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.

Happy Days

fire in the middle of the city during night time

Our resolve can wear down a lot after a couple of months of being hammered in the market. Choppy action for months can be harder than a steady grind down. You get your hopes up that the sector is decoupling from the general market just to get the rug pulled out from under you.

It is hard to see that equity prices go towards, or below, prices the equities were at a year ago. Getting closer, or below, your entry price is even worse. When you are up by a lot you are playing with the house money. It does not give that much consolation that commodity stocks are performing a lot better than the overvalued tech stocks or the other overvalued sectors. The only thing that matters is that we do not lose money. If you give it all back, you get angry at yourself that you did not take some of it off the table.

Still, keeping things in perspective is very important. Yes, a recession, or a several year long depression is a possibility. In that case a lot of wealth will be wiped out in the world, but we will still need food and energy to survive. I do not believe that uranium and other essential commodities will fall as much as many of the speculative options out there. (We do however see the uranium sector has outsized beta to the up- and downside again and again). If they do, I believe they will bounce quicker. Why? Because they are essential for our way of living. Most of the speculative cryptocurrencies and tech companies (with unproven business models) can not proclaim the same place in the Maslow hierarchy. Well funded companies with great management in a sector essential for the world energy supply will survive. Compared to other investments many commodities have few to no substitutes, and many of them also have very inelastic price demand. Demand can go down a certain amount during a recession, but if the commodity already is in a major supply deficit, there is a bigger margin of safety compared to other investments. You still have to pick the right companies. (Picking the wrong one, who has to do a capital raise at the worst possible time, can be the difference between bad and spectacular returns).

With hindsight on the last couple of years, I would maybe have been a little less aggressive and been more patient with putting on my positions. Lobo Tiggre, the Independent Speculator, is someone I want to emulate more. The markets have time and again given us great buying opportunities. I am however not changing my overall strategy. As with diets or fitness programs, the best strategy is the one you are able to follow. What helps a lot for me is having a job with a cash flow coming in every month. I have diversified some of my new funds into the oil sector, but I am still buying uranium. If we continue lower, I will have some money ready to take advantage of it.

Getting on the offensive

One of my older posts “The Big Commodity Short” has been shared this week. I think that most of it is still on point. If I could have made one change for my own part, I might have invested more in the oil and gas sector that has been on a tear the last year. Still, I think that I also may have dodged a bullet. The cheapest and most undervalued oil and gas equities were in Russia. When I wrote this piece we knew that rising commodity prices would lead to higher prices on other products. That this again would put pressure on the central bank banks to curb runaway prices was a given.The question is still if the central banks will continue to increase rates and cause a major recession.

One should not be in the situation where you doubt the thesis every time the market is going down. The markets do not move up or down in a straight line. I see proof almost every week that the thesis is unfolding:

On Thursday June 16th Borja (@piterloskot82) reported that CGN (China General Nuclear) and CGNPC (China General Nuclear Power Corporation) have entered into a new sales framework agreement for three years between 2023 and 2025 for 3.12 million pounds per year. The interesting part was that 40% of the contract was fixed at $61.78/lb multiplied by an inflation multiplier, but the majority (60%) of the contract was linked to the spot price:

I have two takeaways from this contract: The first one is that the fixed part of the contract is way higher than the spot price at the moment ($61.78/lb versus $46.98/lb). The second part is that CGN has the majority of the contract linked to the spot price at the future delivery date. CGN would not have 60% linked to the spot price if they did not think it would be a lot higher than $61.78 during the contract period 2023-2025.

We also got the news that Global Atomic has received a Letter of Intent from a major North American utility to produce 2.1 million pounds of uranium from 2025 to 2030. Utilities are looking for pounds outside the major producers with developers to diversify supply. (Previously we have seen companies like Encore Energy contracting pounds for delivery in 2023). We did not see a lot of this before 2021. Focusing on just the general markets and the spot price of uranium going down (while SPUT is getting stink bids filled) becomes very myopic with this backdrop.

The challenge now is to get on the offensive. When looking back at the time we are now five years in the future, what do you think will be the best decision you can make today? Do you believe this is a buying opportunity or should we abandon ship and wait for better times? I am looking for more cash to deploy more steadily, but I will try to be a bit patient the next couple of months.

