The Last Bear Standing, on why the bear market should continue.
The Koala, on why the Lithium market is like Iron Ore, and how big suppliers have an advantage.
Dr John Cambpell (Aug 6th): The BA5 strain is taking over, and there seems to be nothing replacing it. I think this might have good implications for a China cyclical recovery (from zero covid). For myself, I'm not playing China.
Tin is a tiny market, not covered by any analysts. Needed for electronics and renewable energy. It can fly in the next bull market.
May 2022 Tin Panel with Adrian Godas and Piet VanRusselt. The presentation is disjointed and slides blurry, so I try to provide a summary here. Timestamps in (brackets).
(1:30) Demand
History of Tin:
One third production in China. A quarter from Indonesia. 10% from Peru, and another 10% from Burma (which may as well be China).
(15:41) @Respulator 's numbers:
(16:08) China. Flat supply for 20 years. Mostly from mature mines in Yunan. A few new ones in Inner Mongolia.
(17:14) Indonesia. PT Timah controls all smelting, majority of production is from sea ("artisanal mining") which fucks the environment.
(20:01) Africa. 5 mines listed.
(21:20) South America: All from Boliva, Brazil and Peru.
(22:12) Australia. Had a lot of past production, but only one producing mine (MetalsX - 8K per year). A lot of potential mines (Ardlethan, Cleveland, Granville, Heemskirk) - but he thinks they have bad metallurgy, with too much sulfites. Maybe Toronga can come online in future,
(23:08) Europe. Hopeful that South Crofty (Cornwall - 3K) and Tellehauser (Germany - 3K) can come on line in a few years.
(24:19) Other:
(25:18) Supply conclusion:
(30:20) Questions
(30:31) Recycling? He can't find any info. Tin market too small.
(37:00) Can big miners return? He thinks its too small. Alphamin is only worth 1bn, don't even bother with due diligence. The selling point for Alphamin is supply security, not profits.
(40:42) How would you play the expected increase in tin price. Alphamin will probably be taken over, MetalsX is the only remaining producer. They do not bother with explorers.
41:81: Not looking at explorers, the producers are cheap enough.
41:50: Scale of PT Timah and their ability to scale. Trying to predict artisanal miners output is impossible. Other sectors (fishing, tourism) are complaining because the tine miners are destroying environment. Vietnam, SEA or African artisanal miners may be able to increase production. This is a risk to the bull thesis because a small increase of even 10kt may change the market.
I've held my short positions throughout the rally, its been a wild ride. From almost 50K profit (10% on the trade) at the trough two months ago, to a 9K loss (-1%) 2 weeks ago. Its now slightly profitable again. Going short is like riding a roller coaster.
I still think its a bear market. And the rally has almost run its course. Its impossible for me to predict when the rally ends, so I'm just holding on.
Norsk Hydro is an integrated, low-cost Norwegian Aluminium producer, one of the few outside China.
Aluminium is produced in several steps:
China produces 40-60% of the worlds aluminium:
Source: international-aluminium.org (Interactive chart)
This is powered by cheap coal. Due to power shortages, China became a net importer in 2021. Now Europe has energy shortages and China's coal-based production is ramping up again.
So aluminium is one of the few commodities that may go *up* if China collapses or invades Taiwan.
Norsk Hydro puts themselves just in the 1st quartile of the cost curve. Lower, if CO2 emissions are taken to have a cost:
Source: Company Presentation March 2022 (slide 11)
In 2021, about half of revenue and 80% of EBIT are from bauxite, alumina, energy and aluminium combined. I count these segments together since the outputs of one segment are the inputs to another. The main cost drivers are energy, labour and carbon. The main profit driver is the LME aluminium price.
The mining and processing of bauxite into alumina takes place mostly in Brazil. Most of the alumina is shipped to Norway, where they produce Aluminium using electricity from hydro power (their "Energy" segment).
Half of revenue and 20% of EBIT is from extrusions (aluminium metal shaped into long pieces, like steel rebar). Its a margin (cost plus) business, unaffected by raw material prices.
They have a number of upcoming businesses:
In short, I'm worried they may end up spending too much on unproven technologies just to appear green. I'll come back to the capex numbers later.
Since the aluminium price is the biggest factor affecting profits, start with it:
\Norsk Hydro's operating cashflows:
Movements in working capital are quite large, so I remove them - they should cancel out over time anyway. After that, the orange bar follows the aluminium price, as expected. 1H22 cashflows are massive.
Average CFO over the past 10n years was 9.7b (excluding 1H22's spike) and 11.6b (including it).
Now lets add Cashflow from Investments:
Total capex in 2021 was NOK 6.9b. Most of this seems to be maintainehnce capex, they did not break it down (p31).
Capex is expected to be 9-11b per year (147:25) between 2022 and 2025. Of that, sustaining capex is 6 to 6.5b:
Source: Capital markets Day 2021 (slide 67)
REIN and Havrand are *not* included in the above capex guidance, and are mostly separate from the parent company. "The external equity injections based on capital raises in their respective companies allocated to the specific project's SPV will impact Hydro's consolidated capex, but not their cashflow. Non-recourse project financing at SPV level, which will cover the majority of investments in REIN and Havrand is target to not impact Hydra's balance sheet" (1:46:56).
So basically, plans now are for ~10b per year of capex in the next 4 years.
The above capex is part of the plans to reduce CO2 emissions by 30% by 2030. This looks reasonable (eg: switching to natty from oil for Brazil's Alumina production). But thery have further plans to become a "Net Zero" company after 2030:
Source: 2Q22 Investor presentation
That part looks pretty vague. Again, I am worried about the technology not being feasible. Chemical & industrial processes don't scale. You can't just run them on AWS.
The target dividend payout ratio now 50% (of profits) over the cycle, with a floor NOK 1.25 per share (NOK 2.5b in total).
2021's dividend is 6.5 NOK per share (or a total of NOK 14b). Plus a 2b share buyback, so 16b. This is way over a 100% payout ratio, so not sustainable. 1H22's results were spectacular, with almost 15b CFO, but we have several years of 10b capex in front of us and commodity prices are always uncertain. I would be a bit more comfortable if they paid for that first, before dividends. Norway's government has a 1/3rd stake in this company, and I wonder if they pushed for higher dividends.
Their net debt is 5bn, and they target 25b debt over the cycle (slide 11).
As of 2Q22, they have hedged some production going forward at prices slightly above today's price (slide 24):
Against a market cap of 131bn (@ today's share price of NOK 64.2):
Commodity stocks can't be valued, since you are just predicting the commodity price.
The company suffered a ransomware attack in 2019. They did not pay, and rebuilt their operations.
