An irrefutable truth right now is the global shift towards the electrification of the transportation system (cars, trucks, buses, trains) as governments and businesses realize that saving the planet from certain environmental destruction 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.
At Ahead of the Herd we’re invested in commodities that ride this electrification trend. Consistent with the shift away from fossil fuels, the metals we’re most bullish on, are: copper, lithium, rare earths, zinc, palladium and gold.
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.
Rare earths dysprosium, neodymium and praseodymium go into permanent magnets used to power EVs. Copper is a major component in electric vehicles, found in electric motors, batteries, inverters and wiring. It’s estimated an EV requires four times more copper than a a regular gas-powered car. Then there’s all the usual uses of copper in construction (wiring, plumbing), telecommunications and transportation (eg. miles of copper wiring in airplanes). Demand for copper in these applications is not going away.
Palladium and zinc are both expected to be in a supply deficit for the foreseeable future. Palladium is beset by problems - strikes, job cuts, mine shaft closures, higher costs, infrastructure constraints - at number one producer South Africa. Zinc inventories at London Metal Exchange warehouses have plumbed record lows this year. Everyone is scrambling for the metal used to rust-proof iron ore and steel; multi-year zinc demand is hitting a wall of fixed supply due to zinc mine closures over the past few years. In 2017 China’s refined zinc production was at its lowest in two years due to problems acquiring zinc concentrate.
Demand for the metallic element has surged since 2016 with the movement away from more polluting diesel-fueled vehicles. The price has more than doubled over the last three years (+124%) and ran up 18% in 2018. That compares to declines in spot gold, platinum and silver last year.
Lastly, we continue to believe in gold because a/ it’s smart to have gold as a portion of your portfolio (most managers say 10% at minimum) and b/ now is an excellent time to own physical gold or gold stocks.
Let’s take a harder look at the six metals that are keeping the bulls running in 2019:
Copper
Base metals copper, zinc and lead are coming under price pressure due to the escalated trade war between China and the United States. MINING.com quoted Capital Economics, a research firm, warning that higher Chinese tariffs on US imports of electronics and home appliances could hurt base metals.
Prices will rise and fall, but it’s long-term supply and demand that copper miners and explorers look to, as far as planning expansions and development properties. Here the market is extremely bullish on 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.
Copper grades have declined about 25% in number one producer Chile in the last decade - highlighting the urgent need for grassroots exploration to arrest the trend.
Over in Chile, which produces 10% of the world’s copper, state miner Codelco said recently that it produced less copper in 2018 versus 2017, owing to declining ore grades at its aging mines. We’re talking a 3.3% drop, from 1.8 million tonnes to 1.6 million tonnes, resulting in $0.8 billion less profit, before taxes. CEO Nelson Pizarro is predicting copper prices to rise to $2.95 a pound for 2019.
Some of the world’s largest copper mines are slashing production, thus feeding into the supply deficit thesis that is predicted to push the copper price back up over three dollars a pound.
This year, output is expected to be curbed by a strike at Peru’s Las Bambas mine and disruptions at other mines in Chile, Spain and the DRC, according to Capital Economics, a macroeconomics research firm.
First Quantum Minerals has reacted to a planned tax hike on operators by laying off 2,500 workers in Zambia. Barrick is reportedly looking to sell its Lumwana copper mine in the second half, targeting Chinese buyers. The new tax increases the royalty spread of 4% to 6% by 1.5 percentage points, and levies a 10% tax when the copper price exceeds $7,500 per tonne. According to Bloomberg, the new tax regime could make over half of Zambian copper mines unprofitable.
Then there’s the long-running trend of population growth.
We already have one billion people out of today’s current population slated to become consumers by 2025. Another 2.8 billion people will be added to the world between now and 2050. Most will not be North Americans but they are going to want a lot of things that we in the Western developed world take for granted – electricity, plumbing, appliances, A/C, etc.
In order to improve the supply-demand imbalance and delay, or maybe even avoid, the coming copper crunch, there needs to be a lot of new copper exploration done. All the low hanging copper fruit has been picked - either mined, refined or recycled - so where are new economic copper deposits to be found? According to conference organizer CRU, the supply gap requires that every copper mining project with a feasibility study is developed, and over 90% of new projects “see the light of day”, Investorintel reports.
Of course, that isn’t going to happen. Mining is a complicated business, so a high percentage of projects will fail due to any number of reasons - low grades, distance from infrastructure, lack of funding, poor management, etc.