Avoid spreading yourself too thin

I have invested in uranium, gold, silver, tin, oil, RRE, and copper. With several of the sectors seeing new highs, people (with or without credibility) calling for a top will increase. Conviction to hold on to a trade when people come with differing opinions can not be given, it has to be earned. Mentally and financially there is a limited number of sectors I can follow at once.

What has worked out for me has been to focus more on a select few sectors and let a lot of the other ones go by the wayside. By being very focused I have missed trades in coal and lithium where companies have gone up several times their value the last year. In both of these sectors I was told in advance, and could have deployed some funds, but I decided not to spread myself too thin. Maybe some people are able to jump from the best performing sector every six months and catch all the trains, but I do not. I stay in a select few and wait until I have that big opportunity. There are just too many opportunities for me to take advantage of all of them.

Learning from previous mistakes

When I was younger I was well diversified with my investments. Among others, I was invested in the fish farming sector, which is very important in Norway. I was in this trade from early 2014 to mid 2016. Here I was invested into one of the most quality names in the sector (Salmar) who was executing on their strategy without fail. Salmon was a growing industry, and had been a great sector for several years already, when I started investing. I had an OK entry at NOK 76 (about $10-11 at the time), but I had nothing but random newspaper headlines and maybe some price charts to guide me. My investment in the fish farming business was just one among several different positions. Being invested in a lot of different companies and sectors had left me with too little time for in depth research. (If you seek diversification it is easier to have a broad index fund do that for you and focus on select areas for yourself).

There were a thousand reasons to sell. The most prevalent was, according to the financial newspapers, that the price of farmed salmon was unsustainable. People would not go on with paying an increasing amount for salmon. After a certain price point, people would switch to other protein alternatives. All this together with the fear of giving back the returns caused me to sell. I got out at a price of NOK 236 (about $28 at the time) mid 2016 for a 3x return in my home currency. With hindsight I do not look at the chart that continued on to a 9.5x return (excluding very generous dividends on the way) with regret. I do however take some lessons from it.

Conclusion

By knowing the sector more thoroughly, by knowing the dynamics and having a knowledge of the different milestones one should look for, you take out a lot of the guesswork in the trade. There are people who are experts in the fish farming sector and who have harvested a lot more gains from this trade than me.

For my part, I find several of the commodity sectors to be a lot less complex than the fish farming business. There is no good substitute for tin when it comes to solder, if you are a nuclear plant you can’t switch from uranium to oil to fuel the plant etc. The commodities are also more cyclical than most other sectors where you go from a market that is oversupplied to undersupplied. Supply also takes a very long time to reach the market. For speculators this cyclicality is a feature, not a bug. The less developed a market is the more potential there is for outsized gains.

Volatility

I have already compared the uranium sector to a roller coaster. Today I will expand on that a bit more. The peaks and valleys you will have to go through will only increase with the higher valuations. You therefore have to be prepared for it.

It is not easy to hold on to uranium positions in a bull market. (I have used a graph for Global Atomic for illustration, but the story is similar for most of the companies in the sector). Since mid June 2021 we’ve had a two months long correction that lasted till the end of August. Most of the companies went down 25% or more during this time. When we reached the second bottom in August, the sentiment was close to rock bottom. Most people knew that Sprott was coming during these months, but towards the end several were doubting that it would have an effect on the spot market. This however quickly turned with SPUT launching their ATM on 17. August. We saw the spot price going up from about $30 to $50 inside one month. Many of the companies doubled during this time. Suddenly investing in uranium was considered a sure bet. Just buy SPUT and count your gains. We went from one extreme to the next.

This did not last long. When sentiment did not seem it could get any more positive, we got the news from China that the real estate giant Evergrande may become the Lehman Brothers equivalent for the markets in 2021. Several uranium companies then corrected down by more than 25% within two to three trading days. These moves up and down within a month can make the most veteran of investors nauseous.

A question for many is, how should you deal with this? Should you sell down and diversify your portfolio? I can share some thoughts I have made on my own portfolio allocation.

Value, volatility and allocation of positions

From 1. August 2020 the value of my portfolio has gone up almost 3X. (I picked August 2020 because the value of my uranium portfolio was still reasonably low then). The increase of almost 3x is partly from new money invested, but mainly from returns on the existing uranium positions.

