Going over the tin market: part deux

Today I want to go back to the tin sector. Tin is one of the smaller sectors out there, and because of the smaller size there are fewer investment banks and analysts that cover the sector. That means less competition and a bigger chance of getting an edge. I have followed the sector since late 2020/early 2021 and been through some ups and downs along the way.

The short reason for me investing in the tin sector is that it is cyclical, demand is increasing, there has been massive underinvestment because of low cost supply, but this supply is drying up. If you want a longer explanation you can go to my first article on tin (“Going over the thesis: the tin market” ) I wrote about the tin sector.

Recent developments in the tin sector

In the second part of 2022 we have seen a hard sell off in many commodities. Something that is not fun when you own a lot of mining shares. Tin has not been sheltered from this sell off, and has fallen together with the other commodities. Electronics amount to about 50% of the tin demand worldwide. Electronics need tin for soldering, and the electronics demand has been lower due to two factors: The first factor is the lockdowns in China in 2022, the country that makes the most electronics in the world. They have therefore produced less electronics and needed less tin for soldering. The other factor is that with increased uncertainty for the economy overall, people postpone purchasing certain products like electronics and the demand goes down overall. 

When I wrote the piece about the tin sector a year ago, sentiment in the sector (and the commodity markets in general) could not be more different than what it is today. In the last three years the tin price has gone from a low $14,000, to a price close to $50,000 in March 2022, and down 64% to under $18,000 in October 2022. Thereby giving back almost all of the gains over the last three years. As of 23. December 2022 we are up 35% from the October bottom, but only about 39% above where we were 3 years ago. At the moment this does not look like a market in a massive deficit for the coming decade.

The tin equities have tracked this development on the way upland the way down.

Short term this is hard, and timing when the markets will turn around is not easy. Still, a falling market leads to possibilities to get companies on the cheap.

Is now really a good time to be invested in the tin sector?

A market can stay down a lot longer than people think. Instead of months, think that the situation we are in today lasts for years. If we see a big recession demand will continue to be low for a very long time. Even if a tin producer is profitable during this time, valuations can be low because overall sentiment in the market drags everything down with it. Few can imagine how bad it was during the 1930s depression, but mass unemployment and a weak economy for years will be bad for all equities. (In this scenario I will be worried for a lot more than just how my investments are performing). 

There are also other unknown unknowns I do not know already that can influence the supply or demand for tin. I would be more worried about the supply side suddenly increasing than demand for tin going down because we have found a cheaper and better alternative to tin soldering. Tin is a very small part of a lot of products. A doubling of the price of tin does not make the sales price of your iPhone or smartphone more expensive in any meaningful way. This also makes it less interesting to engineer an alternative to tin soldering. A new cheap source of tin supply is therefore higher on the list for me.

Although the worst case with a long lasting depression probably is not priced in, I think today’s valuations offer a good potential entry into the sector.

The options for people who want to speculate in the tin sector

Alphamin Resources (TSXV: AFM)

Alphamin Resources is the best alternative for people who want to look closer at the tin companies. They are the owner and operator of the Bisie Tin Project 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 with an all in sustaining cost of between $10,000 – $12,000 per tonne.

During 2021 and 2022 they have completed a lot of drilling on their Mpama South exploration property with great results. Mpama South is about 1,000 meters center to center from Mpama North, the mine where they are producing today. Being this close to Mpama North makes use of the existing equipment at the production site instead of adding more production facilities. In June we had Alphamin announce a 46% increase in their Mpama South inferred mineral resource estimate. At the same time the price of tin was falling, and dragging the company valuation down with it. The valuation of Alphamin is now down almost 50% from the top earlier in 2022, but looks to have recovered from the bottom.

With a much bigger resource than last year Alphamin is a much stronger buy today than last year if you believe the tin price will recover within a reasonable timeframe. In addition, if we have a long lasting recession, the low cost profile of Alphamin will make them better suited to survive than most of its competitors.

The biggest concern most investors have to the company is the jurisdiction in the DRC. 

Metals X Limited (ASX: MLX)

Metals X Limited is the other clear alternative if you want to invest in a tin producer with operations in Australia. They hold a 50% stake in the Renison Mine in Australia.

With all in costs at a higher level than Alphamin Metals X has a higher beta to the price of tin because it will affect the profitability in a bigger way. Something that was great when the price of tin was on the way up towards $50,000 per tonne, but a lot worse on the way down to $18,000 where we were at the bottom. The share price of Metals X was at the worst, down more than 70% from the top earlier in 2022, and as a higher cost producer, they have a bigger downside than Alphamin.

The big advantage with Metals X compared to Alphamin is the jurisdiction in Australia. 

Most of the other tin companies are more of a speculative nature, and are in the exploration and developer category. If we see the general markets improve drastically these names will probably do a lot better than the two aforementioned companies, but they do also have a bigger downside. I will therefore only mention them in passing and say I would only put a small part of my allocation to these. The other names I have found in the tin sector are: Cornish Metals, Afritin, Elementos Limited, Stellar Resources, Tungsten West and First Tin.