces between 60 and
75% of world supply.
Oilprice.com
writes that several years of rising cobalt prices “brought about a
rush to mine as much cobalt as possible and sell it to the Chinese,” noting
that China accounts for two-thirds of the world’s
lithium-ion megafactory capacity. The publication also argues that
artisanal mining in DRC was a factor in over-production.
But, a very recent article
by Bloomberg reports that the market expects to see a big drop in
artisanal cobalt output this year, due to prices falling. The hard-scrabble
miners who use rudimentary digging tools, are switching to copper
instead.
Another reason for the anticipated 70% decline in artisanal output, is
less miners, says Bloomberg, citing cobalt specialists at Darton Commodities
and Roskill:
The workforce at Kaumbu’s cooperative has halved this year
to around 500 and the group is only producing 2,000 tons of ore a month, 15%
of which is cobalt, compared with 4,000 tons of cobalt ore and 1,000 tons of
copper a year ago.
Artisanal production will retreat to levels seen in 2013 to 2016
before the boom, said Jack Bedder, a cobalt expert and director at
Roskill Information Services.
The Mutoshi Cobalt artisanal project has shed about 2,800 of
its 4,100 authorized diggers this year.
As lack of artisanal supply is absorbed by the market resulting in higher
prices, though, driven by explosive demand for cobalt used in EV batteries,
more workers should return.
“Artisanal mining will continue to be the swing producer,” Bloomberg
quotes George Heppel, senior analyst at CRU Group.
Boreal Metals Corp
(TSX.V:BMX)
Universal Copper Ltd
(TSX.V:UNV)
Copper
There is no getting around the fact that the copper market is experiencing
some weakness. However, we see the current price slippage as a blip in what
the evidence points to as a growing and powerful bull market for copper.
As we wrote in The
coming copper crunch, copper mine production is expected to increase for
the next year or so, then drop off significantly. By 2035, without major new
mines up and running to replace the ore that is being depleted from existing
copper mines, we are looking at a 15-million-tonne supply deficit by 2035.
Four to six million tonnes of added capacity are needed by 2025. Lower ore
grades are also part of the waning supply picture. Copper
grades have declined about 25% in Chile in the last decade -
highlighting the urgent need for grassroots exploration to arrest the trend.
One country that may be able to help fill the supply gap is Colombia.
Better known for coal and gold than copper, Colombia is reportedly
hoping to diversify into the essential base metal. The country only has
one producing copper mine, in the Choco department of northwest Colombia.
Choco is also the region the Andean Copper Belt runs through. The belt hugs
the South American coastline all the way from Chile in the south to Central
America in the north, and hosts some of the largest copper porphyry deposits
in the world.
For now though, copper output is falling. Exports from
Chile's Escondida, the world’s second largest copper mine, are expected
to drop
this year by 85% due to operations moving from open-pit to underground.
That’s a dramatic fall from 1.8 million tonnes in 2018 to just 200,000 in
2019. The mine is expected to take until 2022 to re-gain full production, I
find it hard to believe they will produce the same tonnage from underground
as open pit.
A processing problem at BHP’s Olympic Dam copper, gold and uranium mine
ate into the company’s second-half production numbers. Problems in Zambia,
Africa’s second-largest copper producer, are putting a big question mark
beside the country’s output. First Quantum Minerals has reacted to a planned
tax hike on operators by laying
off 2,500 workers. Barrick is reportedly considering
selling its Lumwana copper mine.
Another example of copper output declining is an expected delay at
Mongolia’s Oyu Tolgoi mine going underground. Difficult ground
conditions are cited as the reason the expansion could be delayed up to 30
months.
Globally, MINING.com reported a 2.4% production fall in February, with
Chile and Peru hit the hardest, at a respective 7.1% and 5.1% reduction, year
on year.
According to the International
Copper Study Group, world copper mine production shrunk from 1.797
million tonnes in November 2018, to 1.515Mt in February 2019, an 18.6%
decrease.
Meanwhile the anticipation of lower interest rates, causing the dollar to
fall with them, is currently helping the copper price. The red metal hit a
two-month high on Friday, with LME copper finishing up 1.4% at $6,065 per
tonne, the best performance since May 10.
Three of the world’s largest investment banks, Morgan Stanley, Citi and
Goldman Sachs, have all placed bullish bets on copper this year; Morgan
Stanley expects the price to rocket 14% as supply tightens. Citi is
predicting a demand surge from China in the second half, as construction
completions requiring copper catch up with housing starts.