At 1. August 2020 my allocation to uranium was just over 60% with gold, silver and other investments amounting to the last 40%.

As of september 2021, my allocation to uranium has gone up the most because it has had the best returns. Uranium is the most volatile of the sectors I am invested in. For my portfolio this means that for any given day, the volatility is now expected to be higher than it was in 2020. I have allocated funds to other positions, but my uranium positions have grown a lot more than my new ones. The volatility in my portfolio is therefore mainly uranium.

From the June top, my portfolio value was down about 27% of its June value when it had its first bottom in July. After a failed recovery, it dipped again in August. At the beginning of September we went vertical with SPUT purchases, and the portfolio recovered its losses and went up to about 30% above its June value in just a couple of weeks. (From the bottom in July the value was up almost 78%). After the latest week of fear in the market I am now down to 5 % above the June high, or about 18% down from September the top. The difference from the June top is the sums are a lot higher, and it feels worse to loose the higher amounts. Other, less volatile sectors can take a year to make any of these moves we have had the last couple of months.

You can compare holding your uranium positions through a bull market to raising a tiger. At the beginning it is not that big and scary, and it is still relatively easy to control. When it is fully grown, you risk losing your arm if you are not careful.

I will take my initial position off at some time to reduce the risk, but we are not there yet.

Uranium chugging along

This week we have seen SPUT is continuing to drain the spot market. Kazatomprom is in talks to supply both SPUT outside the spot market, and Chinese stockpiles. Today I will have a shorter update, and my focus will mainly be on the action in the market on Friday. I also share some of my thoughts for new investments going forward.

Uranium

Friday was a very interesting day. I hope that everyone that has entered into the uranium sector has been aware that these daily moves are both possible and normal. Volatility is the name of the game, and it cuts both ways. There can be several reasons why the companies, on average, lost 10% on Friday:

The situation in China with Evergrande Group and their creditworthiness we are seeing going down. This is scaring the general market who is afraid of contagion. A lot of people remember the housing market in the US was the first domino to fall in the 2007-2008 financial crisis. If not a full blown crisis, people might just be afraid of a correction. That however usually means a run to the dollar. With the uranium sector having a high beta, the moves down in the general market is amplified among the uranium companies.
We can also have traders who look at $50 as a resistance level that could give a pullback and have traded this level. The market is made up of several different players who play a different game than you and me.
Friday was also the date for option expiry for a lot of the companies. Before Friday a lot of these options were in the money, but with a 10% correction a lot of these expired worthless. I have not seen any numbers to see how big of an impact this correction had, but I would not find it surprising to see these kinds of moves.
Some investors in the uranium sector can have $50 dollars as their first sell target for their first tranche of selling. If enough big players sold down a portion of their holdings, this could affect the market. (I think the marginal cost of producers is more around $60-70, and is where a functioning market could find its equilibrium).
We’ve had several tweets shared about utilities that have three years worth of uranium. This can make the utilities wait longer for contracts than we think, and ride this price spike out. I do not think that three years sounds that long. We have the ramp up times for existing (and new) mines that can take years, and the time for the fuel cycle is not that quick too. John Borshoff of Deep Yellow, says that there are many teams that lack the skills to start up and run a uranium mine. He thinks the ramp up speed is way too optimistic for most of the aspiring producers in the sector.
We have the existing producers (Kazatomprom and Cameco) who do not want a spike in price. This could lead to overproduction, followed by a sharp decline in price, with the price settling down in the 20-30s again. I believe we can have a spike and a drop, but going back to the 20s again would mean all the utilities have topped up inventories again as they had before Fukushima. They had been contracting over 100% of their yearly consumption for years by that time. I do not think that Kazatomprom and Cameco will be able to cap the price at around $60 now. In 2019, before the supply disruptions by Covid-19, and before SPUT was launched in 2021, I think they could have been successful. Now that the financial players on Wall Street are smelling blood, it’s a whole other game. Wall Street now has a vehicle where they can move the spot market.

When I take the numbers from UxC (that Kazatomprom has been using) for utility term volume (over a simplified assumption of 180 million pounds consumption/demand per year), I get a graph very close to the one Sachem Cove Partners have been using in their presentations. The years with 40% contracting led to several years with over 100% contracting. Several years of contracting at this higher level had to pass before the price could drop from oversupply of the market.