A continuing dearth of copper will not only keep prices dear, it will also have an effect on the hundreds of billions of dollars countries need to spend on infrastructure containing copper, steel, cement, iron ore, steel, zinc, aluminum, etc.
Copper is used for electrical applications because it is an excellent conductor of electricity. The base metal is essential for infrastructure build-outs. The construction industry would not exist without copper - it is used in both wiring and plumbing.
Consider how much metal will be required to upgrade US freight and passenger rail? We can only estimate but imagine the amount of copper it takes to build a high-speed train network: 10 tonnes per kilometer of track. Powerful electric locomotives contain over eight tonnes of copper, according to the Copper Alliance.
Public transit is lacking in the US compared to Canada and Europe. New subway and light-rail systems are badly needed to get motorists out of their cars. Buses will also be in high demand.
Likely, the buses of the future will be electric. EVs contain about four times as much copper as regular vehicles. A hybrid electric bus has 196 pounds, and 814 pounds of copper go into a hybrid-electric bus, mostly the battery. The Copper Alliance states that the largest EV maker, China’s BYD, used an estimated 26 million pounds of copper in 2016.
For more on this read our $2 trillion infrastructure plan will require mega metals
Zinc
Zinc is the fourth-used metal today, behind only iron ore, copper and aluminum in terms of annual tonnage produced. Zinc’s main function is to galvanize metals.
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.
History may be repeating itself. Earlier this year zinc inventories fell to the point where there were less than two days worth of global consumption locked in London Metal Exchange (LME) warehouses. The paucity of the metal used to prevent rusting caused prices to spike to the highest they’ve been since last June.
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. 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.
Wood Mackenzie states that zinc mine closures, attrition and demand growth will require 2.2 million tonnes of new mine capacity a year.
BMI Research noted in June 2018 that refiners, particularly in China, will have a hard time securing zinc concentrate, due to zinc mine production curtailments in 2015-16. Tightened environmental standards to deal with choking air pollution meant that Zijin Mining, the country’s largest gold miner, cut 8.2% of its zinc production in 2017.
Chinese smelters rely heavily on imported zinc ore. In 2017 China’s refined zinc production was at its lowest in two years due to problems acquiring zinc concentrate.
For more read our Zinc cupboard nearly bare as price soars and China’s environmental crackdown buoys lead, zinc
Demand-wise, every steel product including buildings and cars, is galvanized with a zinc coating, making it a highly-prized metal.
Zinc is also used heavily in infrastructure build-outs. This includes desperately needed bridges, public buildings, power stations, dams etc. in the US, much of the developing world, and China’s Belt and Road Initiative which along with needing billions of tonnes of copper, is going to require a lot of steel containing zinc.
Palladium
Palladium is an ingredient in catalytic converters for gasoline-powered cars, vans and trucks; platinum is in the catalytic converters of diesel vehicles. Autocatalyst demand accounts for three-quarters of palladium demand.
Demand for platinum has surged since 2016 with the movement away from more polluting diesel-fueled vehicles. The price has more than doubled over the last three years (+124%) and ran up 18% in 2018. That compares to declines in spot gold, platinum and silver last year.
As drivers shift from diesel to gas-powered cars or hybrids, the market for palladium used in gasoline engines has buoyed the price. In 2017 palladium raced past $1,700 an ounce for the first time since 2001.
Despite automobile demand slumping in China last year, palladium finished 2018 at $1,262 an ounce - almost catching gold’s year-end close of $1,282/oz.
Not only has demand bounced up, palladium is also facing constricted supply.
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.” Indeed there is limited scope for producers to increase supply, in the near term.
On March 19, 2019, palladium prices ran up past $1,600 an ounce, the market’s reaction to news that top producer Russia is considering banning the export of precious metals scrap, refining it domestically instead. That was on top of an announcement that Fiat Chrysler has been ordered to recall almost a million vehicles over failed emissions testing.
Metals Focus, a London-based consultancy, is forecasting palladium to outperform platinum, palladium’s sister metal, in 2019. For platinum, Metals Focus thinks there will be a surplus of 630,000 ozs this year, whereas palladium will see a 574,000-ozs deficit.
Among the factors in favor of palladium are a 3.6% forecasted rise in autocatalyst demand, driven by tighter emissions standards, and increased marketshare for gasoline vehicles in Europe.
According to Metals Focus, despite short-term headwinds for palladium such as slumping car sales in China and the US, palladium prices are expected to hit 1,490/oz this year, a 45% increase year over year.
For more on palladium read our Palladium, darling of the PGEs, shifting into high gear
Lithium
In North America, electric vehicles are still a niche market, with most EVs priced higher than gasoline cars, and limited charging infrastructure failing to provide an incentive for consumers to switch. Globally it’s a different story.
