Climeworks – Pioneering a way forward for a greener world

Climeworks developed an innovative technology called “direct air capture” to remove CO₂ from the air so it can no longer contribute to climate change. Carbon removal solutions refer to removing existing CO₂ from the atmosphere, which enables a company to actively remove its unavoidable and historic emissions to reach net zero.

 

In April, Independent Capital Group visited Climeworks’ DAC-Plant in Hinwil, which is located on top of a waste incineration plant. The plant delivered electricity and heat to operate the DAC-modules.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Although the plant in Hinwil ceased operations in October 2022, it is still fully intact. The stacked modules contain a fan which draws in air. The air flows through a specially treated cellulose-based filter material. Like a sponge, the filter absorbs CO₂ molecules until it is saturated. To reactivate it, the filter is placed under vacuum and heated. The CO₂ molecules, which are only loosely attached, detach from the surface, and are temporarily stored. One cycle lasts around 4 hours – whereby the first 1.5 hours, air is sucked in and the rest of the time the conversion takes place. The CO₂ was then sold via underground pipeline to the nearby greenhouse (picture 3) to boost the growth of vegetables. Another sales channel were beverage companies that use CO₂ in their bottled drinks.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Since the commissioning of its first direct air capture and utilization plant in 2017, the company has scaled up and changed its focus. Climeworks developed the world’s  first commercial direct air capture & storage facility in Iceland. Operations started in September 2021 – the plant has a capacity of up to 4’000 tons of CO₂ per year. It is 100% powered by clean geothermal energy and, unlike the Hinwil plant, the CO₂ captured at Orca is permanently stored underground through mineralization. Climeworks chose Iceland for its cheap and clean electricity supply as well as the geological conditions that allow easy and safe underground storage. The next plant is already in construction and will go online in 2024 – the “Mammoth” plant, also in Iceland, will add up to 36’000 tons of capacity per year.

 

 

 

The company aims to reach multi-megaton capacity in the 2030s, while the long-term goal is to reach gigaton capacity by 2050. Recently, the company expanded into the US in the wake of the country’s $369 billion climate bill, which provides significant financial incentives for climate tech companies and room for growth to achieve the ambitious goals it has set for itself.

 

 

Direct Air Capture and Storage as a Business

 

Climeworks offers a unique carbon removal service, where companies and individuals can remove their emitted CO₂ via subscription or a one-off payment. People can choose an amount they want to remove in their name and, in return, Climeworks will provide a confirmation of removal and a third-party verified certificate to the buyer. Most of Orca’s capacity has been sold already. Nevertheless, individuals and companies can purchase carbon removal capacity from future facilities, such as Mammoth.

 

Companies have already tapped in, as demonstrated by the list of notable corporate clients such as Microsoft, Swiss Re and Audi who chose Climeworks as a partner on their journey to net zero. Also, investors are showing great interest. The company collected USD 650 million in the most recent equity raise, the largest-ever equity round into DAC, valuing the company at  over USD 1 billion.

 

 

The future seems bright for Climeworks as the company offers a unique way to fight climate change. We at Independent Capital Group firmly believe that carbon removal technologies can be an important accelerator along the energy transition/road to green. Visiting Climeworks and learning about their technology has strengthened us in this belief. It certainly got us thinking about how we could improve the climate footprint of our resource-intensive financial solutions. Many thanks to Dominique Kronenberg, Chief of Staff, for the interesting tour and insights.

 

 

Visit www.climeworks.com for more information.

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ICG Commodity Update – April 2023

The ICG Commodity Update is our monthly published comment on the energy, industrial metals and precious metals market.

 

