Surfing The Waves In Commodities and Resource Stocks - A Quick Rant On Lithium, Uranium, and Copper Stocks
Hey there Excelsior Prosperity Substack crew! Yesterday, over at the KE Report, we posted an interview with my buddy Nick Hodge, of Digest Publishing. We started with the macroeconomic picture, but then dove into opportunities in the commodity sector, mostly focused on the bullish fundamental supply/demand setups for the uranium and copper sectors and related resource stocks.
I’ll start off by sharing the link to that video with Nick Hodge before diving in to my personal related rant, that then expanded into the pricing runs we’ve seen in Lithium, Uranium, and the potential run setting up for Copper.
Fed Policy Expectations, Select General Equities, The Uranium Surge, And Thoughts On Copper Stocks
That discussion with Nick sure got my wheels turning… As I was posting a few different links to other interviews on uranium and copper on the KER blog, I came across an article that discussed how there were a number of struggling “critical minerals” and “battery metals” companies in the lithium, nickel, and cobalt sectors that were in trouble today, after this niche of the commodity sector received a fair bit of fanfare over the last few years. I’ll post a link to that article below, and then my ensuing commodities investing rant that followed.
Battery Metal Price Plunge Is Closing Mines and Stalling Deals
Thomas Biesheuvel – Bloomberg News – January 9th, 2024
https://www.bnnbloomberg.ca/battery-metal-price-plunge-is-closing-mines-and-stalling-deals-1.2019715
That article on “Critical Minerals” linked above is well worth the read. It goes on to list off a number of Lithium, Cobalt, and Nickel companies that are struggling to move forward with mining or building projects. It gets into the price collapses in the underlying commodities, and brings into focus the challenges facing the mining industry. There is a continued divorce seen between what political and special interest policy makers want to see and their projected timetables for adoption of EVs, batteries, and a green initiatives, versus the actual realities of getting large mines built and maintained to bring on the supply of the raw commodities needed to fuel the engines of manufacturing.
Once again, the dreams and ideologies of the masses and their ruling elite, as it relates to how they think and talk about how the future is going to unfold, clearly has a massive disconnect growing on the front-end sourcing of the materials needed to make it all happen. This widely touted past vision of all EVs by 2020 and then pushed back to 2030, and only renewable energy running everything with the assistance of energy storage and backup batteries, stands in stark contrast to the cold hard reality of what played out.
So like usual, the can was kicked further down the road moving projections out to 2040 and 2050 now. Regardless, it is going to take major changes and cooperation on the ground level (and underground level for that matter), to actually develop, permit, build, and extract the raw materials for the future from mining operations. It will mean much less blaming and shaming, and much more collaboration and support for the mining sector.
Another glaring point is that all these future projections for adoption implementation stand in stark contrast to the actual demand for these products that has been seen thus far from consumers (which is much smaller than where their models predicted things to be by this point 10 years ago or even 5 years ago). That’s a point that the powers-that-be conveniently ignore. Everything did not switch over to just EVs on the roads and solar and wind power by 2020 (like they stated would mirror the same kind of 10 year mass adoption move from horses to automobiles did in the past)… and doesn’t look like it is going to get anywhere close by 2030 either. (Remember those Agenda 2020 and Agenda 2030 initiatives….which were plugged by UN nations since 1994 where they laid out their grand vision of the new world order?) Now Agenda 2020, which became Agenda 2030, has overtly morphed into monstrosities like the Green New Deal and World Economic Forum hiding in plain sight, but apparently these visionaries lacked the proper foresight for adoption by consumers.
Regardless, this all seems to be building towards a massive choke point, where either we are going to need to see even more cooperation between world governments, special interest groups, and the mining industry, or there is going to be a collective realization that there just isn’t enough commodity supply to actually bring online to get anywhere close. It’s a moot point so far, because until present the actual consumer demand just hasn’t been there to really kick off manufacturing anywhere close to the degree needed for mass adoption. When/if there finally is enough consumer demand, then there are going to be much higher prices needed to incentivize new supplies of commodities to come online. I’m sure just like what we saw with the oil/natgas spike in 2022, when it hit a choke point, that it will somehow all the be the fault of the evil profiteers in the extractive industries (and not the terrible political policies and do-gooder environmental pushback that crushed all the investment in new growth for the sector).
