Our 2023 Outlook on Critical Investment Themes (Pt. 2)
Published 21-JAN-2023 14:00 P.M.
16 minute read
Today we share part two of what we predict could happen across our key Investment themes in 2023. (See Part 1)
We are Invested in a portfolio of small cap stocks across a number of macro themes we believe will perform well.
At the end of 2023 we will grade and share how accurate our predictions were. In the meantime, our portfolio performance will likely provide a running indicator of how good our predictions are.
Here is part two of our series, where we will share our 2023 outlook for individual battery materials lithium, cobalt, graphite, manganese, nickel, copper and rare earths.
We have added the macro theme of USA based battery materials projects, which we think will perform well.
We will also cover the energy transition itself, including our outlook for hydrogen, renewable energy and uranium.
Finally rounding off with our views on food security, iron ore, and our outlook for growth stocks.
Today we share the following:
- What we like about each theme for this year
- What other analysts say about the macro theme
- Present the bear case against, or what could actually go wrong
You can read part one of our 2023 outlook in last weekends edition for our views on the commodities supercycle, the broader energy transition theme, development stage resource companies, oil & gas, gold, biotech, cannabis and tech.
Here is part two:
Lithium is a component in virtually all batteries that power electric vehicles (EVs) and many consumer electronics, that has already seen a sharp rise in demand (and price) over the past five years.
New lithium mines are notoriously hard to build and can take ~7-10 years to bring online.
In contrast, battery manufacturing capacity can be built in less than 3 years.
We think that the supply/demand imbalance in the lithium market comes from this mismatch in ability to come to market with new supply.
With lithium demand surging from the billions of $ being invested into battery manufacturing capacity there is a lag in the number of new mines being built.
Global battery metals consultants Benchmark Mineral Intelligence estimates that the world will need >74 new major lithium mines before 2035.
Our view is that the lithium price will remain high for quite a while longer whilst mining capacity attempts to catch up to demand over the next 5-10 years.
Lithium stocks in our Portfolio: LRS, VUL, PUR, RAS, TYX, EMH
Cobalt is an essential part of the EV supply chain and almost all of the world's supply comes out of one country with ~70% being sourced from the Democratic Republic of Congo (DRC).
The DRC is notorious for its unethical mining practices so presents a dilemma for ESG conscious battery and technology companies purchasing the raw material.
We think ethically sourced cobalt from friendly mining jurisdictions must urgently be discovered and brought online, or else cobalt could eventually be at risk of being phased out of battery chemistries.
This is where we see the big opportunity in cobalt.
Cobalt demand from EVs was estimated to reach 63K tonnes in 2022, increasing ~75% to 110K tonnes by 2026 - and EVs are likely to make up more than consumer electronics in the cobalt demand “pie”.
As cobalt plays an essential role in high performance NCM (nickel, cobalt, manganese) batteries, our view is that in 2023 we start to see capital flow towards cobalt projects in politically friendly locations that can support ethical supply.
Cobalt stocks in our Portfolio: KNI
Graphite is a critical raw material used in key industrial sectors like steel production and in the electric vehicle and renewable energy storage space.
While traditional applications still represent about 75% of total natural graphite demand, we anticipate graphite demand to rise alongside the prevalence of lithium-ion batteries.
Graphite is the largest component of lithium-ion batteries, comprising over 50% of every battery and over 95% of a battery’s anode.
Synthetic graphite anodes currently dominate market share, accounting for over half of the battery anode market. But considering the higher price of synthetic graphite and its sustainability issues (its manufacture is very energy intensive, it comes from a carbon intensive industry - oil, and it is mostly made in China), we expect to see increased natural graphite consumption.
Benchmark Minerals Intelligence predicts the need for 97 new graphite mines by 2035.
We think graphite will be the “in focus” battery material this year — market interest has so far focused on lithium, nickel and cobalt with graphite overlooked, in part because its industrial uses have always been the main driver for demand.
