Going over the thesis: the tin market

I have dipped my toe into the tin market as an investor, but I have not written that much about it yet. Information about the sector is not as readily available as some of the other commodities. I do not know much of metallurgy, and even had to google what alluvial mining is. I am a generalist investor, and this post is aimed towards other generalists.

I first got a sniff of the tin market sometime after New Years Eve 2020/2021, when my twitter feed got filled with people using the #tinbaron hashtag. Later in March I got to listen to the excellent episode with Trevor Hall’s Mining Stock Daily: A Very Tin Special with guests Mark Thompson and Emil Bagge that made me more interested in the sector. After that I have looked for more readily available information on the sector, and placed some funds into the sector. Much of what I write today however, will have been covered in that interview.

Why is there an investment opportunity in tin?

I will not go over the full history of tin, but tin has had a very important strategic purpose for decades after WW2. The military for example needed copper-tin alloys to make bronze that is used in cannons in addition to a lot of other essential equipment. (If you have any interest in the two world wars, you will know how essential getting hold of the right materials to supply the war effort has been). During the Cold War the US amassed a big strategic stockpile of tin to squeeze the Soviet economy. (The Soviet Union did not have a big supply of tin at the time). This however failed when the Soviet Union found their own deposits in Russia some years later.

Like many other commodities, tin has turned out to be a very cyclical one. There has not really been a global exploration plan for tin since 1985, the year of the collapse of The International Tin Council, and the tin price crash. By 1991 the price of tin had fallen by about 90%. The tin market was in the following years kept amply supplied throughout the 1990’s and early 2000’s due to a massive ramp up in supply from Indonesia, China and Peru. You had a big marked surplus that was keeping prices depressed.

This 20 year bear market had a profound effect on tin exploration. Most mining companies exited the tin sector, and today we see there is a severe shortage of projects. In addition to this, the US had their strategic tin stockpile from the Cold War for years. This stockpile was not worked off before 2005. After the 2005 bottom at a price of about $3,875, the price has been volatile with spikes up to over $30,000 and followed by hard drops.

With 35 years of below trend exploration on the hardrock side, we are facing shortages in the future. What has postponed this development have been massive alluvial discoveries in Myanmar in 2015 that have come into production, and continued mining in Indonesia of their marine assets. (Alluvial mining is the mining of stream bed deposits (also known as alluvial deposits) for minerals. These alluvial deposits are formed when minerals are eroded from their source, and then transported by water to a new locale). Myanmar’s best deposits have now been mined and production is decreasing. When these alluvial deposits run out, you have to replace them with new discoveries, and the future of tin supply will be from hard rock mining. We need a price over $30,000 for several years to tempt bank financing for new production.

What is tin used for?

Most people have heard of tin cans, but tin’s main use area is in solder. Solder is the glue that makes items join together, typically in circuit boards. You do this by melting the solder to create a permanent bond between the components. Tin is an excellent metal for solder because it melts at temperatures considerably below other metals melting points. 

Electronics is 50% of tin demand. Tin demand has gone up a lot during the lock-downs because people are buying more electronics. In almost all cases, you cannot replace tin with another metal or material. There is a worldwide dearth for chips in cars and we see shortages in several other sectors. Tin is widely used in many products, but only as a very small component. If the price of tin goes up by a lot it will not have a big effect on overall price because it is used in such low quantities. We therefore do not see very price elastic demand.

Future demand

The supply and demand picture going forward looks similar to what we expect in a lot of other commodities. Low demand has led to low prices that have not incentivized new production. This has led to a gap between demand and production with tin inventories scraping the bottom of the barrel.

In addition to primary uses (in solder, tin plating, chemicals, and copper alloys), tin is also becoming important for the “green” economy. With the electrification planned over the next decade tin is likely to be found in lithium-ion and other batteries, solar PV, thermoelectric materials among others. In solar panels alone, we can expect between 2-3x increased demand for tin from what we have today.

Sentiment

If we go by investment banks’ interests in different commodities, I will say that tin is still a very contrarian play. What is the reason for this? Because tin is nowhere to be found on their radar, even with the supply situation in the sector. The tin sector is also too small to be investable for most funds and is therefore ignored by most.

However, looking at the performance of the Tin companies last year we see a great move already. One would expect this when the price of tin has more than doubled. I sometimes wish the #tinbarons on Twitter had been a bit louder earlier. With the run up the companies have seen already in the industry, the smartest contrarians have already entered their positions. Looking at the charts of the companies it can make you feel like you have missed the boat. Many investors in the space have seen 5X returns already.

In the last two years the tin price has gone from a low $14,000 to over $34,000 in July 2021. We are currently at an all time high. However, if we are going to get meaningful production online, the price has to stay above this level of $30,000 for years to incentivize the existing known projects. They will not be able to get bank financing without the price staying above this level.

The effects from the lock downs will probably go away, but the demand from the electrification and green economy will most likely not.

How do one participate in this market?

If you have no experience in the market, do not know about metallurgy, or if the team is able to take the project into production, you should keep things simple. This means investing in one of the two producing companies: Alphamin Resources and Metals X. That is basically what I have done. 

Alphamin Resources is the owner and operator of the Bisie tin mine located in the Democratic Republic of Congo (DRC). At a tin grade of roughly 4.5%, Alphamin has the world’s highest-grade tin resource, about four times higher than most other operating tin mines. In addition they belong to the lowest quartile cost producer. The biggest concern most investors have to the company is the jurisdiction. If you think the company specific pros outweigh jurisdictional cons, the company is a buy. Alphamin has a drill program to increase their resource,and they are also increasing their production from 11,00 tonnes to 13,000 tonnes. This is great timing in a rising price environment.

Metals X Limited is the other alternative who has a producing asset. They are the largest tin producer in Australia, and they hold 50% stake in the Renison Mine in Tasmania. They are working on increasing the output from the mine to 10,000 tpa from 8,500 tpa by full year 2025. With jurisdiction it is not as challenging, and at a higher tin price they are a good option for people who want exposure to the sector.

The producer with the lower margins will often have the more transformational change in profitability with a higher commodity price. Alphamin, to their advantage, has a bigger potential upside in their exploration program. A 50/50 allocation to both companies might therefore not be too bad.

There are other companies like Afritin Mining, Elementos Limited, Stellar Resources and Cornish Metals. Many of these probably have higher potential than the two producing ones, but you have to have some more in depth knowledge to assess them.

If you want to look for more information on the sector you should start by looking at Twitter and Mark Thompson‘s page in addition to search for the #tin hashtag. You can also use Google to search for articles, and there is also a handful of podcasts you can listen to. Lastly, the webpages of the different tin companies usually have information on the tin sector.

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