Capital 10X Growth Navigator: The Commodity Hedge

Markets in a Tail Spin, Commodities Hang Tough

It has been a tough 2022 in the global equity markets, the Dow Jones Industrial Average has now sold off for 8 straight weeks. Inflation is running hot and commodities are the only asset class offering refuge for investors.

The S&P 500 is inching closer to bear market territory, down -18% year-to-date; however technology investors have fared worse with the Nasdaq 100 down -27% YTD.  The Ark Innovation ETF run by Cathie Wood, a proxy for the riskiest stocks in the market, is down a staggering 55% YTD.

Investors have traditionally relied on bonds to cushion the downside during pullbacks in stocks, however this year the 50% stock and 50% bond portfolio is down 16% year-to-date, one of the worst drawdown periods in the last 25 years.

In comparison commodities are having a stellar year, with the Goldman Sachs Commodity Index up 36% YTD. Within the commodity basket natural gas is the best performing, up 116% YTD – pricing driven primarily by the Russia-Ukraine war.

Capital 10X believes we’re in the early stages of a decade long bull market for commodities. The following chart highlights the bullish backdrop for commodities, commodity stocks only represent a 10% proportion of the S&P 500 total corporate capex, while technology stocks represent nearly 40% of corporate capex. The strategy for investors is to buy commodity stocks when the companies are under-investing in commodity extraction, which ultimately underpins a bullish backdrop for the commodity itself (tight supply).

Green Metals

Goldman Sachs Asset Management stated last week that the global economy is set to move from a focus on fossil fuel scarcity towards shortages of key industrial metals; noting that solar requires 40 times more copper than fossil-fuel generation.

Citi estimates that an incremental 5.5 billion tonnnes of metal for green energy will be required from now till 2050 to reach ambitious net-zero emission targets.

Largo Intends to Initiate a Big Stock Buyback, Reports Strong Pricing in Q1 2022 Results

Vanadium supplier and clean energy battery storage company Largo (TSX: LGO, NYSE: LGO) delivered Q1 2022 results; strong pricing is expected for H2 2022 and the intention to initiate a buyback was announced.

Though the company is working through COVID induced supply chain bottlenecks like the rest of the mining industry, the underlying drivers of the vanadium business have never been stronger.

The most important takeaway from this quarter’s results for us is how confident management is in the future of the company. A decision to commence a buyback for a peer leading 10% of shares outstanding is not made lightly. For management to believe they can generate enough free cashflow to satisfy the buyback means they expect very strong profitability in the years ahead.

Coupled with the buyback announcement we believe investors are drawn to the attractive fundamentals of the vanadium market, with the average benchmark price per pound in Europe up 31% year-to-date in 2022. An ongoing structural shortage of vanadium and growing demand from aerospace, chemical and energy markets should provide strong support to pricing over the coming decade.

Largo trades at an 85% discount to its life of mine NPV ($4.2 billion), additionally the company trades at a sizeable discount versus its green metal peers.

Sierra Metals Q1 2022 Results: The Operational Turnaround is in Full Progress

Copper focused diversified miner Sierra Metals (TSX:SMT, NYSE:SMTS) delivered Q1 2022 earnings, results highlight an operational turnaround is in full progress at their major mines and they are on track to meet full year guidance.

With a backdrop of soaring inflation, Sierra Metals provides investors with an attractive inflation protection revenue mix; 93% of current production comes from copper, silver, zinc and gold.

Sierra Metals trades at a deep discount vs its copper peers, on a forward price to cashflow basis Sierra metals trades at 1.6x vs small & mid cap copper peers at 4.4x.

Additionally, the company has an attractive dividend yield of 3.4%, 2% higher than the dividend yield of the S&P 500.

SQM Q1 2022 Results: Lithium Supercharges Earnings

SQM (NYSE:SQM), one of the world’s largest lithium producers, announced very strong Q1 2022 results on the back of record lithium prices.

The company said that both volume and average price of lithium sales high all-time highs of 38,100 tons and $38,000/ton respectively. Management stated  on the call that it’s very likely that SQM will increase the resources oriented to the further development of the business in Chile and abroad.

SQM trades at a 43% discount to Albemarle and a 49% discount to Livent on a forward price-to-cashflow basis.

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Sierra Metals is a market awareness client of Capital 10X.

Largo Inc. is a market awareness client of Capital 10X.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Capital 10X gets down to the real money business, actionable financial insights for traders and investors. We analyze company earnings, interview management teams and help teach the fundamentals of financial analysis and options trading. Our mission is to hunt for genuine 10 baggers.
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