Aben Resources Ltd
(TSX.V:ABN)
Sun Metals Corp
(TSX.V:SUNM)
Universal Copper Ltd
(TSX.V:UNV)
UNV
acquires highly prospective copper block
Universal
Copper batting for a double in Colombia
Running
on empty
Boreal Metals Corp
(TSX.V:BMX)
Max Resource Corp
(TSX.V:MXR)
Max
pursuing new high-grade gold target and hunting for copper-gold porphyry
Max
in the chips at North Choco with high-grade gold/copper
Lithium
Arguably, lithium is the most important metal for electrification. As the
main ingredient in lithium-ion batteries that drive EVs, a steady supply of
lithium for battery-makers and auto manufacturers is going to be crucial.
Automobile manufacturers are increasingly investing in EV models. Just
about all car makers are incorporating EVs into their production mix, and
they are calling for public charging infrastructure to accommodate them.
Volvo has banned the internal combustion engine, stating that this year,
all new models will be electrics or hybrids. Nissan, JLR, Daimler,
BMW, Geely and BYD have made public commitments to EVs.
In North America a very small percentage of the auto market is electric,
but elsewhere governments have made deeper commitments. Norway, the
Netherlands, France, Germany, UK, China and India have all indicated they
will ban cars running on fossil fuels.
Bloomberg says EV sales are expected to increase from 1.1% of the total
auto market in 2017, by a factor of 10 by 2025, 27X by 2030 and 50X by 2040.
JP Morgan is forecasting electric cars to be 35% of the global market by 2025
and 48% by 2030.
All these EVs will need lithium-ion batteries containing lithium,
graphite, nickel and cobalt, plus other mined metals that go into EVs, like copper.
Will there be enough? According to Adamas
Intelligence, in February 2019, 75% more lithium carbonate was
deployed for batteries in electric and hybrid passenger vehicles compared to
February, 2018.
We know that the lithium market, long term, is likely to be in deficit as
troubles ramping up production meet a mounting wall of demand.
For more on this read Call
for lithium tsunami cancelled
We also know that China produces roughly two-thirds of the world’s
lithium-ion batteries and controls most of its processing facilities. This
gives China tremendous clout should it decide to deprive the United States of
lithium batteries or raw materials, just as the US is planning a mine-to-EV
battery supply chain.
But North America has a problem. There is only one producing lithium mine,
Silver Peak, run by Albemarle, the world’s largest lithium producer. The
grades at Silver Peak are rumored to be declining. There are a number of
companies exploring for the element in and around Nevada’s Clayton Valley
(including AOTH’s lithium junior pick, Cypress Development Corp. (TSX-V:CYP))
but none has yet advanced to the mine permitting stage. The US is about 70%
dependent on foreign suppliers for its lithium. Lithium products from
Albemarle’s Silver Peak lithium brine operation in Nevada are sent to its
processing plant in North Carolina. This material is then loaded on ships and
sent to Asian battery manufacturers, which sell the batteries to automakers.
There is currently no “mine to battery” supply chain in North America, but
steps are being taken to address our lithium dependence. The big question is,
where are all the North American auto plants, once they get re-tooled for
EVs, going to get their batteries from?
IHT Markit thinks electric vehicle sales in the US will smash 1.28 million
units by 2026, a whopping 540% increase from the 200,000 sold in 2017, or a
CAGR of 30.4%.
Major investments in the hundreds of millions and billions by some of the
world’s largest EV automakers and battery-cos give us a good look at what
could be a future electric vehicle ecosystem, where batteries are made in the
United States possibly even from metals mined in America - like lithium,
nickel, cobalt and graphite - then sold to EV makers in the US - likely the
southeastern US anchored by SK Innovation’s huge battery plant being built in
Georgia.
The announcement a few weeks ago by Schlumberger, the world’s largest
oilfield services firm, that the USD$50.5-billion market cap company has
invested $2 million for Pure Energy’s (C:PE) lithium brine project in the
Clayton Valley, appears to support this thesis.
But the immediate growth is definitely centered around
Tesla.
Tesla’s massive lithium battery plant, Gigafactory 1, in Sparks Nevada,
was built to supply Model 3 electric motors and battery packs along with
Tesla’s energy storage products. Panasonic makes Tesla’s EV batteries; the
individual cells are assembled into battery packs for the cars at the Sparks
plant.
Elon Musk, Tesla’s CEO, recently talked about plans to ramp up car
production and to start mass-producing electric pick-ups and electric Class 8
semi trucks by the end of 2020. Musk added these plans are dependent on Tesla
being able to manufacture a lot more lithium-ion battery cells. In
fact the luxury car-maker may even try
to go it alone without Panasonic.
Tesla skeptics may scoff, but the company apparently is zipping around its
competition including the 400-odd electric vehicle manufacturers in China.
A report
from Toronto-based Adamas Intelligence states that Tesla’s vehicles
accounted for 22% of global EV capacity in May, against 18% in May, 2018. The
next-best EV maker was China’s BYD, backed by Warren Buffett, at 4%
capacity.
Tesla’s head of minerals procurement has said the company expects global
shortages of lithium, copper and nickel in the near future.
