Markets & Metals Navigator (October 25th, 2020)

Bitcoin’s Breakout

The big bang in capital markets last week was Bitcoin’s breakout through $13K, the digital crypto currency was up 15.5% last week overshadowing all other asset classes.

The surge in the Bitcoin price was driven by the news that PayPal customers will be able to buy and sell Bitcoin and other virtual currencies using their PayPal accounts.

Mike Novogratz, CEO of Galaxy Digital viewed the PayPal announcement as the biggest of the year, as it would prompt other banks service crypto.

Early Innings of the Commodity Bull Market

Commodities have never been more attractive relative to the stock market in the last 120 years.

We’re in extreme value territory and metals are the best positioned plays in the commodity complex.  Investors should have exposure to each of the following metal buckets:

  1. Store of Value Metals: gold & silver
  2. Industrial Metals: copper, iron, zinc, aluminum & nickel
  3. Green Metals: copper, lithium, cobalt & vanadium

Commodities vs. Dow Jones Industrial Average: 1900 – 2020

Copper Miners are the Leveraged Play on Economic Stimulus

In the 2009 economic crisis central banks utilized unorthodox monetary policy (ie. money printing) to stimulate the economy and we are seeing central bankers utilize the same playbook in 2020.

Source: US Federal Reserve

Capital 10X analyzed the performance of copper miners relative to the S&P 500 during these periods, we found that copper miners had meaningfully higher returns than the market.

We believe that we are still in the early innings of a stimulus driven recovery and that there is significant upside for copper miners in absolute and market relative terms.

From a valuation perspective First Quantum (TSX:FM) and Sierra Metals (NYSE:SMTS, TSX:SMT) are the best positioned in the mid/ large cap copper miner universe.

Sierra Metals: Strong Value Accretion from Doubling Output at Bolivar

Sierra Metals (NYSE:SMTS, TSX:SMT) announced preliminary economic assessment (PEA) results for the proposed doubling of output at the Bolivar Mine in Mexico to 10,000 tonnes per day (TPD).

The PEA highlighted the Net Present Value (NPV) of the Bolivar Mine operating at 10,000 TPD would be US$283 million using a discount rate of 8%. This is substantially higher than the mine’s 2018 PEA of US$214 million at the 5,000 TPD operating rate.

The PEA analysis found the incremental after-tax NPV benefit of increasing the production at Bolivar from 5,000 TPD to 10,000 TPD to be estimated at US$57.4 million with an internal rate of return (IRR) of 27.9%.

This is a very value accretive use of capital, given the high IRR and the high absolute value of NPV. To put it in perspective the value of the expansion (US$57.4M) represents 20% of the current market cap of Sierra Metals (US$293M).

Vanadium: Largo Resources Announces Record Q3 Production Results

In our October 6th launch of the ‘Green Metals in Focus’ series we highlighted vanadium as a key metal in the green industrial revolution.

This week Largo Resources (TSX:LGO) announced stellar Q3 2020 operational results, producing a record 3,092 tonnes of V2O5 (Vanadium Pentoxide), a 5% increase from the previous year.  Additionally, global recovery rates have increased by 8% year-over-year, to a high of 84.2%.

Largo Resources continues to perform despite setbacks due to the global pandemic, company has reduced 2020 cash operating cost guidance by 14% and 2020 total cost guidance by 7%.

Low Interest Rates are the Tail Wind for Real Estate

A beautiful chart created by Len Kiefer (Deputy Chief Economist at Freddie Mac) highlighting the low current 30 year US mortgage rate in the context of the last 50 years.

We’ve clearly seen the impact of this ultra easy lending environment in commodities this year as lumber prices spiked to all time highs.

U.S. Cannabis Shift into a Higher Gear Ahead of the Elections

With less than 10 days till the U.S. elections cannabis investors are focused on whether Republicans or Democrats will control the Senate. If Biden were to win the election and have control of both chambers it would be much easier to pass legislation to legalize cannabis.

According to Nate Silver at FiveThirtyEight, the Democrats have a 73 in 100 chance of controlling the Senate – which would be a very positive outcome for the U.S. cannabis sector.

The big 4 U.S. multi-state cannabis operators continue to rally on the back of these favorable Democratic party winning probabilities.  Trulieve (CSE:TRUL) and Curaleaf (CSE:CURA) lead the way last week, up over 10%.

Valuations are still very reasonable given the potential massive catalyst on election night. Trulieve, Curaleaf and Creso Labs are all trading at lower forward price-to-sales multiples currently vs. early 2019.

Two weeks ago we highlighted attractive valuations U.S. cannabis stocks have vs. tech stocks with similar levels of strong growth.

The U.S. cannabis stocks are setting up for a potential explosive run after election night.







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

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

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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