By: The Energy Report and Paul Renken
Source: Brian Sylvester of The Energy Report
Paul Renken, mining analyst with London-based VSA Capital, says risk capital is being invested ahead of actual consumer demand in the high-technology battery/electric vehicle sector, and believes the "if-you-build-it-they-will-come" mentality pervading the space is an investment wave of the future. In this interview with The Energy Report, Renken offers insight into what he wants in battery materials equity plays, as well as in uranium and fertilizer plays, all of which are primed to power energy portfolios.
The Energy Report: The FTSE AIM All-Share Index recently crossed the 100-day moving average to the upside. How are you interpreting that signal?
Paul Renken: That move happened in early April, and means the market is moving upward for micro-cap natural resources stocks here in London. About two weeks after, the FTSE AIM All-Share Oil & Gas Index also moved above its 100-day moving average. Right now, we're looking at a gain of about 29% since the lows were set in early February. Things are looking quite favorable in the micro-cap space.
TER: Why is this happening now?
PR: It appears that some of the policy and taxation changes that have taken place in the last 12 months here in Europe—and the United Kingdom (U.K.) specifically—are creating extra liquidity in the smallest end of the market. Investors—particularly private investors and people with pension money to invest—are actually getting more favorable treatment by putting mining stocks into their portfolios. That's all good news.
TER: As someone who's taking and exiting positions in different micro-cap names, what are you seeking at this stage?
PR: When companies release good news, share prices are once again moving up. That means investors are looking for news catalysts in these micro-cap stocks. Investors should be able to take a position sometime in advance for what is anticipated to be good news, whether that's drilling results, permit approvals or a change in management. That's how we're positioning.
The interesting thing is that the activity here in the London market is not commodity-price driven. Even if the commodity price over the last six months hasn't done any favors for the sector or a stock in particular, it doesn't seem to matter.
TER: That said, many basic materials commodities are seeing steady, if not rapid, price increases. Which ones specifically?
PR: We are focused on battery materials such as lithium, both the carbonate and hydroxide. The quote prices are back to where they were on a per ton basis in 2007, which was the previous price peak. Other basic materials include things like rare earths and graphite.
TER: London-based Benchmark Mineral Intelligence reports that as many as five battery manufacturing "megafactories" will be built over the next five years. How should investors see that news?
PR: Investment in these battery manufacturing facilities means people are putting a significant amount of money into the forward-thinking picture that sees batteries as critical components in a range of manufactured products, namely cars and high-technology devices. The megafactories in China are being built because the Chinese government is getting serious about reducing vehicle pollution by encouraging consumers to choose electric vehicles. It is a wave of the future—it's where the risk capital is flowing, so I suspect we should pay close attention to that.
TER: Are you surprised by the number of factories being built?
PR: I'm not surprised. There's actually another factory in Europe that wouldn't be in the megafactory category but has expansion plans to become one. That adds up to six.
The really interesting thing is the amount of money being invested ahead of actual consumer demand. It means that risk capital is going into the manufacturing end of the business. It's more or less an "if-you-build-it-they-will-come" mentality in the battery/electric vehicle sector.
TER: Four of these megafactories are in China. Does China have sufficient raw materials to feed its domestic factories, or will it have to look at importing raw materials?
PR: Our research says the Chinese will have the raw materials because they have already been making equity investments at the project or company level in the upstream end of the lithium market, namely some early-stage players with lithium-bearing deposits.
Also, if the growth in battery usage—particularly in large-scale batteries for things like electric vehicles, but also in the stationary storage market for storing power from alternative energy sources—scales up according to projections, then essentially all the known lithium deposits in the world will have to be put into production just to feed that market. In other words, the demand for lithium in 10 years' time will have at least doubled. All the current lithium projects will be needed at some point.
TER: What are some things you look for in a lithium producer or developer?
PR: We're looking for three things in particular when we are reviewing either a deposit or a company.
First, we look at the size and grade of the resource. It's all well and good to have a lithium deposit, but if it's not scalable the story is not going to garner much institutional interest.
Second, we look for the kind of capital intensity a deposit requires to reach production. We like two scenarios: We like a large, low-grade deposit with a fairly straightforward production plan, such that it will last for decades and have an appropriate return on its significant initial capital investment. We also like a smaller-scale operation, like an underground mine, which is less capital intensive and easier to finance to get into production.
Third, we ask where the deposit fits in relation to a potential market. Who ultimately will be the lithium offtaker? Are there battery plants or original equipment manufacturers inside several hundred kilometers of the deposit, such that it will have a logistical price advantage over sources of lithium from far-flung countries?
TER: Tell us about some lithium names that VSA Capital follows.