Barring a bigger correction or financial crisis, I do not see much stopping the Sprott Physical Uranium Trust from continuing to push the uranium spot price past $60 the next couple of weeks. The uranium equities can however correct 50% at any time, and still be in a bull market. This volatility is something you have to live with if you want to hold them.

Other commodities

I have to admit that I am looking a lot at other commodities than uranium at the moment. My allocation, and the appreciation, of the sector has made my uranium holdings very large. (The picture was totally different during the Summer of 2020. My uranium holdings were a fraction of what they are now, and their performance made me pinch my nose when I bought more). I do not have that feeling anymore and I am looking to precious metals that have had a horrible year. Copper and tin are also sectors I want to get a better exposure.

Commodity companies are not buy and hold investments, and the different sectors will have different peaks. I know some think they can surf one wave perfectly and then hit the next one. I doubt that I will be able to do that. I therefore want to average into some other commodities going forward. I have to preface this with the fact that I have tried to do this before, and I have most of the time ended up just increasing my positions in uranium.

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.

Zero to one

faceless man with decorative shoe playing table game

I made my first substantial money investing in tech. Books like «Zero to One» is a book that was referenced a lot for investing in the tech sector and I really respect Peter Thiel as a thinker. I have found this book can also be applied to commodity investing. One can take knowledge from one place and try it in other sectors.

From my experience the biggest change in valuation a company can have is going from the impossible to the possible. A company that is able to get into production, come successfully out of a restructuring, or strikes gold are events I would put in this category. Things that are already seen as possible for a company will already have a lot of this priced in. Unanswered questions, or impossible situations are not priced in, and people do not know what it is worth.

In Zero to One there are three ways of approaching this:

1. Bet on a contrarian truth

What important truth do very few people agree with you on? Here you have to take a step outside the mainstream consensus. Some examples I have for this in the commodity sector are:

Renewables like solar and wind can’t save the environment alone. We need reliable baseload power. The solution for this is in many cases nuclear.
The electronics industry is experiencing a chip shortage because of increased electronics demand. The tin shortage is the bigger factor, and not production capabilities in the factories that the mainstream media portrays it as.

By betting contrarian here in smaller sectors, one avoids competing one will experience in bigger, more popular sectors.

An important factor to make sure you are correct here is: Is it the right time? If you have seen “2001 a Space Odyssey” they have a version of an iPad in the movie. The movie is from 1968, more than 40 years before the technology and the market was ready for such a thing. You would not want to wait that long for something to materialize.

2. Start by dominating a small market

The book here gives an example of Amazon that started in a small niche market, selling books. They used this as their launching pad for getting into other sectors later.

Also here you can apply this to the commodities market. You will have a better chance with over performing in a niche market like tin, tungsten or uranium than iron ore or coal. But as for every rule there are exceptions. For example, after the big fall in the oil price after 2014, a lot of the workforce had to leave the sector. After investment interest went down in the sector, competition among investors to find the best investments also went down.

3. Strive to be a monopoly

This point is about how you should not compete against other companies. You should be without competition as much as possible. By doing this you prevent the competition from eating away your profits. By doing this companies like Google can focus on improving, and creating new features which the customers will get advantage from.

I do not apply this to the companies by themselves, but more the sector by itself when it comes to commodities investing. The sector has to be the only solution for their customers. There should not be an easy substitute for them.

The uranium sector is the only source of fuel for the nuclear plants. There is no substitute for uranium to keeping them running. That is why, when the circumstances are right, the price utilities have to pay does not matter.

If you want to solder circuit boards you need tin. Tin is the glue metal. Before you could use lead for soldering, but due to regulatory requirements, plus the health and environmental benefits, tin is the only real alternative now.

Conclusion

This is something one must try to do with more than this example. From every aspect of your life you might have something you can transfer to another situation. From football you might have to learn to keep cool under pressure, from long distance running you might learn patience and perseverance. All things you can transfer to the rest of your life and maybe to investing. A lot of great things can happen if you go from zero to one.

The Inflation King

Preserving or increasing my purchasing power has been a big reason why I am investing in commodities. At the moment there is no agreement on what the massive amounts of money printing will lead to. Will we have massive inflation or deflation (or will we have stagflation)? For this week I have focused on the Inflation King.

