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.

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, the Inflation King, or “Inflationskönig” in German. I did not know that much about this Tycoon. Most of the information on Hugo Stinnes has been in German. Not before I read the book ”The New Depression” by James Rickards did I get to know about this man.

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.

Hugo Stinnes

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 product (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 and forwards 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 fall 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

large bison

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. For incentivising new supply the price of uranium has to go up. If not quoting Rick Rule the lights go out. 

We have the same scenario with battery metals like #lithium #nickel 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.

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 like a ton of bricks. This will 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 what 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, 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.

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.