Graphite stocks in our Portfolio: SGA, EV1
We are big believers in the growth of the energy storage and EV battery markets - this is a big part of why we like the outlook for manganese in 2023.
When we say the manganese outlook for 2023, we are especially interested in the outlook for high purity manganese (HPM) which promises to go into EV batteries in higher volumes over the coming decade.
Global car makers Tesla, Volkswagen, Stellantis, and Renault have each announced moves to batteries with high manganese content.
That’s not to entirely discount the essential role manganese plays in the production and strengthening of steel, which still accounts for roughly 90% of manganese demand.
We expect the use of manganese to increase this year if governments around the world roll out fiscal stimulus to ward off a recession - a factor for manganese consumption which is closely bound up with steel demand.
We think that could happen in the second half of the year adding further fuel to the ongoing commodities supercycle. Longer term, support will be underpinned by the EV battery market.
Manganese stocks in our Portfolio: EMN, PFE
Nickel is an important base metal used in stainless steel, electronics and specialist engineering.
It's also an important component in lithium-ion batteries, and we expect it to ride the electric vehicle boom for years to come.
As the EV industry continues to expand a greater proportion of nickel is being directed to battery production — forecast nickel demand from the EV battery industry is set to more than double by as soon as 2025.
We think nickel demand will increase as EV production increases in 2023.
And between 2020 and 2040, the International Energy Agency (IEA) expects nickel demand to increase by 7-19 times.
Nickel stocks in our Portfolio: GAL, LCL, ARN, KNI
Copper has become a long-term critical metal as the world upgrades its energy infrastructure and transitions to green renewable energy.
It’s also a key component of Electric Vehicles (EVs) — used in the electric motor, batteries, and wiring, as well as in charging stations. There are no substitutes for its use in EVs, or in wind and solar energy.
We expect that with copper being a key green metal, demand will only improve amid the accelerated move into renewables and EVs, supporting higher prices long term.
Copper stocks in our Portfolio: TTM, AKN, TG1, LCL, KNI
Rare earths are important to the world's decarbonisation goals as they are essential in the production of permanent magnets found in EVs and wind turbines.
China currently produces the majority of the world's rare earths but that dominance has waned over the last few years.
Australia stands to benefit, and the US government has started directly funding Australian rare earths projects.
That being said, there’s still a chance China may look to use its position in the market to its advantage - rare earths has had an increasingly distinct geopolitical element to it ever since Western and friendly nations started publishing their lists of critical minerals.
Due to these geopolitical reasons we think new rare earths discoveries will be rewarded in 2023
Rare earth stocks in our Portfolio: LYN, LNR
US-Based Energy Transition Materials
We believe the recent trend of “de-globalisation” to bring security of supply will place high value on finding and developing resource projects inside a country’s borders.
Specifically for the critical materials required for the energy transition.
We had great success with this theme in Europe, and now are adding the USA.
The 2020 COVID pandemic and the Russia/Ukraine war changed the way world trade is conducted.
Decades of globalisation has led to the hollowing out of the US manufacturing/commodities complex and exposed shortages of critical raw materials/supplies.
For some context, China controls ~80% of the world's lithium hydroxide processing capacity and Taiwan makes 65% of the world’s semiconductors and almost 90% of the advanced chips.
The US government recognises this and over the last three years signed into law multiple infrastructure spending bills such as:
- The Inflation Reduction Act (IRA) - Allocating ~US$400BN over the next 10 years towards clean energy technologies and supply chains INSIDE the US.
- The Bipartisan Infrastructure Law (BIL) - Allocating US$1.2 trillion in funding over the next 10 years on US based infrastructure.
- The CHIPS & Science Act - Allocating ~US$280BN over the next 10 years on domestic semiconductor manufacturing, R&D and wireless supply chains.
The US is throwing almost ~$2 trillion over the next 10 years into building up domestic manufacturing capacity and a secure supply of the critical raw materials needed for industries like EV batteries and semiconductors.
