Canadian Mining Companies Energized On Double Shot Of Positive Industry News
Apple, Glencore Deliver Lasting Long-Term Catalysts For Canadian Mining Companies
For Canadian Mining companies, today was a good day. Irrespective of how the cornucopia of metal/energy/agriculture stocks perform on this particular session, long term, some exciting macro-economic catalysts have been set in stone. The news comes courtesy of Apple Inc. (NASDAQ:AAPL) and Glencore PLC (LON:GLEN), two behemoths in their respective sectors. This article attempts to breakdown the magnitude of each news event, and how Canadian investors can profit.
We begin with news emanating out from the depths of Silicon Valley.
Technology bellweather Apple Inc. is reportedly attempting to source long-term cobalt supplies directly from miners themselves. The strategy is designed to buffer internal reserves of the key lithium ion battery ingredient as supply competition with electric car manufacturers heats up. Currently, the iPhone maker is one of the world’s largest end users of cobalt (approximately one quarter of all cobalt production ends up in smartphone batteries), which until now, sourced cobalt through third-party procurement. Apple is seeking to obtain “several thousand” metric tons of cobalt annually for a period of at least five years, according to sources.
Obviously, this is great news for the cobalt sector on several fronts.
The first being that Apple’s move is an implicit admission that it believes cobalt supplies will be difficult to source. At least, difficult enough that serious supply constraints are an ongoing strategic concern. This has manifested itself in cobalt spot prices, which have almost quadrupled since early 2016. Apple isn’t taking any chances by instituting full control over its supply chain, and rightfully so.
Still, we don’t see companies clamoring to make bilateral deals with aluminum or nickle or zinc miners where supplies are plentiful. If we’re reading the tea leaves correctly, we believe Apple’s maneuver is directly correlated with angst about the cobalt supply channel going forward. That can only mean one thing: robust pricing driven by demand-side fundamentals for the foreseeable future.
The second positive component is acquisition potential. Apple is among the richest, most capitalized corporations in the world, with $285.1 billion in free cash available. That gives Apple enough firepower to comfortably purchase any mid-level cobalt miner the world over without impacting its balance sheet.
As such, could they be eyeing strategic partnerships with important Canadian cobalt producers like Katanga Mining (TSE:KAT) or eCobalt Solutions (TSE:ECS)? The latter provides battery-grade cobalt salts that are ethically sourced (which is important to Apple) and are produced in the Idaho cobalt project located in Lemhi County, Idaho. The former (KAT) is up 16.08% to $2.02/share (as of this writing) on the day, with investors perhaps speculating on future strategic partnership initiatives.
Keep in mind that Apple increased its U.S. Advanced Manufacturing Fund from $1 billion to $5 billion in January 2018, with a plan to create 20,000 new jobs manufacturing jobs over the next five years. Sourcing from companies with domestic supplies—at least for the North American component of production—may become a strategic necessity.
This is especially true when you consider the increasingly hawkish stance the Trump government is taking on trade issues. The administration has already opened up NAFTA trade negotiations, and has continually butting heads with China by threatening import tariffs on various goods. What goes around comes around. Seemingly, the trend towards the imposition of retaliatory import tariffs may be on the upswing, and Apple is positioning itself to avoid that game of chicken.
In any event, the benefits of outsourced globalized manufacturing are clearly waning. The inevitable rise in second/third world wages, political instability, and Trump’s carrot/stick approach to coax multi-nationals back into the U.S. is clearly working. In our estimation, North American cobalt producers with sizable domestic mineable reserves will like command interest with not just Apple, but their competitors like Samsung, Nokia and Ericsson.
When the industry leader throws down his chips, his competitors usually follow.
Did Cobalt Just Experience Its ‘Lithium Moment’?
In the author’s opinion, Apple’s foray into the cobalt market is eerily reminiscent of Tesla Inc.(NASDAQ:TSLA) entrance into the lithium market 30 months prior.