Energy

The recent banking crisis resulted in a sell-off in risk assets and commodities. Nevertheless, OPEC+’s oil output-cut bombshell at the start of April is widely expected to tighten oil markets further. Experts see the reason behind the cut being more economic than political as they want to keep oil prices at a comfortable level, which most estimate at $80/bl. Analysts expect the 2H of 2023 to show a deficit of >1.4mboe/d on average. Looking into oil and gas companies, first quarter earnings season started well. The two largest US oil and gas companies ExxonMobil and Chevron reported booming profits of $11.4bn resp. $6.6bn. Both companies have posted hefty profits averaging $9-11bn for four straight quarters even as international crude prices slid more than 35% from last year’s peak. Despite increasing dividends and buybacks, spare cash is increasing. Meanwhile, Exxon’s net debt to capital ratio shrank to 4% and has a near record cash pile of $33bn. As companies remain aflush with cash, it is no wonder that M&A rumours are increasing. Most notable was the WSJ rumour that ExxonMobil would be looking into Pioneer Natural Resources to become the Permian champion with a substantial amount of high-yielding und undrilled inventory. However, despite being a much-anticipated target, nothing happened so far. Nevertheless, according to Rystad assets worth $21bn are currently up for sale in the Permian alone. The potential for a string of acquisitions in 2023 is no surprise to us. Another interesting development is the changing investor perception towards the sector as a solution to the energy transition. As the plans to build up low-carbon businesses to achieve scale start to take shape, supported not least by the strength of upstream cash flows and strong balance sheets, we believe the message of the legacy major oil and gas companies as being part of the solution to the energy transition is starting to resonate with investors. Our impression is that the markets’ approach to the energy transition is becoming more balanced and educated, with the major oil and gas companies being more aptly referred to as integrated energy companies. We think that energy companies are key to the energy transition as they understand energy systems with all their operational, geological, geopolitical challenges u.a. and this is still underestimated.

 

Industrial Metals

Last month, coper dropped 4.4%, the most in almost a year, on a dimming global economic outlook including a weaker-than-expected start to China’s peak building season. According to Goldman Sachs, the bearish views on Chinese demand had been misconstrued and it is important to recognize the persistence of a negative shock in mine supply as a tightening effect. The bank said that current demand environment for copper is far from recessionary. Market participant gathered in Santiago in April for “Cesco Week”, one of the copper industry’s biggest conferences. The industry isn’t letting tightening credit and slowing growth kill the fundamental story behind copper. Underpinning the confidence are the lowest stockpiles of the metal in 18 years, standing at less than a week’s worth of consumption. CEO of Freeport, one of the largest copper producers, confirmed that demand for the company’s copper continues to be strong. As new deposits become pricier and tricker to develop, major producers like BHP and Glencore are turning back to deal-making for growth – as seen recently, when Glencore offered to buy Teck Resources for $23bn. The controlling shareholder has said the company will be up for sale, but only after separation, but the board withdrew its separation proposal ahead of its AGM due to lack of support. The company is set to pursue a simpler and more direct separation, which is the best path to unlock the full value according to the CEO. Most analysts expect a revised offer from Glencore, who is willing to present its takeover offer directly to shareholders if the board doesn’t come to the negotiating table. The deal is also closely watched by politicians, Canadian Prime Minister Trudeau said that any takeover bid for Teck will have to get through a rigorous process to win government approval. Looking at lithium, Chile, the No. 2 lithium producer globally, is transforming its model for production and is seeking majority stakes in new contracts with private companies. Although the royalties and taxes paid to the government are already by far the highest globally, Chile also wants direct ownership – with risking to lose investments and market-share to other lithium-rich destination like Argentina or Australia. The news dragged down shares of Albemarle and SQM, even as the government has vowed to respect existing arrangements. SQM’s contract expires in 2030, Albemarle has more flexibility with its expiration date only due in 2043 – both are encouraged to enter talks with the government though.

 

Precious Metals

Gold futures have ended April only modestly higher than in March and moved around the $2’000/oz mark throughout the month. Analysts think that many of the key drivers behind gold prices rising past $2,000 are still present, including persistently higher inflation in many countries, the likelihood of a U.S. and global recession, the U.S. regional banking system getting wobbly, and instability caused by war, but the relative strength of the U.S. dollar has been a drag on even higher gold prices. Gold as a hedge against uncertainty is regaining more and more attention, particularly since the U.S. banking issues of late, which are in addition to the de-dollarization rhetoric coming out of the BRICS nations, which include Russia. Especially since the seizure of Russia’s foreign exchange reserve, central banks view gold as a safe haven and spur demand. Looking at PGMs, new emission standards in China due from July will spur demand from new models – according to BMO, vehicle sales were strong year-over-year in developed world and increasingly in China. Going forward, the heavily concentrated supply risk should keep all PGM balances tight, although markets suffer from the electric vehicle narrative and the associated lower demand. Some analysts predict the PGM demand for fuel cells in hydrogen are set to replace the missing future catalysts demand for traditional ICE vehicles.