Our view is that the US government has recognised the need to build out domestic manufacturing capacity to ensure a safe, secure supply of the critical raw materials needed to produce the products of tomorrow.
This will mean that US based commodities projects, especially those that are considered critical raw materials will benefit the most from a wave of capital flooding back into the US.
We think that decades of underinvestment and the need to shore up domestic supply chains will lead to a wave of capital flowing into commodities projects that are located inside the USA.
US-based commodity stocks (and stocks leveraged to the Inflation Reduction Act) in our Portfolio: 88E, GTR, GGE (EMN, LRS)
Clean Energy Outlook
Clean energy, as opposed to fossil fuels, has been top of the agenda in the last few years for two key reasons:
- Ambitious net zero commitments made by countries at the UN climate conference in 2021 meant that the “pace and scale” of the renewable energy transition was important
- The war in Russia/Ukraine accelerated the urgency to transition to renewable energy for energy security reasons
These two factors have meant that Europe, Australia and the US are accelerating renewable energy and clean energy projects at a rapid rate, and we think that this will continue through 2023.
Let’s take a look at the three key sectors that sit under clean energy:
Hydrogen is being touted as the ‘next generation gas’ and a potential solution to the net zero emissions targets set by governments around the world.
Hydrogen energy could be the energy of the future, but large scale hydrogen production is in its infancy, with many projects still at the development stage rather than the construction stage.
If the last two years have been about drumming up support for the industry, we think that 2023 will be where push comes to shove as companies, governments, leaders and financiers look to evaluate the feasibility of making these projects a reality.
Hydrogen stocks in our Portfolio: PRL, EXR, MNB
First it’s important to note that if renewable energy projects take off, increased battery materials demand will follow, which is why we are following this macro theme closely.
In addition to the transition to electric vehicles, the global transition to renewable energy forms part of our belief in the boom of battery materials.
We believe the global “energy transition” to renewables is just as much about energy security as it is about the environment.
In 2022 the Albanese government legislated for Australia to reduce its carbon footprint by 43% by the end of the decade. To do this Australia will need to have an ~80% renewable energy mix.
Other countries around the world, in particular those in Europe and Asia, have committed to similar renewable energy targets.
We believe that in order to achieve these milestones, renewable energy projects that are at or nearing development will need to be fast tracked, funded and brought online.
Renewable stocks in our Portfolio: PRL, VUL, EXR
For the past couple of years uranium has been one of the commodities that have modestly been on the rise, tipped for a further break-out that hasn’t yet materialised.
We think that a turn-around for uranium is on the horizon, and that companies with good uranium projects will prosper.
With nuclear energy being another option for many countries’ coveted energy security goals, we think it will have a good year in 2023.
Uranium stocks in our Portfolio: AKN, GTR
The Russia/Ukraine conflict brought about a worldwide food crisis.
Russia and Ukraine together supply ~30% of the world's wheat supplies and Russia on its own is the world's largest exporter of fertiliser - a critical input in the agricultural supply chain.
While the conflict restricts direct exports of agricultural products like wheat, the shortages in the fertiliser supply chains impacts crop yields across the agricultural industry.
Without fertiliser, farmers simply can't produce enough crops to supply the world's food requirements.
And the world population continues to increase each year.
In response to these supply chain shocks, fertiliser prices are up over 300% from when the war broke out in early 2022.
Our view is that over the next 5-10 years we will see an irreversible shift to localise or at the very least diversify food and fertiliser supply chains.
Our food security Investments: MNB
Iron ore is primarily used to produce steel which is the world's most important construction material - without steel we couldn't build homes, cars, windfarms, bridges, etc...
Iron ore is therefore the single most mined material in the world.
The iron ore price has bounced up and down over the last five years, and has started to come back from its 2022 weakness as China re-opens from its COVID lockdowns, and hence construction activity increases.
We think this means a lot more demand for construction materials and of course more demand for iron ore products.
