Base Metal Reflections and Outlooks – Copper, Nickel, Zinc, Lithium and Iron Ore

2018 did not turn out like I thought it would – and that’s okay. As many of you already know, I don’t put much stock in trying to predict where metal prices are headed. Instead, I focus on the quantitative and qualitative aspects of each company that I invest in to determine whether the price to value ratio is adequate enough for the risk I’m going to take. If the metals rise in the meantime, that’s a huge bonus.

Here are a few thoughts on the metals in 2018 and what they may do in 2019.

 

Enjoy!

 

 

2018 Resource Market

Arguably the biggest headline affecting global markets in 2018 was the trade war between United States and China. However, I don’t think the trade war is solely to blame for where we are in terms of the resource market today. In my opinion, the rapid ascension of interest rates by the Fed might have had the biggest effect on the course of the global market.

To put it into perspective, interest rates were not only raised over the course of the last 12 months, but they were raised at almost double the frequency of years previous. In my opinion, this put a lot of stress on the global economy and, therefore, set up a “perfect storm,” so to speak, when the U.S. and China trade war took centre stage.

To give context to a prediction on where the market is headed in 2019, I think you must first decide the direction of interest rates and the U.S. and China trade war.

For interest sake, I will say that the Fed will not continue raising interest rates in 2019. I believe the short-term fear of a market crash will outweigh the long-term consequences of not continuing to raise interest rates.

Additionally, while I can’t reference any evidence that would point to a resolution to the trade war, it is my feeling that both governments will see a need to stimulate their economies, and as a result, will find a resolution to the trade war in 2019.

With these two issues taken care of, I believe that although the broader market is overdue for correction by historical standards, a pause or a reduction in interest rates and a resolution with China will lead to new highs.

In terms of the resource sector, I believe we will see a precious and base metal resurgence, with spot prices increasing and the equities following suit.

 

 

Copper

I’m bullish on the long-term supply and demand fundamentals for copper. In 2019, I see copper maintaining an average price of around US$ 3.00/lbs for the year.

Copper Exploration

On the copper exploration side of things, my attention has been drawn to South America, specifically the north end of the Andean copper belt, which is located in Ecuador. In June of this year, I wrote an article entitled, “Ecuador – A Renaissance in Mining Investment Attractiveness?” For those interested in Ecuador as a jurisdiction for mining investment, I believe it’s a very valuable read.

For those who have been following resource companies with projects in Ecuador over the last year, they would have been pleasantly surprised to see mining behemoth, BHP, take a major position in Ecuadorian copper developer, SolGold (SOLG:TSX).

In my opinion, this is both a nod to the quality of Cascabel and to the level of comfort that a major mining company has with investment in Ecuador.

The fact is, much of Ecuador has been untouched by modern exploration techniques, and rightfully so, as the political environment prior to 2014 made it much too risky for major investment. I believe that times are changing, however, and while there is still risk, Ecuador has great mineral potential.

The company in which I’m investing, and which is exploring in Ecuador, is Adventus Zinc Corporation. They will be conducting a major exploration program on their Santiago Project, which, I believe, holds great potential for a copper porphyry discovery. I just wrote an article on their 2019 exploration program – check it out here.

Also exploring for copper in the Andean Copper Belt is Aethon Minerals. For those who aren’t familiar, Aethon is a spin-out of Altius Minerals and IPOed early this year. The company has gone through some growing pains since its IPO and is in the midst of a CEO change, but I’m confident, especially given their cash position of roughly $5.0 million and their project portfolio, things will turn around quickly in 2019. Also to note, they are currently trading for less than their cash value!

 

Companies I own, looking to add to or take a position in: Adventus Zinc Corp. (ADZN:TSXV), Aethon Minerals (AET:TSXV), Mundoro Capital (MUN:TSXV), Kutcho Copper (KC:TSXV)

 

 

Zinc

Zinc’s fall from its 5-year high of around US$1.60/lbs to almost US$1.00/lbs was drastic. The fall from grace is a mixture of some new production coming online, hidden inventories feeding the market and, finally, the U.S. and China trade war, which, I believe, was enough to send the price back down to levels we haven’t seen since the fall of 2016.

However, LME zinc inventories remain very low and, in my opinion, still give upside potential to the zinc price. While I do believe there’s potential for a nice spike in the price, especially upon news of a resolution in the U.S. and China trade war, I don’t think it will be sustainable over the long term.

In my opinion, barring a crash in the global markets, today’s zinc price, between $1.10 and $1.20, is probably a good gauge for an average price in 2019, with proviso that there’s definitely room for a nice spike due to the very low visible LME inventories.

Zinc Air Batteries

Zinc air batteries are not new, as the technology started to be developed in labs in the early to mid 2000s. What is new is their growing commercial use, which I have been increasingly hearing and reading about this year.

Unlike the narrative-heavy vanadium redox battery storylines, zinc air batteries are legit and I believe could be an emerging major demand source for zinc in the future.

 

Companies I own, looking to add to or take a position in: Adventus Zinc Corp. (ADZN:TSXV), Tinka Resources (TK:TSXV)

 

 

Nickel

LME Nickel inventory levels have been falling steadily since mid 2017 and have been continually reaching new 5-year lows this year. In my opinion, this has been driven by strong consumption in the stainless steel industry and, of course, the burgeoning battery market.

