Commodities Are Dead… Or Are They?

Commodities Are Dead… Or Are They? post image

Let’s start with two charts.

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Pretty depressing right? They’re the YTD charts for gold (top) and silver. Since their hay days in September of 2011, the valuable metals lost 35% and 53% of their value respectively. On their way down, they created an avalanche, in which thousands of commodities related stocks were decimated to a fraction of what they were once worth.

But isn’t there an old Wall Street adage that says ‘Buy When There’s Blood In The Streets’? We believe there is. And just because a sector has fallen out of favor, doesn’t mean it will never be back. Long story short, we went to Mines & Money in London earlier this week, Europe’s leading mining investment and capital raising conference, to find out more about the state of the market, its trends and opportunities.

In general, the show was well attended the entire three days. It wasn’t (over)crowded, but certainly wasn’t slow either. About 230 companies had a booth at the event, with the quality of most of them being pretty good.

The atmosphere obviously wasn’t super optimistic, but it wasn’t depressed either. Everybody has their fingers crossed for better commodities prices in the new year. Despite that only being hopes for now, companies are moving along with the development of their projects, albeit at a slower pace.

2 Stocks We Like

We heard several very attractive stories. Two of which we will share below. Others will be featured on Smallcaps.us in the coming weeks.

Santacruz Silver Mining Ltd. (SCZ – $0.86) is a Mexican focused silver company. Its Rosario Mine reached commercial production in April of 2013 and currently initiatives are being undertaken to increase its operational capacity to 500 tpd by the end of the first quarter 2014. The ramp up of production at Rosario is on target to become cash flow positive by year-end 2013. In addition, Santacruz is advancing its San Felipe project to production. It can do this without raising additional funds. On June 30th the company had over $10 million in cash.

Rye Patch Gold Corp. (RPM – $0.145) has several properties along Nevada’s Oreana and Cortez gold trends. On January 1st, 2014 it will start receiving royalties from Coeur d’Alene Mines. In June of this year, Rye Patch settled a legal dispute with Coeur d’Alene, in which Rye Patch conveyed a number of claims to Coeur in return for $10,000,000 in hard cash and a net smelter royalty (NSR) of 3.4% on gold and silver produced and sold from the Rochester Mine covering 39.4 million ounces of silver equivalent. At today’s gold and silver prices, Rye Patch will receive more than $24 million over a four year period from this NSR. Also Rye Patch had over $10 million in cash on June 30th.

2 Commodities We Like

The chart below shows the price of uranium during the past five years. We realize there’s a lot of controversy surrounding uranium and its use in nuclear power plants because of the potential hazards. But fact of the matter is that there’s no realistic – read affordable – short term alternative for nuclear power.

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Two events may have a positive impact on uranium prices. At the end of this year the US-Russian HEU (Highly Enriched Uranium) agreement, under which Russia is dismantling a portion of its old Soviet-era nuclear warheads, to produce commercial-grade, LEU (Low Enriched Uranium) for use in nuclear power plants, is coming to an end. This may result in supply shortages of uranium in the US, which should drive up the uranium spot price.

A second event which will undoubtedly increase uranium demand over the longer term is the fact that over 60 nuclear power plants are currently under construction in 13 different countries. Next to the reactors already being constructed, there are plans for many more units around the world, including in the US and Russia.

There are plenty of companies active in the uranium field. Bigger ones such as Denison Mines Corp. (DNN – $1.13), but also small caps such as Kivalliq Energy Corp. (KIV – $0.22). When you want to invest in uranium itself and not in individual companies, there’s also the very interesting tracker Global X Uranium ETF (URA – $14.93).

A final chart is the one for antimony. Antimony is a lustrous grey metallic-looking solid, with intermediate to relatively good electrical conductivities. China is by far the largest producer of antimony with about 80% of the world’s supply. Followed by Russia, Myanmar, Canada and Bolivia. According to the United States Geological Society (USGS), total production of antimony in 2012 was 180,000 tonnes.

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The overall production rate in China has slowed in recent years, as the government has closed down many antimony mines. Additionally, the Chinese government has declared antimony a strategic metal and has introduced quantitative and export licensing restrictions in 2010.

Based on the current usage, antimony reserves will run out in the next 8 to 12 years. The largest mine, accounting for over 50% of China’s production, is expected to come to the end of its mining life in 5 years.

Moreover, although several new antimony mine projects are being evaluated and developed in countries like Armenia, Australia, Canada, China, Georgia, Italy, Laos, Russia, and Turkey, they will all take plenty of time to come to market.

About 60% of antimony production is consumed in flame retardants for products such as children’s clothing, toys, aircraft and automobile seat covers. Approximately 20% is used in alloys for batteries, plain bearings and solders. Additionally, it forms a highly useful alloy with lead, increasing its hardness and mechanical strength. Even more important, antimony is increasingly being used by the military to harden ordnance and lead in storage batteries, making it a strategic metal.

Because of the expected supply shortage and the increasing strategic use of the metal, the British Geological Survey (BGS) has placed antimony on top of a list which contains 52 materials or elements of economic and lifestyle value that are most at risk from supply threats. Also, the European Union has identified antimony as one of 12 critical raw materials in a report published in 2011, primarily due to the lack of supply outside China.

As a result of reduced production and increased demand, the price of antimony, which is evaluated by specialist publications and providers such as Fastmarkets, rose from $4,000 per tonne early in 2009, to well above $10,000 in 2011. Nowadays, the price hovers around $10,000.

There seems little chance of a significant switch away from antimony to alternatives such as hydrated aluminium oxide for retardants, because the manufacturing processes based on antimony trioxide are well established. It is not an overnight task to simply switch production lines to cater for a completely different metal.

The other outcome of high prices is that previously uneconomic sources of production start to become attractive, and new antimony mine projects are being evaluated and developed. We like Global Minerals’ (CTG – $0.06) Strieborna project in Slovakia, which, according to its latest resource estimate, not only contains over 25 million ounces of silver, but also about 56 million pounds of antimony with a gross market value of $250 million.


For important disclosures, please read our disclaimer.

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