For example, just think about the huge mismatch in projected demand versus the current price of Copper. Newsflash to the EV and global electrification dreamers and schemers: $3.50-$4.50 copper is not going to cut it for billion dollar mines to be built, brought into production, and maintained. Industry experts we talk to concede that we are going to need to see $5-$7 copper to really get some traction with advancing new mines, and these things take multiple years to go from an economic study to a viable producing mine. When the masses finally have this lightbulb go off in their minds about how much new copper is actually going to be needed, then they’ll likely shift the blame to the copper companies for not producing enough, (without a moment of self-reflection, or looking into why the industry has been stalled). Then if prices do go higher to $5, $6, $7 a pound, spiking related prices in the end-products copper goes into, then they’ll again likely shift their ire to those terrible commodity speculators for bidding up the copper prices. Rinse and repeat. It’s a tragic comedy.
The other completely converse side of the issue, that has always plagued the commodity sector, is what happens when prices do finally rise higher. The article linked above pointed out that when we finally did see higher prices in some commodities in the so-called “Critical Minerals” category, like Lithium, Cobalt, and Nickel; that new supply did finally come on-line, but it totally swamped demand and then slammed prices right back down again. Now there are all these new junior producers shutting back down, and larger producers creating stockpiles of all 3 aforementioned commodities. Development companies get stalled, and manufacturers become hesitant to sew up deals with the respective commodity producers to ensure supply chains are met.
This played out in the Battery Metals space, where prices in those “critical minerals” that have cratered down by 40%-60% over the last 2 years; since their frothy peaks in early 2022 after the Ukraine/Russia geopolitical conflict got underway. I guess since then, in only 2 years, these critical commodities have suddenly became less “critical” to the factories. (What gives?)
Here is a great image put out by the Visual Capitalist in 2022, showing the groundswell into Lithium, Cobalt, Nickel, and Copper at the time and where their prices were trading then for perspective.
In commodities, just like the cure for low prices is low prices…. well, the opposite is also true, and the cure for high prices is high prices. The consumer and business demand has not been robust enough at this point to mop up the new supply that has been created in Lithium, Nickel, and Cobalt and so we went from famine, to feast, and now back to famine again in the pricing of these commodities.
Longer-term, yes, the demand will keep growing, and it will absorb the above-ground stockpiles, and push pricing back higher again, but if pricing grows too suddenly and spikes to the point where mining companies do scramble to put more supply out there leading to too much supply, then it can be a virtuous circle that ends up imploding the very things people say they want.
Maybe the governments of the world and so-called environmental lobbyist groups should have decided to work with the raw materials and mining companies for the last 2 decades to achieve their green dreams; instead of oppose them in permitting, in funds allocation using ESG as a weapon, and blocking so many mines with their NIMBY protests. Then maybe we could have had a more measured and logical discussion and approach to bringing on the new supply of commodities needed for whatever initiatives were the flavor of the day.
Instead it went from “we don’t want any more mines…booo!,” to “hey, when are you guys going to mine more of this stuff?” (because manufacturers say they don’t have enough supply to meet our projections). As a result of insufficient supplies of commodities, and everyone knowing it; then of course prices ratcheted up to much higher levels in anticipation. Well these higher prices needed to incentivize new production were at odds with the projections for a mass adoption of electric vehicles for transportation powered by renewable energy.
These higher prices were also at odds with all the materials and commodities needed to build out the charging station networks or the energy grid infrastructure to accommodate the growth projections. As a result of high overall prices to play in this arena, paired with the lack of infrastructure, the consumers have not all rushed in to adopt this new type of transportation anywhere close to where it was projected over the last decade. Not to mention, the electric grid could not have supported a mass adoption of EVs, even if consumer had collectively gone for it. (another point the policy makers and activist groups conveniently ignore).
Even today, the required infrastructure is simply not in place for the great expected mass adoption of EVs in 2024, or anytime soon. It will be a long process and not an event. The charging station infrastructure in most countries is still very much in it’s infancy, and needs to grow many times over to give the masses adequate ways to charge their vehicles in larger commercial sense. Until there is a charging station on every corner in every city and town, instead of a gas station on every corner, it’s just not going happen. Yes, in the very most progressive cities we are starting to see that transition, but that is a far cry from mass adoption across whole nations… it’s still a ways off.