 

Also, Independent Capital Group visited this year’s Denver Gold Group Forum in Zurich in April. As the industry is struggling with an ageing asset base, lower grades as well as declining production, it seems that companies are slowly bringing their focus back to growth. Interestingly, companies currently prefer organic over inorganic growth. Nonetheless, balance sheets remain clean and offer plenty of room for shareholder returns. Companies are aware that the industry still has some work to do to gain back the trust of generalist investors – the best way to get the trust back is through dividends and shares buyback. Please find the full report about the Gold Forum on our blog.

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Summary: Gold Forum Europe – Zürich, April 2023

Independent Capital Group attended this year’s Gold Forum Europe in Zurich and is pleased to publish a one-pager with the most important take-aways from the conference. You can download the document below – if you have any questions on a specific topic or would like a second opinion, please feel free to contact us.

 

Detailed company level abstracts are available upon request at research@independent-capital.com.

 

 

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ICG Commodity Update – March 2023

The ICG Commodity Update is our monthly published comment on the energy, industrial metals and precious metals market.

 

Energy

OPEC+ has changed the narrative in global oil markets over the weekend. Things had been starting to look a bit gloomy for crude in recent weeks. Prices slumped to a 15-month low near $70/bl in late March as the banking crisis added to concerns over a worldwide supply surplus and stubbornly resilient output from Russia. However, nine members of OPEC+ announced yesterday a surprise “voluntary” collective output cut totalling 1.66mboe/d which will take effect from May till the end of 2023. Russia cuts would also extend into 2H 2023. Saudi Arabia led the cartel by pledging its own 500kboe/d supply reduction. The move is a surprise given previous messaging (as recently as Friday) suggesting they would hold output steady. The Saudi Arabian Ministry of Energy official emphasized that “this is a precautionary measure aimed at supporting the stability of the oil market”. This announcement represents further evidence of Saudi Arabia and their allies’ new oil policy since last summer to prioritize prices over volumes. Most analysts think this announcement will improve the oil market from a large oversupply to close to breakeven in the second quarter while expanding the deficit in 2H23. However, spare capacity will also increase to +3mboe/d in the near-term. On the company side its interesting to see, that upstream investments may hit pre-Covid levels in 2023, according to Rystad Energy. They have tracked 70 companies so far that are guiding for $165bn in investments in 2023, which makes up around one-third of total upstream investments. The spending increase among the various company segements is, however, different. Majors are on the conservative side, with an average growth of 11% this year. Shale companies are guiding an average increase of 16%, while all other companies are guiding average growth north of 20%. For the ‘others’ group, Equinor and Petrobras are the main drivers of growth. Another observation is that the growth in investments this year with +15% will be slower compared to last year – in 2022, upstream investment growth for this full set of companies was +30%. Indeed, many producers were left more exposed after they had rolled back hedges. Top listed shale producers have locked in prices for only about 27% of their output for 2023 at an average price of $66/bl, down from over 40% they hedged last year. By the way, we noticed that our peer group in Switzerland fell significantly. There are just 8 mutual funds in the energy space left.

 

Industrial Metals

Last month, the EU published its “Critical Raw Materials Act”, amid the growing battle for security of raw material supply. In it, the EU has admitted that full raw material self-security is impossible, and thus it wants to establish a ”critical raw materials club” with like-minded countries. Notably, some support to mining will be provided, while copper, nickel and manganese have been added to the critical raw materials list. By 2030, the EU is targeting domestic extraction to be 10% of annual EU consumption of strategic raw materials, refining/processing to be 40% and secondary material to be 10%. Meanwhile, no more than 65% of consumption at any stage of the process should be imported from a single third country. It is worth putting China’s share of metals and energy transition materials into context. China is now almost 60% of global steel and aluminum production, and ~50% of all other base metals. For refined battery raw materials, this goes up towards 70%. However, there is a weak spot, in that China is reliant on raw material imports in many areas. Also, South American nations are stepping up efforts to propel themselves further down the EV-supply chain by leveraging their vast mineral wealth, expanding processing capacity, and targeting vehicle manufacturing. Argentina, Chile, Bolivia and Brazil plan to coordinate action on turning more mined lithium into battery chemicals, as well as moving into manufacturing of batteries and EVs. Looking at copper, according to Trafigura, the global inventories have dropped rapidly in recent weeks to their lowest seasonal level since 2008, leaving little buffer if demand in China continues to pace ahead as strongly as it did in February – Chinese copper demand was up 13% year-on-year last month, after activity picked up following the lunar new year. Goldman Sachs expects the world to run out of visible copper inventories by the 3rd quarter of this year and expects new highs. On the company side, Teck Resources rejected a proposal from Glencore to buy the company and then spin off their combined coal businesses, in the latest sign of dealmaking heating up across the mining industry. It shows how large producers of coal are grappling with the future of this business. Mining companies are seeking to focus more on metals that will benefit from the clean-energy transition, and yet coal still remains a big profit driver.