The International Energy Agency is predicting 24% growth in EVs every year until 2030. The global fleet is expected to triple by 2020, from 3.7 million in 2017 to 13 million in 2020, according to the IEA.
Bloomberg states that there will be a 54-fold increase in EVs between 2017 and 2040, when global light-duty EV sales are expected to hit 60 million; there are currently about 4 million EVs in the world.
A Reuters analysis shows that automakers are planning on spending a combined $300 billion on electrification in the next decade.
Meanwhile more battery factories are being built, driven by the demand for lithium-ion batteries which is forecast to grow at a CAGR of over 13% by 2023.
There are 68 lithium-ion battery mega-factories already in the planning or construction stage.
All these EVs will need lithium-ion batteries with their metallic components - lithium, cobalt, nickel - not to mention copper and rare earths for other parts of the vehicles (the rare earths neodymium and praseodymium are used in permanent magnets that go into EV motors).
EVs are the biggest growth driver of lithium-ion batteries, but there are others.
Lithium-ion batteries find their most common applications in small electric devices and power tools. They can also be employed in large-scale energy storage. As renewable energies come down in price and become a larger percentage of countries’ total energy mixes, the need to store energy for later feeding into the grid will become more and more important.
Some lithium market observers believe that the market will be overwhelmed by new supply coming on stream to meet the huge amount of lithium required by EVs.
But according to Benchmark Intelligence, the predicted supply expansions in 2018 - including from South American brine operations, new spodumene mines and Chinese lithium production - were slower than expected:
“The ‘tsunami’ of new supply forecast by some has turned out to be little more than a changing in the lithium tides.”
In a January 2019 report, Benchmark reminds us that Chilean state lithium miner SQM encountered a technical obstacle at its conversion facilities, which delayed a targeted capacity increase to 70,000 tonnes per annum.
An even bigger disappointment, in terms of higher output, was Chinese production from the Qinghai region. High magnesium concentrations are a problem and “only an additional 5,000-10,000 tonnes of material found its way to market, much of which only reached technical grade specifications. This meant a large proportion was either reprocessed (adding cost) or converted to hydroxide to meet the growing demand for nickel rich cathode technologies,” states the report.
Regarding hard-rock spodumene mines, while the four new Australian mines are on track to produce over 20,000 tonnes of lithium carbonate equivalent (LCE) by the end of this year, by Benchmark’s calculations, less than half of that amount made its way to the market in 2018.
Another important factor here is offtake agreements. As we pointed out in a recent article, all present and future production from Australian lithium mines has been spoken for, which reduces the amount of spodumene on the spot market – putting upward pressure on prices.
An example is the Mt. Marion mine. The mine’s 52,000-tonne increase last year was absorbed by Ganfeng Lithium’s new lithium hydroxide facility.
Benchmark notes that the “rapid development” of four new spodumene operations in the space of 12 months has come at a price: “dependence on offtake agreements and partnerships which will tie in the majority of their production for the foreseeable future.”
“Entering 2019, 100% of spodumene capacity is either tied to offtake or fully integrated in the case of Greenbushes.”
According to Benchmark, with all of the spodumene supply locked up (Nemaska’s new lithium mine in Quebec has offtakes in place too), “there is likely to be less than an additional 80kt LCE equivalent enter the supply chain in 2019.”
What is clear is that there is a still a long way to go to reach the 1 million tonnes per annum lithium threshold the industry is expected to exceed by 2026. The current lithium market sits at about 280,000 tpa.
On Feb. 20 North American Lithium stopped production at its La Corne hard-rock lithium mining operation in Quebec, due to low Chinese spodumene prices. The mine which produced 140,000 tonnes last year is expected to remain idle until the summer. That’s about 50,000 tonnes that won’t add to the supply glut.
On the brine side, heavy rains in Chile and Argentina have dented production for both Orocobre and Albemarle. A recent deluge at the Australian company’s Salar de Oroz facility in Argentina means that it won’t be able to lift production as previously anticipated, with output not expected to exceed last year’s 12,470t.
Albemarle has said that a dilution in the pond system from heavy precipitation will cost the company about 3,000t of production.
We already know that Salar de Oroz in Argentina will only produce about 12,500t this year - just over a quarter the output of Albemarle’s La Negra mine in the Salar de Atacama. North American Lithium’s mine is out until summer. Commissioning of the Mt. Holland lithium mine in Australia is halted while they sort out issues with endangered species. Nemaska Lithium’s Whabouchi lithium mine and Shawinigan electrochemical plant in Quebec isn’t doing anything until Nemaska comes up with a way to fund a $375 million shortfall.