The battery manufacturers have been scrambling for years to get factories built all over the world, but the cost of those batteries are still way too expensive for the masses to buy up many of the new EVs, or even the aging EVs. The high cost of batteries continues to affect both new and used EV adoption. (not to mention the manufacture and disposal of all those batteries isn’t really that “green”). If we see enough factories ramp up in scale and production, to mop up some of the stockpiled supplies, then maybe this helps bring down pricing over time, but there is also the inflation component of wages and the cost to build new plants that makes this near-term affordability for consumers dubious proposition any time soon.
There were some pretty big prognostications from this years COP 28 conference, about how many charging stations are slated to be built. Lets see how the projections match up with reality when these policy dreamers and schemers realize there isn’t enough copper for the wiring for all these charging stations, much less the electricity generation on the grid to feed them all.
On the electrification side (which is the new fuel needed to charge all these electric vehicles, electric buses, electric bikes, and electric planes)… when we look at the renewable energy sector, it has failed as the politicians (and their media sycophant’s) chosen white knight that was supposed to ride in to save the day. Many parts of the world have had repeated power brown outs or rolling power black outs when intermittent renewable energy sources failed to deliver as advertised.
Sure, there is no doubt that solar and wind are growing in their contribution to the overall energy mix, but let’s be real here… they absolutely did not come anywhere close to displacing fossil fuels as it was predicted they would 10-15 years ago. In fact, coal power plants, natural gas power plants, biomass plants, and oil and gas powered vehicles are still in very strong demand. So what happened to all those prior projections of where we’d be today with all renewable power and energy utopia?
Remember all the government money that was just evaporated chasing defunct solar companies in prior administrations and years gone by? Over the last 2 years, many nations realized they were overzealous in their desire to “phase out fossil fuels.” When prices spiked again in 2022, the same political bodies that had opposed oil and natural gas operations for over a decade (just like they have opposed hard rock metals mines), suddenly wanted companies to “drill baby drill.” (??)
These people suddenly had amnesia of the fact that they were the ones that had crimped supplies in the first place with onerous policies. It is tragic comedy to have watched the same people that tried for over a decade to shut down oil and gas companies, or smother them in unrealistic ESG policies, then suddenly beg them to produce more oil and gas to drive prices back down again. As inflation pushed consumer prices higher, it was only be exasperated by higher oil/gas/diesel prices, and it was a politically bad look. The real issue is 2 decades of terrible policies that led to the supply/demand mismatch and lack of investment growth in the extractive industries.
Also, look at the policy train-wrecks of Germany’s and other so called “green nations” over the last decade. They shunned not only fossil fuels, but also illogically attacked nuclear energy, in favor of solar or wind to displace them. This resulted in them ending up belly-flopping into the energy pool and then needing to import nuclear energy from neighbors in France (ironic?), or to actually import far more polluting coal power. This spiked the energy rates in Europe big time, and people were not happy about it. Realizing their error in judgment, Germany then did the myopic natural gas pipeline deals with Russia (laughing at people that tried to warn them) until it all unraveled on them by 2022. Somehow “I told you so” doesn’t quite encapsulate it, but Germany has been the poster child of what not to do in energy policy.
Now the tides are finally to turn, with respect to how viable renewables actually are for providing 100% of baseload energy (which isn’t ever going to happen). Even though it’s a day late and a dollar short, at least some reality has set back in with think tanks that fossil fuels are still very much needed, and we actually need more natural gas power plants, not less of them. Additionally, once reality has finally set in for the greenies…. nuclear power is finally back in the mix and discussions again. Nuclear energy is the only carbon-free baseload power generation input to even come close to providing the kinds of 24/7 electricity requirements needed to support the mass adoption of EVs, eBuses, eBikes, and ePlanes and the massive strain they would put on the energy grid. Nations either need coal plants, natural gas plants, or nuclear plants to back up the intermittent power and down periods from solar or wind. If they want it to be carbon free, then nuclear power is the clear choice.
It is going to be interesting to see how things develop moving forward, but like usual, the commodity sector will remain cyclical, and going from famine to feast, back to famine and back to feast, over and over again. As a result, commodities investors must learn to surf the waves in these different sectors as they swell coming into shore, and then exit positions before they crest in pricing and come crashing back down again.
Lithium was an obvious place to be positioning from 2016-2019, as all the fundamental drivers for higher prices were clearly there, and we discussed that repeatedly on the KE Report blog at that time, as the conditions were clearly setting up. Well that massive wave of value creation came in to shore from late 2019 to late 2021-2022 range.
