We are living in unprecedented monetary times, global central banks have never printed this much money in such a short amount of time. The amount of cash in the economy (M1 Money Supply) is up an astounding 355% from the previous year.
As this mountain of money flows into the economy it results in an increase of prices of goods & services: inflation. Cash and bonds are the biggest losers in periods of high inflation, investors have historically sought safety from the destruction of purchasing power through hard assets.
The bond market is clearly concerned about the risk of future inflation in the system, future inflation expectations are the highest they’ve been in over a decade.
This low interest rate environment has played directed into lumber prices, they are now over 100% higher than they were a year ago. The increased demand for single family homes (driven by low rates) has resulted in housing starts up 30% year-over-year.
The Bloomberg Commodity Index (33 commodities) is currently sitting at multidecade lows. The recent rally in commodities during the COVID-19 recovery is a mere blip on the chart – we believe there’s sizable upside ahead.
Additionally, commodities are the cheapest they have been in the last 50 years relative to U.S. Equities.
This commodity super cycle has similarities to the spike in the 70s, where inflation was a key feature.
When looking at global urbanization and development trends it’s clear that the world still has significant base metal consumption per capita ahead.
Last week Capital 10X highlighted the favorable supply/demand dynamics for the copper market and provided an fundamental screen for copper miners trading at a discount.
We believe the combination of strong global demand, low inventory and lack of mining exploration will drive copper significantly higher over the next 3-5 years. Copper will be the main event in the commodity super cycle.
Goes without saying a bull market in copper is very favorable for copper producers as operational and financial leverage accrue to the bottom-line.
In our analysis we found that small & mid cap copper producers are trading at steep discounts relative to large cap producers on every valuation metric.
Given that large cap valuations are nearly double that of small/mid producers, M&A is one of the most tangible ways for large caps to grow production and enhance shareholder value.
We found that Sierra Metals (NYSE:SMTS, TSX:SMT) and Hudbay Minerals (TSX:HBM) traded at a deep valuation discounts relative to their to their small & mid cap copper peers (which are already very cheap vs. large caps).
Sierra Metals has unique combination of superior production growth (14% compound annual growth rate over the next 5 years) and below industry average cost structure (32nd percentile on the copper industry cost curve).
Hudbay is well-positioned on the cash cost curve relative to global copper peers and the company has a strong track record of achieving or exceeding production guidance.
Given the sizable shift to electric vehicles and green infrastructure we believe the commodity super cycle will be very pronounced in the green metals sector: copper, lithium, cobalt and vanadium.
On March 17th Largo Resources (TSX:LGO), one of the largest vanadium producers, delivered stellar Q4 2020 results.
Key Drivers for 2021:
Sierra Metals 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.
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