I love reading about historical figures like the Robber Barons: I’ve read about the Vanderbilts, Rockefellers, Carnegies, Mellons and Morgans. The topic of today is Hugo Stinnes, more famously known as the Inflation King, or “Inflationskönig” in the original German. Most of the information on Hugo Stinnes has been in German, and I did not know that much about this Tycoon before I read the book ”The New Depression” by James Rickards.

If you have grown up in the West and paid attention at school, you know that Germany in the 1920s suffered hyperinflation. This led to a devastating loss of purchasing power for the general population in the country. People lost all their savings they had in the bank, and they had to pay for products with more and more of their currency. There are pictures of people carrying cash in wheelbarrows and kids playing with their useless currency.

The hyperinflation was caused by massive money printing for paying reparations for the First World War from the Treaty of Versailles. The result of this devastating loss of purchasing power for the population. The depression that followed sowed the seed for what came to pass in the 1930s and 1940s.

The reichsmark became worthless. The exchange rate between it and the US dollar went from 208 to 1 in early 1921 to 4.2 trillion in late 1923.

Hugo Stinnes was born in 1870 and was from a prosperous German family who had interests in the coal mining industry. Later Hugo inherited the business, and expanded it by buying more mines and diversifying into shipping, buying cargo lines. He could then use his own vessels to transport the coal. (With John D. Rockefeller making a lot of money on transporting oil, it was probably not a bad idea to be in charge of your own transportation). He also expanded the shipping to include lumber and grains.

Prior to the Weimar hyperinflation, Stinnes borrowed vast sums of money in reichsmarks to make more purchases in the different sectors. (I have not found out if he was just a very big gambler, or if he had read up on the works from the Austrian School or similar). When the hyperinflation hit, the value of coal, steel and the price for shipping retained their value, while the reichsmarks fell in value. (Hugo Stinnes also had investments outside Germany where the currencies had not lost their value on the same scale).

Stinnes was able to repay his debts in worthless reichsmarks from his profits from his investment in commodity production and shipping. The price of the commodity, and the shipping of the products, went up while the debts stayed the same. Stinnes made so much money during the Weimar hyperinflation that his German nickname was ‘Inflationskönig’, which means ‘Inflation King’.

The reason why I bring up the example of Hugo Stinnes is that we have heard mostly about the middle classes being destroyed. If you are prepared you can take advantage of this instead of becoming a victim. Hyperinflation has happened in several places. Three examples are in Hungary, Venezuela and in Zimbabwe. There are cautionary tales throughout history which illustrate the consequences when too much money gets printed.

My takeaway

Writing this I have not run to the bank and borrowed as much as possible to do the same. (However, I did increase my mortgage a bit. I had already paid down a lot on it, and the mortgage is less than two times my yearly salary). I am also using most of my monthly salary to add to my commodity investments. With countries printing trillions of fiat currency with no end in sight, the value of the currencies will go down. The deflationary pressure we have experienced since the 1980 with products imported from low cost countries will not be enough. The price of labor might still be low, but the price of the commodities that go into the products will go up. For commodities we have no new supply coming online at today’s prices.

As for currency default, my home currency is one of the few in the world that is not printing itself into oblivion. I am more worried about the USD than the Norwegian Krone. I have most of my investments outside my home currency in CAD, USD and AUD. I do not expect hyperinflation but a steady devaluation of most currencies and the commodities going up or keeping their value.

Printing new money (stimulus) is far easier for governments than the alternative, which is a full-blown deflation, crashing markets and a subsequent depression. In a depression, prices of everything drops in value and the purchasing power of the currency actually goes up, which encourages savings and hoarding cash. Why buy a car today (if you have the money), when you can buy the car next year for less currency. The thing with inflation is that it hurts people that have been good savers the most.

Inflation is already here. I go by the definition that inflation is an increase of money supply. “Inflation is always and everywhere a monetary phenomenon.” Increasing prices, which we often call inflation, is a result of the inflation. The question is if we will see increasing prices on goods and services. For anyone who has seen the price of copper or lumber, or anything that is not included in the reported CPI, the answer is yes. We get a decline of purchasing power of a given currency over time.

I do not care if you are a Tin Baron or Uranium-, Silver-, or Gold bug. We will all be inflation kings.