Most larger lithium producers and developers, after going up 5x-15x, peaked in pricing valuations by late 2021, and yet a few trekked higher into 2022. It is easy to see that trend topping in the sector ETF (LIT) or large producers like SQM (SQM), Ganfeng Lithium (GNENF), or developers like Lithium Americas (LAC).
Personally, I was acquiring a half-dozen key names in the lithium space (my portfolio had even more than that at certain points in the cycle) during the lean years in 2017-2019, and rode them up higher into that frothy peak in 2021. It was late 2021 when I mentioned repeated over at the KER that I had exited my Li mining stocks holdings in the sector, seeing the eventual writing on the wall. Overall that wave had swelled, was cresting, and was set to crash.
Sure for some Li names the rally continued for them into 2022, so I may have jumped out of a few a bit early, but the majority meat of the move had mostly played out from 2019 to late 2021-2022. There were a handful of pegmatite companies in James Bay that suddenly exploded in valuation in 2022 into early 2023, and some Direct Lithium Extraction companies that caught the imaginations of investors and ballooned the last 2 years that I missed out on, but most of those DLE companies are still not in production and suffered big draw downs in valuations for the balance of 2023.
However, anyone that really understands the lithium mining sector knows that most of the larger key players and producers in the sector got way over their skis in valuations by late 2021 - mid 2022, and it should be noted that they haven’t got back up anywhere close to those levels since then. Obviously prices in lithium have collapsed back down since then too, getting hit really hard in 2023, and that has sucked all the air back out of that room. The point being, it was clear far in advance that the Li wave was swelling and coming into shore, and yet few investors positioned into that to really capitalize on the trend before it played out. People love to tout supply/demand stats, but then fail to act on them when they are staring them right in the face. That’s what makes a market though…
Uranium has a similar story in the works for the last 5-7 years, but likely with a longer-trajectory to play out than in the Lithium sector. It was plain as day to any thinking person that the double bottom lows in the Uranium spot-price in the $17-$18 range in late 2016 and again in late 2017 were down to simply ridiculous levels that we would not see again. The price to incentivize production back in 2017 was $60 per pound, and now due to inflation and rising costs it is north of $70. It wasn’t a matter of “if?” but simply a matter of “when?” we’d see pricing get back up above those levels. So then why in the world didn’t everyone start accumulating for the eventual payoff? Again, this is what makes a market.
There were fits and starts and some really nice tradable rallies with uranium mining stocks in 2017, 2018, and 2019, but many still doubted the reality of higher prices and incorrectly thought nuclear power would just keep getting phased out, even when all the data said the exact opposite. Well as the saying goes “Truth will out.”
We’ve seen the huge runs in U-stocks since then coming out of the pandemic lows in 2020 and surging since then (check out a chart of UUUU, or UEC, or DNN, NXE, or EU.TO since those lows). Even so far in 2024, Uranium stocks have been off to the races to even higher levels as evidenced by URNM or URNJ.
Since that pandemic low we’ve seen almost a 4 year run in the uranium equities, that was admittedly a long time coming, but still inevitable. Yet most investors, armed with the full knowledge this was going to happen, sat out this meteoric rise in the uranium stocks on the sidelines and missed some of the best gains in the resource stocks the last few years. (Why?) There is likely still more room to run in this sector before it crests and comes back down over the next few years, but the biggest swell in the wave and the easiest money has been made at this point. This is how commodity sectors work, and the commodities and related equities need to be surfed and traded.
We’ve heard for years that the same kinds of fundamental supply/demand mismatches are stacking up in the Copper sector, and so higher prices here for the good doctor are once again, inevitable… just like they were for Lithium at one point, and just like they were for Uranium at one point. Will investors start to get positions before the wave starts to swell and come into shore?
We’ll see how it goes, but if past is prologue, then most investors will once again miss the copper wave too, just like they missed the prior lithium and uranium waves. Same thing with the precious metals wave that will be swelling and coming into shore over the next 2 years…but that’s a bit different in that it is less about supply/demand in manufacturing, and more about macroeconomic events. Still most resource investors will be out of position when that wave comes in, and will fail to have accumulated during the corrective stages we’ve seen the last year or two, and will miss the big gains in the 2 years we have in front of us. That’s what makes a market. Rinse and repeat.