Meanwhile the demand for lithium batteries keeps marching along.
It appears the rubber is finally hitting the road, as far as the realization that without a very large increase in lithium production, there is no way that the current level of lithium production can satisfy future demand from lithium-ion electric car batteries.
Even luxury EV maker Tesla admitted as much. The manufacturer with a Gigafactory in Nevada expects global shortages of nickel copper and other EV battery materials due to underinvestment in the mining sector, Reuters reported the company’s global supply manager for battery metals telling an industry conference.
The executive’s viewpoint matches a German study that came out in March saying that cobalt and lithium both face shortages; researchers warned that production of lithium would have to be boosted 10 times in order to meet future demand.
Rare earths
The United States was once the largest producer of permanent magnets, used in dozens of industrial applications including electric vehicle motors and for wind turbines. Permanent magnets are built from the rare earths neodymium, praseodymium and dysprosium.
That was until the mid-1990s, when the US ceded control to China, which now has a monopoly, either mining or processing over 90% of the 17 elements on the Periodic Table, used in everything from smart phones to weaponry.
Without a domestic supply, the US must rely on Chinese rare earths and technology to build “made in America” military and space equipment. (For the fascinating story on how this happened, read Magnequench Has Left the Building and How the US Lost the Plot on Rare Earths)
For example, permanent magnets made from Chinese rare earths are used in the Joint Strike Fighter, the Pentagon’s answer to a one-size-fits-all warplane. Rare earth metals, alloys and magnets needed by US defense contractors come either directly or indirectly from mostly China.
The US doesn’t want to do that, but China has pretty much cornered the market on rare earths. Sure, there are a handful of other countries that mine and produce them, but the process is so difficult, costly and harmful to the environment, if done wrongly, that few attempt it.
The only US rare earths mine, Mountain Pass in California, was sold a few years ago to a US-led consortium. The rare earth concentrate is shipped to China for processing by the Chinese company in the group.
The other significant non-Chinese producer, Australia’s Lynas has been locked in a dispute with Malaysia on waste disposal after it was told to remove years of accumulated waste at the facility in order to have its licence renewed. Wesfarmers, last month, approached Lynas with a A$1.5 billion ($1.08 billion) takeover offer.
For years, China has been the world’s largest rare earths exporter, shipping over 53,000 tonnes in 2018, 4% more than 2017.
It’s all part of China’s plan to produce more rare earths for internal consumption than for export, which is in line with the country’s ambitions in the global clean energy trade. China is already the world’s largest solar power producer and sells the most electric vehicles. By 2020, the Chinese government wants its battery makers to double their capacity (BYD is the largest electric vehicle battery company in the world) and start investing in production facilities overseas.
What can the United States do about the near Chinese monopoly on rare earths, which it has used to control prices and bankrupt the only US producer?
In 2016 ThREE Consulting, the Thorium Energy Alliance and retired brigadier general John Adams suggested new legislation that would create two private entities: one to upgrade rare earth ore into metals, alloys and magnets; and another to store thorium. This would ensure a reliable rare earths supply for defense contractors and non-Chinese technology companies. As far a we know, however, nothing has been done.
Other possible solutions are to:
- Spur innovation in minerals production by removing regulatory hurdles.
- Accelerate the mine permitting process which in the US is seven to 10 years.
- Dedicate more of the Defense budget to rare earths mining and refining.
- Create a centralized, cooperative rare earth refinery. This would ensure production of heavy rare earths (Mountain Pass currently only produces light rare earths) and the potential for thorium-based nuclear energy.
- Continue to fight against unfair trade practices.
The other critical piece of the puzzle is to explore for rare earths in North America, thus creating a “mine to magnet” supply chain. While the United States has some rare earths deposits outside of Molycorp, in Alaska and Wyoming for example, none is anywhere close to production. This open the door to rare earths explorers who can help to create a “mine to magnet” industry right here in North American, thus bypassing the Chinese monopoly.
Gold
At Ahead of the Herd we love gold (and promising junior gold companies) because gold holds its value through time. Owning gold is a way to preserve wealth against paper currencies which are subject to inflationary pressures and over time, lose their value.
We also like gold because gold companies are finding less of it. All the easiest gold to mine has been found, including gold found near surface and in underground veins. We are now facing “peak gold” where gold production from here-on will keep falling. The experts agree the industry is seeing a significant slowdown in the number of large deposits being discovered. It used to be that major gold miners were looking at 5-million ounce projects to buy and develop; now they’d be happy with a million ozs in the ground.