Once Tesla increases production to a “very high level it will look further
down the supply chain and get
into the mining business” said Musk.
Cypress
Development Corp (TSX.V:CYP)
CYP
partners with Lilac Solutions to get 83% recoveries from
Nevada claystones
Gold
A few weeks ago we wrote that this is The
season for gold. At the time, our reasons for being bullish on the
“barbarous relic” were mostly to do with negative economic news coming out of
the United States, including a bond yield curve inversion, signaling a
recession is on its way.
Now it seems every day the gold price breaks a new record - the latest
being on Friday, when gold breached a six-year high of $1,452.60/oz. Gold’s
current movement is not so much related to economic malaise, but rather, is
being judged against bond yields and what the Federal Reserve is going to do
next.
The metal used mostly for jewelry and investments is up a rollicking 11%,
year to date.
Until June the Fed’s party line was to keep increasing interest rates as
long as the economy was hitting the right employment and inflation targets.
When prices increased slower than expected, the Fed took a pause. At its last
meeting, Fed Chair Jerome Powell strongly hinted that a rate cut - the first
in a decade - was coming, which lit a fire under the gold price. Gold
investors love low interest rates because that could weaken the dollar,
thereby pushing up commodity prices and making dollar-priced investments like
gold attractive. The idea of monetary easing causing inflation also appeals
to gold investors, since the precious metal is known to hold its value over
time versus depreciating fiat (paper) currencies.
The gold price is also being lifted by very low and in some countries,
negative interest rates on sovereign debt. If investors have
to effectively pay for lending money to borrowers, gold is seen as a
better investment. Finally, the price is moving up in response to
geopolitical tensions – among them, reports of an Iranian drone being shot
down by an American warship.
As for what happens next, all eyes are on the next Fed meeting July
31.
NV Gold Corp
(TSX.V:NVX)
NV
Gold identifies large, structural target for August drilling
NV
Gold swinging for the fences in Nevada
NV
Gold chasing high-grade Au in Nevada
Max Resource Corp
(TSX.V:MXR)
Max
pursuing new high-grade gold target and hunting for copper-gold porphyry
Max
in the chips at North Choco with high-grade gold/copper
Boreal Metals Corp
(TSX.V:BMX)
Sun Metals Corp
(TSX.V:SUNM)
Aben Resources Ltd
(TSX.V:ABN)
Aben done
drilling at Justin, moves on to Forrest Kerr
Aben drills
targeting hi grade gold in Golden Triangle and Yukon
Guyana Goldstrike (TSX.V:GYA)
Guyana
Goldstrike discovers mineralized outcrops along 1,100m trend
Guyana
Goldstrike aims to add ounces at gold-bearing iron formation
Silver
Last week, ruminating about tools we might use to predict what direction
gold is going, we decided to take a look at gold ratios, including
the gold-silver ratio.
The gold-silver ratio is the amount of silver one can buy with an ounce of
gold. Simply divide the current gold price by the price of silver, to find
the ratio.
On
June 12, the gold-silver ratio hit a 26-year high by breaking
through the 90-ounce mark - meaning it took 93 ounces of silver to purchase
one ounce of gold. The higher the number, the more undervalued is silver or,
to put it another way, the farther gold is pulling away from silver, valued
in dollars per ounce.
Given then that silver was so undervalued, one might speculate that now
would be a good time to buy under-valued silver. Well low and behold, that is
exactly what’s happened.
The chart below shows a major outbreak for “the devil’s metal”
(characterized for its volatility). In the last two weeks, silver has shot up
from $14.92/oz on July 5, to a close of $16.12 on Friday - a gain of
8%!
Bullion
Vault remarked that at $16.10, the gold-silver ratio was down about
five points to 88, the lowest in two months. The average ratio over the past
20 years is around 65.
While gold was retreating from Thursday’s six-year high, silver was taking
off. On Friday the precious metal hit a 13-month high of $16.62, prompting a
colorful commentary from Ross Norman of Sharps Pixley, London’s largest
bullion broker:
Rather like the vapours emanating from the Temple of Apollo at the
oracle in ancient Delphi, silver’s price action now portends well for gold.
The gold/silver ratio has fallen from 95 to 87 and if you like gold
you should positively love silver as there is scope for a further correction.
NV Gold Corp (TSX.V:NVX)
Boreal Metals Corp (TSX.V:BMX)
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This document is not and should not be construed as an offer to sell or
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Richard Mills has based this document on information obtained from sources he
believes to be reliable but which has not been independently
verified. Richard Mills makes no guarantee, representation or warranty and
accepts no responsibility or liability as
to its accuracy or completeness. Expressions of opinion are those of
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assumes no warranty, liability or guarantee for the current relevance,
correctness or completeness of any information provided within this Report
and will not be held liable for the consequence of reliance upon any opinion
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