The Russia-Ukraine War has trigged a significant squeeze in nearly all major commodities. We analyze green metals of interest and the companies best positioned. Copper: Sierra Metals & Hudbay; Lithium: SQM & Lithium Americas & Vanadium: Largo.
Russia-Ukraine War: Sanctions Having a Wide Ranging Impact on Commodities
The unprecedented sanctions on Russia are having a wide-ranging impact across the commodity complex, since the beginning of the conflict the Bloomberg Commodity Index (a basket of 23 commodities) has spiked 10%.
Vital energy commodities have spiked significantly, European natural gas prices are up +153% year-to-date and oil prices are up +44%.
Russia’s Significant Positioning in Major Commodities
Russia is a major producer of many key commodities. Of world production Russia is 12% of oil production, 17% of natural gas, 6% of aluminum, 6% of nickel and 4% of copper.
Averting a Global Energy Crisis: Green Energy Metals of High Strategic Interest
The major sanctions on Russia will likely be in effect for a protracted period, the developed world’s key focus will be to avert a global energy crisis.
We highlight three energy green metals of high strategic interest:
Copper is a critical metal for the green economy, a key input for electric vehicles, wind and solar. Goldman Sachs projects green copper demand as a percent of total copper demand will rise from 4% in 2020 to 16% by 2030.
Within the copper mining universe, Sierra Metals (NYSE:SMTS, TSX:SMT) and Hudbay Minerals (TSX:HBM) screen the cheapest.
Sierra Metals: 70% Discount vs. Peers
Relative to it’s small & mid cap copper producer peer group, Sierra Metals trades at a 70% discount on blended valuation fundamentals (forward price-to-cashflow, forward EV/EBITDA and forward price-to-sales).
Sierra Metals offers a diversified exposure across the metals complex, as of Q3-2021 copper and silver were the top two contributors by revenue, 38% and 21% respectively.
Hudbay: 45% Discount vs. Peers
Hudbay trades at a 45% discount vs copper peers on blended valuation fundamentals (forward price-to-cashflow, forward EV/EBITDA and forward price-to-sales).
Hudbay is well-positioned on the cash cost curve relative to global copper peers and the company has a strong operational track record.
Lithium is a foundational metal for the electric vehicle market, strong EV demand puts the market in structural deficit till the end of the decade.
SQM: 30% Discount to Large Cap Peer Albemarle
SQM (NYSE:SQM) is the second largest lithium producer in the world behind Albemarle (NYSE:ALB). The company has double the ROE vs ALB (30% vs. 15%) and trades at a 30% discount on forward EV/EBITDA.
The company announced strong Q4 2021 results, pricing for their lithium has increased 3-fold over the last year.
Lithium Americas: 35% Discount to NPV
Lithium Americas (NYSE:LAC) is pre-production lithium company, with it’s projects having a sizeable and steady production growth through the end of the decade. It is expected that Lithium America’s projects should have attractive positions on the cost curve.
Lithium Americas trades at a 35% discount to consensus NPV of $40/share.
Vanadium is the strategic resource efficiency and battery metal, low carbon technology and batteries will drive demand over the next decade.
Projected strong vanadium demand driven by green applications and batteries over the coming decade will result in demand meaningfully outstripping supply over the coming decade.
Largo: 85% Discount to Life of Mine NPV
Largo (TSX:LGO, NYSE:LGO) is the vanadium pureplay, it is among the 3 largest producers of the metal. Largo is one of the lowest cost producers in the industry and the company currently trades at an 85% discount to its life of mine NPV ($4.2 billion).
Of important note, the life of mine NPV does not factor in the significant upside in Largo’s vanadium redox flow battery business. Additionally, Largo trades at a sizeable discount vs. its green metal peers.
Sierra Metals is a market awareness client of Capital 10X.
Largo Inc. is a market awareness client of Capital 10X.
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