This week in South Africa, AngloGold Ashanti announced plans to sell its last remaining gold mine in the country, the Mponeng mine southwest of Johannesburg. Bloomberg reports that, despite extremely rich 10 grams per tonne ore, “the challenges of making money at Mponeng are immense,” referring to the depth (it’s the world’s deepest mine) and high-temperature working conditions. Whereas AngloGold Ashanti made about a billion dollars profit from its South African mines in 2011, in 2018 gross profits from its operations there barely register on a chart comparing its mines in other parts of Africa, the Americas or Australia.
What do you do if you can’t rely on fiat currencies for holding their value, nor bonds or real estate? You buy gold.
According to the World Gold Council, central banks backed up the truck for gold in 2018, buying 651.5 tonnes versus 375 tonnes in 2017. That’s the largest net purchase of gold since 1967.
What do scared citizens do when they fear an economic or political crisis initiated by a renegade foreign leader like Donald Trump? They turn to hard assets like gold.
Indeed, gold’s status as store of value, as money, the only currency available when yours is worthless, has come into play with respect to the drama that has been unfolding in the Persian Gulf these past couple of weeks.
Gold gives all of us something that fiat currencies (paper money), or any other financial innovation, cannot deliver. Gold is insurance, irreplaceable in its functions.
The US Federal Reserve has indicated no more interest rate hikes this year. If economic headwinds blow harder against the US, like more negative fallout from the trade war with China and continued low growth in China, affecting all its trading partners, there may even be a rate cut.
That would weigh the dollar down, pushing commodities up, including precious metals.
The usual indicators show the US economy is doing just fine, knocking down the odds of a rate cut, but a deeper analysis shows signs of trouble. For more on this read our Make America’s economy great again.
On Monday, upon digesting the escalation of the trade war, the S&P 500 and the Dow suffered their worst day since Jan. 3; more ominously, the yield curve between 10-year and 3-month Treasury notes re-inverted, after dipping in March into negative territory for the first time since 2007. MarketWatch reported the yield on the 10-year note fell to 2.402%, below the 3-month note’s 2.406% yield. An inverted 10-year/ 3-month yield curve is a reliable recession-indicator.
Middle East tensions, an escalating trade war, a constitutional crisis that is brewing in the United States over the Trump administration’s legal troubles, and diminishing global gold reserves.
Conclusion
It’s a fact in the mining world that most discoveries are made by a) junior mining companies and b) old time individual prospectors. Why are the juniors so successful at making discoveries and finding mines? Well, the good ones are lean mean boots on the ground exploration and development companies run by people who have been out there and know what it takes. They know how to raise money from the suits and they know how to get the story out to the retail investor.
They are not tied up in bureaucratic red tape and can make the important decisions without commissioning a six month study or running it up through 12 layers of pencil pushers and then sitting on their butts waiting for an answer while somebody else scoops the prize. They can and do make up their minds very quickly and can execute immediately on plans.
I believe junior resource companies offer the greatest leverage to increased demand and rising prices for commodities. There is also a very real and increasing trend for Mergers and Acquisitions (M&A) in one of the few bright spots available for investors - resources.
“As the potential for commodity scarcity escalates, M&A activity in the global mining sector will likely intensify, mimicking a ‘global arms race. With few large targets in play and diminishing key resource reserves, we expect global miners will continue to scour the globe for projects and broaden their deal strategies." M&A in the Global Mining Sector - No Stone Unturned, PricewaterhouseCoopers
Juniors, not majors, own the worlds future mines and juniors are the ones most adept at finding these future mines. They already own, and find more of, what the world’s larger mining companies need to replace reserves and grow their asset base.
Junior resource companies, the owners of the worlds next mines, are soon going to have their turn under the investment spotlight and should be on every investors radar screen.
If I was looking for superior investment vehicles to take advantage of what I think I know regarding the future for commodities I’d be looking at junior producers, near term producers and companies that are in the post discovery resource definition stage with the occasional green field exploration play thrown into the mix.
To identify and learn more about what I believe to be the best junior mining companies right now exploring for the best metals of 2019, visit my home page.
Richard (Rick) Mills
aheadoftheherd.com
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This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. 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 Richard Mills only and are subject to change without notice. Richard Mills 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 or statement contained herein or any omission. Furthermore, I, Richard Mills, assume no liability for any direct or indirect loss or damage or, in particular, for lost profit, which you may incur as a result of the use and existence of the information provided within this Report.