Critical Metals: A Bright Spot in the Downturn?
It’s rough out there for resource investors. In the wake of Black Monday, metals prices continue to fall and many mining stocks have taken a bit of a beating.
However, when it comes to critical metals, the situation is a bit different. Indeed, Andrew Miller of
Benchmark Mineral Intelligence said his firm believes that critical metals could be a bright spot for investors in light of the broader downturn in the commodities space.
Miller stated that there’s plenty of potential for growth in the lithium-ion battery space. By extension, minerals that are part of the
battery supply chain — including lithium as well as graphite and cobalt — are poised for growth also. “Lithium prices are already showing the effects of this growth, and other materials like graphite and cobalt will most likely follow this trend in 2016,” he said.
While Miller thinks it may be difficult for investors to gain exposure to critical metals in the short term, he stated that Benchmark is “firstly looking at the junior mining space” for opportunity in terms of future battery supply chains.
Here’s more of what he had to say.
INN: How will the broader fall in commodities prices affect the critical metals space? Could it be a bright spot for investors, or is negative sentiment trumping growth and rising prices in sectors like lithium right now?
AM: We think the critical minerals space will certainly become a bright spot for investors in light of the downturn in the commodities space and the wider economic readjustment. We’ve already seen evidence of increased investor interest in the past few months.
With major commodities prices slumping, the critical minerals space is providing some optimism for investors as one of the few remaining growth markets.
With the outlook for industrial markets weakening, investors will be looking for new growth areas. We at Benchmark believe the battery space is one of these sectors, and subsequently the critical minerals — such as lithium, graphite and cobalt — that fuel this production will be pivotal.
Ironically, while the macroeconomic adjustment may slow the evolution of these upstream sectors — particularly in terms of China’s role and the progress of new projects — in the longer term, it will likely serve to heighten the criticality of many of these minerals.
INN: What are your thoughts on what caused this week’s Black Monday fall? Which factors should investors be paying attention to in terms of what’s driving the downturn and how long it could last?
AM: The latest in the chain of events that has caused this fall has clearly been the devaluation of the yuan, but many participants have seen this day coming for some time.
On a macro level China is having to restructure. It can no longer sustain the double-digit growth rates of the 2000s, and industry developments will slow as a result. The country opened up its markets and now it’s having to accept that it’s susceptible to global economic pressures like everyone else.
In terms of critical minerals, I think it’s important for investors to take a step back from wider macro issues and learn about the market fundamentals of these small and often fragmented markets.
We at Benchmark always emphasize that these critical minerals are not bulk commodities markets and cannot be treated as such.
INN: Where should investors be looking right now, in light of the fall? Do you see any silver lining?
AM: In terms of critical minerals we think there are some exciting end markets developing that will cause huge disruptions to existing supply chains and provide significant opportunities for investors.
Take markets like
3D printing, aerospace and other advanced materials, and you will see that there is still scope for significant growth.
Most of all, we believe the evolution of the lithium-ion battery into vehicles and utility will be a real game changer. We’ve already seen the first phase of mass commercial growth in this sector with the rise in portable
technologies. If, and more importantly when, this electrification spreads to transportation and utility storage is the game changer — particularly for resources.
You need look no further than the growth protections for these markets, which even by conservative estimates are substantial. Plot that growth against existing raw materials supply dynamics and you can see that change is coming.
Lithium prices are already showing the effects of this growth, and other materials like graphite and cobalt will most likely follow this trend in 2016.
The transformation of these markets has the potential to not only be a silver lining but a game changer as traditional industrial markets find a new equilibrium.
INN: How investors can gain exposure to critical metals? When it comes to lithium, I know that the mineral only makes up a portion of revenues for the biggest three producers, so it can be hard to gain exposure there. Similarly, Freeport-McMoRan (NYSE:FCX), mainly a copper producer, is a significant producer of cobalt. What about lithium, graphite and cobalt juniors, and/or ETFs?
AM: As relatively immature markets, where supply is dominated by a few (often privately held) companies, I agree it can be difficult to gain exposure to these critical mineral sectors in the short term.
However, with the dynamics of these markets expected to change quickly over the coming years, we at Benchmark believe there is opportunity for investment into future supply chains.
By future supply chains we’re firstly looking at the junior mining space. New supply will be required as growth in emerging markets escalates, and these junior companies are striving to serve these markets.
While the exploration boom of 2009 to 2011 saw a surge in the number of junior projects in these markets, the past four years have served to consolidate this group, in many cases leaving a few relatively developed companies. There are a lot of good-value, long-term investments still on the market as these industries will need new supply.