Given this fact, I think it’s apparent that there’s a mine supply deficit, particularly that which feeds the class 1 nickel market.  I wrote about this earlier this year, here is a link to the article for further reading.

For me, personally, the high consumption, falling inventories and weak spot price have been the most interesting thing to watch in this year’s nickel market, as the spot price really is running opposite to the way most would think.

In my opinion, in whatever scenario you pick, the world is headed toward electrification. This revolution in human history will be led by electric vehicles (EV) and will have a tremendous impact on the battery metals market.

In saying this, given the current and future chemistries used in EV batteries, NMC and NCA, nickel plays a major role. While I don’t see it staying this way forever, I would say that the next 10 to 12 years of battery demand is very bullish for nickel.

The question that then needs to be asked is, what will the EV adoption rate be, moving forward?

It’s a hard question to answer, but one thing to keep in mind is countries around the world are incentivising the adoption of EVs with rebates and instituting taxes on carbon emissions. I believe these incentives and penalties will only increase with time, making me more optimistic of a higher growth rate in the global EV market.

In saying this, it still isn’t an easy question to answer. One of the nickel market’s largest producers, Glencore, released an estimate a few months ago which used a 30% adoption rate in EVs by 2030.

In terms of nickel, a 30% adoption rate is equal to roughly 1.0 million tonnes of class 1 nickel demand. Considering the entire nickel market is currently 2.0 million tonnes, and given the current supply and demand fundamentals and the time and cash needed to find, develop and produce nickel sulphide projects, you have to ask yourself, where is it going to come from?

I’m bullish on nickel and provided there is resolution to the U.S. and China trade war, think 2019 is going to be a good year for the nickel price. In my opinion, nickel could challenge the US$8/lbs price level in 2019.

Companies I own, looking to add to or take a position in: FPX Nickel Corp. (FPX:TSXV), Horizonte Minerals (HLM:TSX)

 

 

Lithium

As I just stated in the nickel outlook portion of this article, I believe the world is headed toward electrification. With this paradigm change will come a much higher demand for batteries. Given current commercial battery technology and chemistry, this means that lithium will most likely continue to play a major role in the battery market as we move through the initial stages of this major shift.

The lithium market is small in comparison to the major base metals and is controlled by 4 main companies, SQM, Abemarle, FMC Corp. and Sichaun Tianqi Lithium Industries. Here’s a link to an article I did on the lithium market.

Given its size, I suspect that steady pricing is in everyone’s best interest and, therefore, believe we have somewhat of a floor in pricing at least at the moment.

In saying this, I believe this is why security of supply will become so important moving forward, because  at some point, there will be many hands looking to attain supply from only a few players.

Many pundits point out that there’s no shortage of lithium in the world, however, I think the rate at which it’s extracted will become the issue in the future, because I see the rate at which industry requires lithium will be much higher than current capacity.

I’m bullish on lithium and believe that we will see higher lithium prices in the future. For 2019, I expect prices to remain steady, while I believe the equities will make a rebound after their dismal performance in 2018.

Companies I own, looking to add to or take a position in: Neo Lithium (NLC:TSXV)

Iron Ore

From my perspective as a speculator, the narrative surrounding iron ore is concentrated on the premiums given to the high-grade concentrates – those which have over 62% iron content.  The beauty of the high-grade iron ore market is that it’s currently smaller than the low- grade portion and, given the increasingly stringent environmental regulations in all countries, most importantly China, I believe there is good reason to think that a hefty premium will be paid, moving forward, almost regardless of where the global economy is headed.

A great example of the high-grade market’s resiliency is its performance over the course of 2018, where both its premium and price have held fairly steady in the face of rapidly increasing interest rates and a U.S. and China trade war.

 

Overall, the global iron ore market isn’t short on iron ore, as there are many sources of low grade – 62% iron content, primarily in Brazil and Australia. In my opinion, the majority of the iron ore market will be susceptible to the ebb and flow of the global economy, and the direction with which the largest iron ore producers, Vale, want to push it.

I’m bullish on high-grade iron ore and am putting my cash in companies that are producers of the high-grade product or are developing high-grade iron ore projects toward production. In terms of price, I’m hard-pressed to pick a number. What I will say is that the high-grade product will continue to fetch a premium, which I believe will only increase with time.

The Labrador Trough is my focus, as not only is it located in a premier mining jurisdiction (Canada), but many of the companies with iron ore projects in that area are able to produce high-grade concentrates – 65% iron content.

 

Companies to watch – Altius Minerals (ALS:TSX), Champion Iron Ore (CIA:TSX), Labrador Iron Ore Royalty (LIF:TSX) and Alderon Iron Ore ( TSXV).

 

 

 

Until next time,

 

Brian Leni  P.Eng

Founder – Junior Stock Review

 

 

 

Disclaimer: The following is not an investment recommendation, it is an investment idea. I am not a certified investment professional, nor do I know you and your individual investment needs. Please perform your own due diligence to decide whether this is a company and sector that is best suited for your personal investment criteria. I do own shares in Adventus Zinc Corporation, Altius Minerals, Aethon Minerals, LIORC, Neo Lithium, FPX Nickel, Kutcho Copper, Tinka Resources.  Of the companies mentioned in this article, Kutcho Copper is the only company with which I have a business relationship. Kuthco Copper is a sponsor of Junior Stock Review.