The Big Commodity Short

This Sunday I will give my thoughts about the coming supercycle in commodities and why I am bullish on almost all of them going forward.

Most people are aware that I am a Uranium Bug and that I have a good allocation to precious metals. I have also just recently made my first allocation to the oil business, but I have to admit that I am optimistic about the whole commodity sector. I have tried to give an explanation for this enthusiasm in the following paragraphs.

Backdrop

Commodities are currently 50% cheaper than their lowest point the last 50 years if you compare them to the S&P 500. There are several reasons for this. The cyclical nature of commodities is that we go through boom and bust cycles. We have seen many of these over the decades. Still, the latest downturn has been exaggerated by a number of contributing factors:

A big factor is there is so much passive money waiting to chase the next big thing. We are looking back at 10 years where everyone has been piling into tech companies, weed and cryptocurrencies. Some people are maybe a bit agitated that these sectors have taken away money from commodities, but there is also a silver lining. Instead of having a better funded market, that might be in a supply and demand equilibrium, we are seeing great potential for outside returns on our investments.

I listened to a great interview with Mark Thompson on the podcast “Mining Stock Daily” in their “Tin Special”. He put into words what has been in the back of my mind about the commodities sector for a long time:

The median fund in the world’s allocation to commodities is zero, and most funds do not touch it. In the 80s and 90s, the risky part of people’s portfolios were either allocated to biotech or to commodities exploration. That part is now consumed by tech companies or bitcoin (and other cryptocurrencies) instead. We therefore have not had the needed allocation to commodities that you need to find new deposits. This has in turn affected the supply side. This underinvestment makes commodities very attractive after 10 years of underinvestment.

In the meantime commodities, which are essential for maintaining our living standards, have underperformed. The cost of producing the commodities is in many cases higher than what the companies make selling them. This has led to production cuts and supply being removed from the market. Prices have to increase a lot to incentivize production. However, this supply can’t be turned back on with a flip of a switch. Ramping up production takes time. The companies have to hire and train workers, permits have to be granted and CAPEX investments have to be made.

The easiest example I can choose from here is uranium. The world is totally dependent on uranium for the 10% of energy production coming from nuclear power. If we want a snowball’s chance in hell of making the climate goals, we can not depend on windmills and solar panels alone. At today’s prices the cost of producing uranium is higher than what they get paid by utilities. To incentivise new supply the price of uranium has to go up.

We have the same scenario with battery metals like lithium, nickel, tin and copper needed for electrification of the world. There are many other commodities that I have not mentioned, but safe to say I am bullish on most of them.

Passive funds influence on the markets

In the coming commodity super cycle we will see massive amounts of passive funds crowding into the different commodity sectors. Passive investing has increased by a lot the last 10 years, and this will hit the very small markets hard. This can have a bigger impact than most people can imagine. When 50% of the market is passive, it will be very different from the bull run in the early 2000s. Passive flows say: let’s buy what is going up no matter the price. Because of this you get big moves. I believe we will see new all time highs in most of the commodity sectors. Many of the sectors today are trading for a total value under the value of companies like Apple or Amazon. When passive funds see the outperformance of the different commodity sectors sustained over time, we will see a rotation away from growth/tech stocks. It is just a question of time.

We are seeing some evidence for this already. (Again, I will give some examples from the uranium sector, because it is the one I am following the closest). In Australia Paladin will be included on ASX 200 and 300 later this year. This means that there will be passive flows coming into the company and give the valuation of the company a tailwind. In Canada we have the same situation with Nexgen and Denison Mines will be added to the S&P/TSX Composite Index.

*Edit Jan 2023: I have added updated returns of URNM & QQQ Dec 2019 – Jan 2023 after the original post in March 2021.

The picture above is a comparison between QQQ (an ETF that includes 100 of the largest companies listed on the Nasdaq stock exchange) and URNM (the North Shore Global Uranium Mining ETF). The last year URNM has a return of 222% compared to 63% for the QQQ.

I expect this to be a trend we will see continue over the next 5 years. After overperformance the funds will rotate out of their old favorite sectors and enter the commodities sector. A couple more quarters of outperformance and we should witness the metaphor about forcing the contents of Hoover Dam through a straw coming to fruition.