Tag Archives: Base Metals

What’s Better Than Bitcoin? Companies That Dig Rocks (Seriously!)

We get a lot of questions about cryptocurrencies. Especially when there is upwards price movement. No one ever seems to ask about them when they are not performing so well… I always answer, that I cannot buy cryptocurrencies for clients, and that we are fully committed to finding profitable opportunities elsewhere.

One example is our investment in copper miners. Copper miners?!? Yes, copper miners.

Since the lows of March 16th, copper miners Freeport McMoRan and HudBay Minerals have actually outperformed Bitcoin:

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Crypto -vs- Actual Miners

We have been following the progress of mining sector securities for quite some time now (Because You Know I’m All About That Base, ‘Bout That Base, Base Metals).

The arguments supporting this trade are:
a) reduced capex and lack of investment in new mines
b) long lead times to new supply (it takes around nine years to build a new copper mine)
c) simultaneous global growth and a resulting increase in demand
d) management commitment to returning cash to shareholders

Given the hysteria around crypto currencies and the resulting incentive to ‘mine’ them, we decided to compare the market capitalizations of the largest publically traded mining companies in the world to the largest crypto currencies. The results were quite interesting: the top five crypto currencies were worth around the same amount as the seven largest publically traded miners on earth.

This is a betrayal of fundamental economics in that crypto currencies are a function of false scarcity (you can generate as many crypto currencies as you like using the available code) versus actual scarcity (code cannot produce copper).

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We are pleased to announce that our weighted average return in December was +2.72%, resulting in total net return of +18.39% in 2017. Since 2015, we have generated a net return of 37.30% with a Sharpe ratio of 1.48.

In terms of investment strategy performance, our weighted average net returns were (a) +4.34% for conservative strategies, (b) +15.34% for balanced strategies, and (c) +28.40% for aggressive strategies.

In our November commentary, we mentioned that many of our favoured sectors had performed poorly. In December, they stormed back with a vengeance. Our largest individual equity holding – Canadian mining company Teck Resources Ltd. – rallied 15%. Our largest equity fund holding – the Polar Biotechnology fund – increased by 4.75%. Both have continued to trade up strongly in the New Year.

A year ago, we wrote, “There seems to be a consensus in the air that 2017 will be a year of uncertainty and many challenges. While we understand the rationale for such a stance (a Trump presidency, rising rates, elections in Europe…), we cannot remember a time when any new year was predictable and without challenges. As such, we remain vigilant in trying to be maximally objective in regularly evaluating our current investment strategies, while trying to identify even better risk/reward opportunities going forward.”

Well, Trump is still POTUS, rates are still rising and Europe continues to have elections – and despite all of the ‘expert forecasts’ no one knows what 2018 will bring.

A few months ago, I read a quote that resonated strongly with me: “we remember the past fondly, because it lacks the fear of uncertainty.” The converse implication is that we fear the future because it is uncertain. Yet it serves us well to remember that the march of history has been one of progress. Today, we stand before more profound possibilities than ever before, which also means that the choices that we make will be all the more momentous.

As asset managers, we look forward to these challenges and opportunities and will be steadfast in seeking out new ideas and while continuing to heed the lessons of the past.

Speaking of the lessons of the past, just a couple of days ago we noticed that the world’s five largest cryptocurrencies had the equivalent combined market capitalization of the world’s seven largest publically traded mining companies. Anyone can buy cryptomining kits, and new crypto currencies are being ICO’d every day. It takes a minimum of nine years to build a copper mine. Crypto and blockchain have countless parallels with the boom and bust of the dot-com era. Guess what followed? The largest commodity rally of all time.

History does not repeat itself, but it tends to whistle a similar tune…

On behalf of our Client Portfolio Management team, I thank you for your continued trust and support, and wish you a happy, healthy and prosperous New Year!

FULL DISCLOSURE: Please note that the opinions expressed in this blog should in no way be considered as investment advice or a solicitation to buy or sell securities.

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On Nickel and the Battery Revolution

If you have been reading this blog, you will have understood that we quite like the prospects of base metals and base metals miners (Because You Know I’m All About That Base, ‘Bout That Base, Base Metals…).

Here is a nice primer on nickel’s not-so-know role in electric vehicles: Nickel: The Secret Driver of the Battery Revolution

Here is some more info on how analysts have been upgrading their pricing forecasts:

Here is how nickel has been doing lately:

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Because You Know I’m All About That Base, ‘Bout That Base, Base Metals…

People tend to get preoccupied with things that are shiny. Investors often fall prey to the same instinct – especially those that are obsessed with gold. Such people are often referred to as ‘Gold Bugs’.

This years, Gold Bugs have been excited to point out that gold has outperformed the S&P 500 index year-to-date:

Congratulations! However, there is a far more interesting metals trade going on at the moment: base metals.

After a slow start to the year, base metals such as copper (sometimes referred to as “Dr.Copper”), zinc, and nickel have seen their prices appreciate significantly:

One way that Gold Bugs like to play movements in the price of gold is to trade the VanEck Vectors Junior Gold Miners ETF (GDXJ US). This ETF holds a basket of speculative gold mining companies and currently has around $4.4 billion USD in assets. In comparison, the Global X Copper Miners ETF (COPX US) only has around $53 million USD in assets. It stands to reason that given this disparity in investor interest, copper/base metals miners are hardly on the radar of most retail investors. However, the YTD performance of base metal miners has been phenomenal:

Another reason why base metals miners do not attract a lot of attention is due to the fact that they carry such a small weighting on major US stock indices.

For instance, there is no longer a single mining company in the Dow Jones Industrial index. Moreover, the S&P 500 Index only has one base metals miner: Freeport-McMoRan Inc. (FCX US). It has a 0.1% weighting. Therefore, for US money managers, the mining sector barely registers in terms of being potentially overweight or underweight versus your benchmark.

Speaking of benchmarks, the escalating supremacy of low cost index ETFs is forcing institutional money managers to differentiate themselves and seek out investments that do not just track their benchmarks. Base metal mining companies look like an excellent place to start…

Here’s a link to our post on May 31st where in the last paragraph we mentioned that we were delving into material stocks:
LINK: We Have Been Busy

Tune in next week when we will delve deeper into why base metals and base metals miners have been performing so well..

P.S. my apologies if you know the song that I referenced in the title of this post. I really hope that it is not playing in your head right now… Sorry. read more