Markets & Metals Navigator: Suez Canal Drama Delivers Blow to Supply Chains

Global Supply Chains at Risk – Inflation on the Way

The 1,300 foot, 200,000 metric ton Ever Given ship has created the mother of all traffic jams by getting stuck in the Suez Canal last Tuesday (March 23rd). There are over 300 ships waiting for the ship to get unstuck as is costing billions in delayed shipment.

The backlog has caused an additional strain for global supply chains already reeling from the COVID-19 pandemic, the canal is a throughway for 13% of global trade.

Early Monday morning global supply chains finally got some good news in this saga, the Ever Given was successfully refloated at 4:30am local time in Egypt. A new attempt with 10 tug boats is now trying to dislodge the ship.

Container shipping rates have increased significantly (4-fold) since the beginning of the pandemic and have stayed elevated since.

The cost to move goods by air, ocean and truck is now structurally higher and will eventually manifest into consumer goods prices.

Commerzbank analysts said in a note to clients on Friday that the Suez snarl up could cause oil to become more expensive for consumers because of higher tanker rates as a result of the incident.

Inflation Protection: Real Assets (Commodities & Real Estate)

Bank of America has produced a very powerful graph looking at the relative value of real assets (commodities, real estate, collectables) vs. financial assets (large cap stocks, long-term government bonds) since 1925 – real assets are the cheapest they’ve been relative financial assets since the beginning of the data series.

Looking at the high inflationary period of the 1970’s we can see that gold and commodities were the best performing assets classes by a wide margin. Gold returned an annualized return of 31% per year, while commodities returned 24% per year.

Copper: Sierra Metals Delivers Strong 2020 Results

Sierra Metals (NYSE:SMTS, TSX:SMT) released full year 2020 results on March 18th, delivering strong EBITDA (cash flow), growing production and reduced operating cash costs.

During a period where many mining companies faced significant operational setbacks due to COVID-19, Sierra Metals was able to effectively implement policies and practices to quickly bring back full operations.

Sierra Metals delivered strong full year 2020 production and profitability results despite the volatile COVID-19 operational environment.

• EBITDA increased by 49% to $97 million
• Production grew 6% to 118 million pounds of copper equivalent production
• Cash costs fell -19% year-over-year to $1.13/lb (copper eq. pounds)

Management has provided impressive growth guidance for 2021:

• Copper equivalent production is anticipated to grow 15% to 136 million copper equivalent pounds (mid-point of guidance)
• At current metals prices EBITDA is forecast to grow 83% to $177.5 million (mid-point of guidance)

Relative to the copper mining producer universe, Sierra Metals trades at a quarter of the valuation multiple relative to its copper peers across all metrics.

• 75% discount on forward price-to-cashflow
• 76% discount on forward EV-to-EBITDA
• 63% discount on forward price-to-sales

Cobalt: Ethically Sourced Battery Metals

Rising investor demand for ethically-sourced battery metals opened the window this week for Norwegian seafarers to become the first deep-sea mining stock publicly offered.

Norway’s Green Minerals AS says it will be able to exploit the cobalt needed by electric vehicles without inflicting damages on people and the environment. Most current production comes from loosely-regulated mines in Democratic Republic of Congo.

The company is among Europe’s 10 best initial public offerings this year after more than doubling its value following Tuesday’s listing on the Euronext Growth market in Oslo.

After raising funds in a private placement last year, Green Minerals is currently valued at about $38 million.

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