Our iron ore Investments: IRD
While we achieve the most eye-watering returns (and of course losses) on early stage exploration stocks, we also maintain a part of our Portfolio in revenue generating businesses, looking to grow.
Growth companies are established businesses that are making money, and focus on growing key financial metrics, typically cash flow and/or profits.
They tend to have easy-to-follow business models, with readily identifiable success based on earnings/revenue growth.
A “bad” year for a growth stock is nowhere near as bad as it is for a high risk exploration stock.
Growth stocks still give us the chance for great returns, but make up a more stable part of our portfolio, which is heavily weighted to way more risky bets.
Growth stocks in our Portfolio: VN8, FOD, AJX
This week’s Quick Takes 🗣️
Get our Quck Takes live:
This week in our Portfolios 🧬 🦉 🏹
Minbos Resources (ASX: MNB)
This week our 2022 Wise-Owl pick of the Year, Minbos Resources (ASX:MNB), reported that dozens of shipping containers transporting its phosphate fertiliser plant and equipment are now on their way to the plant site in Angola, ready for final assembly.
These are the last of the parts that will be assembled into a 187,5000 tonne p.a. phosphate plant, ahead of first production that’s on track for the second half of 2023.Ultimately, MNB wants to expand to two plants, supporting a 20 year project life that will deliver project gross revenues of over US$1.4BN.
This news, along with the previous week’s investment contract with the Angolan government, clears the path for MNB to actually build a revenue generating mine — a something that very few small cap companies ever achieve.
📰 Read our full Note from Thursday: Full Steam Ahead - MNB to assemble fertiliser plant
Kuniko Ltd (ASX: KNI)
This week our European metals exploration Investment Kuniko (ASX:KNI) kicked off the first of its three drill programs at its Norwegian projects for this quarter.
Each drill campaign will focus on a different metal - nickel in January, cobalt in February and then copper in March.
KNI is currently focused on unlocking a critical metals discovery in Norway (inside the European Union) at a time where Europe is looking to reduce its reliance on imports from Russia and China.
KNI’s plans for the quarter are as follows:
- January - Drill for nickel: KNI will drill 5 diamond drill holes, ultimately aiming to convert the existing (non-JORC) mineral resource of 2.7mt at 0.83% nickel, 0.69% copper and 0.06% cobalt into a maiden JORC resource.
- February - Drill for cobalt: KNI will follow up on its high grade cobalt hits, from last year’s drilling program, with 10 diamond drillholes. KNI is aiming to extend the ~450m strike length and drill deeper to see if mineralisation also extends at depth.
- March - Drill for copper: KNI will drill test two geophysical anomalies displaying outcropping sulphide mineralisation and where rock chips grading 1.7% copper and 2.8% zinc were collected.
📰 Read our full Note: KNI Now Drilling - First of Three Drill Campaigns this Quarter
⏲️ Upcoming potential share price catalysts
Updates this week:
- KNI: Drilling the first of its three Norwegian battery metals projects inside the EU.
- Drilling has begun at the Ertelian nickel project, the first drill program of three planned over the coming three months. KNI plans to drill for cobalt in February and copper in March. Read our deep dive on the news here.
No material news this week:
- GAL: Is undertaking a second round of drilling at its Callisto PGE discovery in WA.
- GGE: Preparing to drill its US helium project looking for a commercially viable flow rate.
- 88E: Drilling for oil in the North Slope of Alaska next to UK listed Pantheon Resources.
- TTM: Drilling its copper porphyry target in Ecuador.
- PRL: Awaiting final execution of a joint development agreement with Total Eren.
- TMR: Awaiting assay results from its ~25.75m visible gold intercept at its Canadian gold project.
- TYX: Awaiting assay results from its maiden drilling program at its lithium project in Angola.
- PFE: Awaiting assay results for its manganese (Weelarrana) project.
- EV1: Updated DFS looking to improve on the already relatively strong US$323M NPV; Framework Agreement with the Government of Tanzania.
Have a great weekend,
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