 

Precious Metals

Gold rose 7.8% in March, its biggest monthly gain since November, and closed at one of the highest prices per ounce it’s ever been at the end of a quarter, as turmoil in the banking sector spurred haven demand and diminished expectations for more monetary tightening. Those concerns have since dissipated after swift action from the US and Swiss authorities, though gold is holding most of its gains. Also, gold edged higher as markets were rocked by a surprise oil production cut by OPEC+ that threatens to add to global inflationary pressures. Treasury yields rose after the cartel’s announcement, putting pressure on non-yielding gold, though support came from the dollar weakening. Swaps traders slightly upped their bets on another Federal Reserve hike to curb inflation. Focus is now turning to economic data for signs the economy is beginning to slow under the Fed’s rate hikes. Most analysts think that heightened uncertainty will continue to fundamentally support gold over the coming months – Goldman Sachs for example raised its gold price forecasts, describing it as the best hedge against financial risks, and reiterated its bullish view on commodities as a banking crisis has yet to spill over into physical markets. It hiked its 12-month gold price target to $2,050 an ounce from $1,950, joining others such as Citi, ANZ and Commerzbank in raising forecasts. On the company side, Gold Fields and AngloGold Ashanti have proposed a joint venture in Ghana that would create Africa’s largest gold mine. Gold Fields would hold two-thirds of the venture that would combine the operations of its “Tarkwa” mine with those of AngloGold’s neighboring “Iduapriem” – both companies would benefit from synergies and cost savings. Gold Fields and AngloGold have shifted their focus to more profitable mines in Ghana, Australia and Latin America as the sector in South Africa dwindles. The joint venture follows gold industry trends for deals that provide scale, unlock synergies, and prolong a mine’s life.

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ICG Commodity Update – February 2023

The ICG Commodity Update is our monthly published comment on the energy, industrial metals and precious metals market.

 

Energy

Energy markets remain lower this year as the prospect of tighter US monetary policy and rising inventories in the US have so far outweighed optimism that Chinese demand will strengthen as activity picks up. Indeed, China’s crude oil consumption is expected to hit pre-pandemic highs and might contribute to most of the global oil demand in 2023 according to most analysts. On the supply side, US shale growth could slow to 300kboe/d in 2023, which is half of the growth of last year on issues with labour shortages and supply chain bottlenecks according to the Fed of Dallas and the EIA. Further to that, Russian flows are also in focus as western sanctions and bans related to the war in Ukraine tighten. However, markets have generally overestimated the extent of Russian oil supply disruptions since the Ukraine war began. Nevertheless, Russia’s deputy prime minister Novak recently indicated that the country will cut its oil production by 500kboe/d in March. According to Goldman Sachs, after all, the bullish micro fundamental story is still very much intact. Even front-end oil time spreads have moved back into backwardation, a sign of physical tightness. Interestingly, products now exhibit higher implied volatility than crude prices, unprecedented since the mid-2000s “Golden Age of Refining”, highlighting that the most binding constraints exist in seaborne transportation and distillation, rather than well-head production. This has direct implications for crude differentials, where quality concerns (product netbacks) and seaborne transportation costs now govern regional swings in crude prices. On the natural gas side, several US companies recently announced they are pulling back on gas drilling as US gas prices have fallen by about 50% this year. February saw the most oil and gas rig drop since June 2020. The 4Q results for the oil and gas companies have proven what we have communicated for some time. The profit for the upstream industry reached a record high-level last year. Interestingly, a key observation from the quarter results is the change in strategy from some of the European majors. Companies like BP and Shell have reversed some of their aggressive energy transition strategies. The clearest case is BP, the company is now guiding higher future upstream investments and higher oil and gas production. This is evidence that energy security is probably becoming more important post-Russia’s invasion of Ukraine.