PR: VSA is working on an initial public offering (IPO) for a private company called European Lithium Ltd. The company is raising £5 million (£5M) to bring the Wolfsberg lithium project, a hard-rock spodumene (lithium-bearing feldspar) deposit in Austria, into production. The £5M will help complete a prefeasibility study on a deposit that was discovered more than 30 years ago and that has been test-mined underground.
Until recently, lithium prices were insufficient to mine lithium profitably at Wolfsberg. The idea is to get it into production sometime around 2018, and to ultimately produce about 12,000 tons (12 Kt) of lithium carbonate-equivalent annually. Given that Austria is quite close to several European battery manufacturers, as well as European automakers, it should have a logistical advantage over other suppliers. European Lithium is the first mining IPO in London to be offered to the retail markets through a crowdfunding web portal, too. You can actually participate as a retail investor through PrimaryBid.com on this IPO.
TER: What's your view on crowdfunding mining equities?
PR: Crowdfunding is catching on nicely here in Europe, but what's even more important is that the U.S. Securities and Exchange Commission (SEC) has implemented a rule under Regulation A-Plus that essentially gives seed-capital funding by retail investors preeminence at the national level over state-regulated securities rules. This new SEC ruling means it's a lot easier to fund earlier-stage companies of all kinds. It suggests that the marketplace is opening to the retail investor taking more responsibility for early-stage risk.
TER: Japan plans to get about 22% of its power needs from nuclear energy by 2030, and China has 23 reactors under construction. Are those two factors enough to move the needle on uranium prices?
PR: Yes, because of the lack of investment in new uranium supply, at least at current spot prices, which have fluctuated over the last six months between $34-39/pound ($34-39/lb). On a long-term contract, the price is probably $15 over that price, or about $50/lb. That's not enough to bring new supply into the marketplace, unless a company has a rare high-grade deposit that is simple to mine. As such, just to fulfill the uranium needs of those 23 Chinese and reactivated Japanese reactors, there is going to have to be an increase in mine production. Prior to 2013 we were relying on supply from the decommissioning of nuclear warheads, but that has ended.
TER: Different sources report that there is a pending 15% supply gap in the near term. Does that sound accurate?
PR: Yes, we are seeing similar kinds of numbers. But that near-term number is relying a lot on how quickly the Japanese get their idled reactors back up and running. It's taken a lot longer than any of us had hoped. The only other realistic energy option is liquefied natural gas, and it is awfully expensive to import. It amounts to billions every year.
TER: What's your outlook for uranium in the near and medium term?
PR: In the near term we're going to have slow appreciation in the spot price and slow appreciation in the contracted long-term price. We've been looking forward to getting a more sustainable spot price in the upper $30/lb range. Any kind of announcement from wherever a nuclear plant is being commissioned, whether it's China, Japan, India or Saudi Arabia, will be supported because that means those utilities will be in the market looking to secure their long-term fuel needs.
TER: What do you look for in uranium equities?
PR: Any company that can show a grade, either for an underground or open-pit operation, in the top 25% of global average grade is going to be on our list.
TER: At the moment, fertilizer seems to be a largely oversupplied market. Can investors make money in this space in the near term?
PR: Yes, if they are selective and pick out those situations that have clear marketing and production advantages over existing producers. Morocco dominates the rock phosphate market on an international trade basis, but it produces rock phosphate as opposed to the more enriched sulfur phosphate. The country is now attempting to produce enriched products so that it's not selling away raw-rock enrichment price advantage in the fertilizer market. But it will take time to adjust.
TER: Do you have some parting thoughts on the batteries materials market?
PR: There are essentially six different mineral commodities that are involved in the battery market, and only one or two of those are traded on the London Metals Exchange. There is a glaring lack of transparency. We cannot get spot quotes on a second-by-second basis to determine what these materials are worth, which is called price discovery in the trade. These materials are bought and sold through arranged contracts between producer and consumer, usually by traders or original equipment manufacturers (OEMs), to secure supply.
As it stands, offtake partners enter the space on a project-by-project basis. But over time that will change, as the storage battery industry grows and helps the alternative energy space become more cost-competitive per kilowatt-hour. The key thing to watch in the nearer term, we believe, is the month-by-month manufacturing rate in China, because China has both the political and environmental imperative to make alternative energy commercially viable. We're watching the speed of that rather closely.
As far as VSA is concerned, we think battery component materials are going to be the most interesting space for the rest of 2015, and perhaps beyond.
TER: Thank you for your insights, Paul.
Paul Renken has a broad range of experience in various aspects of the mining and minerals business. He began his career as a geologist for Canadian junior resource companies in the western United States. Owning a stake in a private consulting firm as vice president of exploration, Renken searched for various base metals, precious metals and industrial minerals. In the U.K., he worked in the equity market media outlets of Digital look and Hemscott before joining VSA as mining analyst in 2006.
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