It was then that Tesla—already embarked on creating the world’s largest ‘Gigafactory’ in the Nevada desert—made a strategic decision to bilaterally source lithium hydroxide directly from the junior miners themselves. Companies like Bacanora Minerals Ltd. (TSE:BCN) and Pure Energy Minerals Ltd. (TSE:PE) were quick to strike deals with Tesla, eventually rewarding shareholders in the process.
As we can see, Tesla’s bold initiative provided the rocket fuel necessary to propel lithium prices higher. Junior lithium miners at all development stages reaped the rewards of the new gold rush. Keep in mind that Tesla announced their Gigafactory plans in February 2014, so prices didn’t go parabolic right away. Sometimes, sector-changing news has to filter through the investor community before the ‘critical mass’ effect takes hold.
The difference between Apple’s cobalt intentions of today and Tesla’s lithium intentions of the past is commodity price cycle positioning.
As we can glean from the chart above, lithium prices went nowhere for at least ten years before Tesla stepped in. The combination of Tesla’s long-term demand put and overall industry demand for long-life/weight-resistant battery ions created the catalyst needed for lithium prices to skyrocket. In today’s cobalt market however, prices have already advanced almost 4-fold in the past two years. In essence, cobalt has already had its ‘lithium moment’ without the aid of a global multi-national guaranteeing continuous demand.
Apple’s upcoming cobalt foray is like icing on an already sugary-layered cake; welcome news, but much of the exuberance (rich taste) is already priced-in.
Regardless of how much cobalt prices benefit directly on the news, the upcoming ‘Apple put’ should help smooth out cyclical price tendencies in a historically volatile market. I expect Apple will procure supply agreements across the globe in strategically important manufacturing areas, promoting price stability worldwide. That would be a win-win scenario for the industry, regardless of location.
Glencore PLC is Back, And It’s Hunting For Strategic Assets
Remember Glencore’s near-death experience in 2016? It was only two years ago when over-indebtedness debt and moribund metals prices threatened to take down the iconic commodity producer. Glencore’s ADR (OTC:GLCNF) nearly closed below $1/share USD, and the liquidity crunch from creditors was deafening.
Well, times have certainly changed for the mega-everything mining & commodity firm.
Nowhere is this more apparent than with today’s dissemination that Glencore Plc surprised investors with a bigger dividend than investors anticipated. Glencore nearly tripled its dividend to $2.9 billion, derived largely on the back of surging profit and commodity prices. This is a great sign that profitability within the mega-cap mining space is as healthy as its been since the Great Recession. It also hammers home the reality that Glencore’s past issues are a distant memory.
Perhaps most salient for small cap investors however, is the fact the Glencore is hungry to start expanding again. With net debt down over 70 percent from a peak of US$38 billion in late 2013, the company is primes to put its cash hoard to work. Chief Executive Officer Ivan Glasenberg has affirmed these intentions by stating, “We’re generating $10 billion of free cash flow on current commodity prices… There is room if and when we want to do any acquisitions.”
Of course, you don’t need some Midas Letter analyst to state the obvious. If Glencore’s financial health is a microcosm for the industry at large, we could be on the cusp of a consolidation wave within the sector. Everything from base metals to agricultural commodities to energy assets could be in play. In my estimation, the mid-cap miners with two or more commodity production streams could be the most likely targets. Either way, if a consolidation wave hits, the tide should raise all boats.
For Canadian mining companies, today was a good day.
Midas Letter is provided as a source of information only, and is in no way to be construed as investment advice. James West, the author and publisher of the Midas Letter, is not authorized to provide investor advice, and provides this information only to readers who are interested in knowing what he is investing in and how he reaches such decisions.
Investing in emerging public companies involves a high degree of risk and investors in such companies could lose all their money. Always consult a duly accredited investment professional in your jurisdiction prior to making any investment decision.
Midas Letter occasionally accepts fees for advertising and sponsorship from public companies featured on this site. James West and/or Midas Letter may also receive compensation from companies affiliated with companies featured on this site. James West and/or Midas Letter also invests in companies on this site and so readers should view all information on this site as biased.