 

Industrial Metals

According to analysts, it appears that the market is looking through a patch of demand softness in the copper market with the focus on firmer cyclical Chinese offtake to come, less growth tail risks in the developed world, and structural demand trends staying resilient. Market participants expect a 3.1% growth in global copper demand this year, while on the supply side, more than 250kt of annualized mine output could be at risk due to protests in Peru. Some analysts also see longer-term implications, with companies potentially delaying the approval of new projects. Politics could put a brake on new supply. Countries with large reserves of metals such as Peru are pushing for a bigger share of the profits from mining, which could discourage investment. In Chile, the world’s biggest copper producer, mining projects have been held back by regulatory uncertainties. In Panama, one of the largest copper mines in the world is embroiled in a tax dispute and has currently suspended ore processing. Companies got burned in the past when the cycle turned, and they found themselves boosting output just as demand was falling. Since then, they have prioritized strong balance sheets and become more wary of investing in new projects. The specter of global inflation makes heavy capital spending even less palatable as it pushes up costs. What is more, rich copper deposits are getting harder, and more expensive, to find – just in time when expansion is needed as large supply shortages are expected in the near future. If supply shortages turn out to be as severe as some analysts predict, it would cause a surge in prices that risks damaging the economics of smart grids and renewables and slowing their adoption. Looking at companies, the results from the world’s biggest miners are so-far disappointing as they grappled with lower metals prices and rising energy and labor costs. 2022 was a volatile year for industrial metals, with record prices in the first half giving way to a second-half slump amid fears for the global economy. Rio Tinto slashed its dividend on lower profits, BHP’s half-year earnings fell from a record, while Vale was hurt by cost inflation. Glencore had a better outing, posting its best-ever profit thanks to a global coal boom. Even though inflationary pressures are softening as supply chains start to ease up and gas prices fall, the direct flow through to the cost base will take time. Nevertheless, the companies are optimistic about a turnaround in its biggest market China, after the end of Covid Zero.

 

Precious Metals

Following a strong rally at the start of the year, rising US interest rates sparking growth concerns and a stronger US dollar have weighed on precious metals. Gold headed for its worst month since the mid-2021, after a slew of data saw traders pricing a higher peak for US interest rates this year. The metal was down close to 6% in February – strong inflation, home sales and jobs data have increased expectations for monetary tightening. The dollar and Treasury yields have risen last month, dimming the allure of non-interest-bearing gold. That’s triggered outflows from bullion-backed ETFs. Looking at companies, Newmont’s $17 billion push to buy Newcrest Mining comes as miners wrestle with the reality that gold deposits are small, costly and short in life – while making the case for more diversification. A tie-up with Newcrest would boost Newmont’s gold output by about a third, based on 2022 production, and give the added bonus of greater exposure to highly sought copper. Newcrest rejected the $17 billion proposal, with interim CEO saying the company was “worth a lot more”. Newmont said during an earnings call that they are still engaging with the company, adding that a combination would create an ideal mix of gold and copper. Newmont’s reference to copper is a sign of how precious metals producers are looking to diversify as margins and revenues take a hit from lower-grade and harder-to-access gold deposits. Some base metals are increasingly coveted as global demand surges for materials that play a crucial role in the global push to electrify transportation and build cleaner energy technologies. Looking at platinum, markets are expected to tighten according to Analysts. Power outages continue to plague South Africa. Last week, state-owned utility Eskom announced power cuts of 7,000 megawatts, aiming to prevent a total collapse of the national grid. South Africa is the largest platinum producer, accounting for more than 70% of the world’s platinum mining supply, and while miners have backup systems, these power disruptions are likely to weigh on PGM production. Palladium on the other hand is expected to be oversupplied this year due to slower economic growth, higher scrap supply and substitution in autocatalysts favoring cheaper platinum at the expense of palladium.

