Markets & Metals Navigator: The Commodity Super Cycle Ahead

Central Bank Induced Commodity Super Cycle

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.

Lumber first Commodity Spike Out of the Gate

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.

Commodities are Firmly in Value Territory

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.

Commodities vs. 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.

Copper Miners in Focus – Hunting for Value

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.

Copper Price ($/lb)

Hunting for Value

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.

Small & Mid Cap Copper Value: Sierra Metals & Hudbay Minerals

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.

Green Metals: Largo Resources Delivers Strong Q4 & Full Year Results

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.

Results highlights:

• Strong topline growth: revenue increased 64% from the previous year to $42.3 million
• Vanadium production reached a new quarterly record of 3,340 tonnes, an increase of 11% year-over-year.
• Net income swung positive to $6.9 million from a loss of $4.3 million in the previous year.
• Cash costs for the full year came in at $2.56/lb, 5% lower than previous guidance and 16% lower than 2019.

Key Drivers for 2021:

• Vanadium Redox Flow Batteries: Largo Clean Energy will continue to work to commercialize their industry leading VCHARGE± battery technology to capitalize on long-duration, clean energy storage opportunities around the world.
• Nasdaq Application: Largo Resources also announced that it has submitted an initial application to list its Common Shares on the Nasdaq – with the view of increasing access to U.S. capital markets and enhancing overall shareholder value.
• Technical Resources Report: The company expects to release an updated technical report in Q2 2020 that will aim to upgrade mineral resources to mineral reserves and expand minerals resources.  The report will also incorporate the vanadium trioxide plant and the titanium dioxide pigment projects.

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