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Cluster Risk in Mining – wieso ein Portfolioansatz Sinn macht

Von einem “Cluster Risk” (Klumpenrisiko) spricht man, wenn sich bestimmte Risiken in einem Portfolio anhäufen, z.B. wenn ein Grossteil des Anlagekapitals in Aktien eines einzigen Unternehmens, Sektors oder einer Region investiert ist – besonders im Rohstoffbereich sollte dieses Risiko berücksichtigt werden.

 

Im Öl- und Gassektor beispielsweise fährt ein Investor mit den Majors wie BP oder Shell nicht nur geografisch diversifiziert, sondern partizipiert mit diesen Firmen auch an den verschiedenen Geschäftszweigen, also vom Up-, Mid- & Downstream Geschäft, die je nach Marktlage anderen Trends folgen und Unternehmensgewinne glätten können. Man kann deshalb durchaus behaupten, dass man zumindest innerhalb des Sektors gut diversifiziert ist – sofern man firmenspezifische Risiken ausklammert.

 

Bei den Metallproduzenten ist dies schwieriger. Es gibt in diesem Sinne keine Firma analog zu BP oder Shell, mit der man auf Produktebene wie auch geografisch als Investor eine genügende Diversifikation erhält.

 

Wir haben diese Problematik genauer untersucht und verschiedene Allokationen auf Produktebene sowie geografischer Exponierung miteinander verglichen. Für die Analyse wurde ein gleichgewichtetes Portfolio der grössten 5 Minenfirmen (BHP, Rio Tinto, Vale, Glencore und Anglo American) dem iShares MSCI Global Metals & Mining Producers ETF (PICK) sowie dem Portfolio des Industrial Metals Champions Funds (IMC) der Independent Capital Group gegenübergestellt.

 

Wir berechnen jährlich sämtliche relevanten Daten auf kupferequivalenter Basis. Die folgenden Resultate basieren auf den öffentlich publizierten Geschäftszahlen 2021 und 2020 und sind gewichtete Werte.

 

 

Inhalt

 

• Top 5 Minenfirmen

 

• iShares MSCI Global Metals & Mining Producers ETF (PICK)

 

• Industrial Metals Champions Fund (IMC)

 

• Critical Minerals Intensität

 

• Finanzielle Kennzahlen

 

• Konklusion

 

• Informationen

 

• Downloads

 

• Quellen

 

 

 

Top 5 Minenfirmen

 

 

Sofern ein Investor sich dazu entscheidet, den Minensektor mit den Top 5 abzudecken, würde das Portfolio besonders auf Preisschwankungen von Eisenerz, Kupfer und Kohle reagieren und hätte geografisch gesehen eine hohe Exponierung zum australischen, brasilianischen und dem südafrikanischen Markt.

 

ESG-sensiblen Investoren wäre das Engagement in Kohle (3. & 4. grösstes Rohstoffexposure) sicherlich ein Dorn im Auge – denn obwohl sich die Firmen teilweise von Kohle verabschiedet haben, erwirtschaften BHP, Glencore und auch Anglo American noch beachtliche Summen mit dem Produkt.

 

Sowohl auf der Produktebene wie auch aus geografischer Sicht ist ein Investor mit den Top 5 Minenfirmen ungenügend diversifiziert – 5 Rohstoffe steuern über 80% des Umsatzes bei, die Top 5 Länder gar deren 90%.

 

 

iShares MSCI Global Metals & Mining Producers ETF (PICK)

 

 

Durch ein Engagement über den PICK ETF erhält ein Investor schon einen bedeutend besseren Rohstoffmix. Die Top 5 Produkte setzen sich aus Eisenerz, Stahl, Kupfer, Aluminium sowie Stahlkohle zusammen und werden kumuliert mit 75% gewichtet. Geografisch gesehen machen die Top 5 Länder gut 65% des Gesamt-Portfolios aus.

 

Problematisch aus unserer Sicht ist jedoch die Portfoliokonstruktion – die Top 10 Positionen werden kumuliert mit über 53% gewichtet, die Top 25 mit 70%, wobei 218 Firmen den Rest bilden.

 

Bei der Analyse der Beteiligungen sind uns neben exotischen Holdings auch solche in Russland und China (H- und A-Shares) aufgefallen – ebenfalls pure-plays im Kohlesektor, «ultrasmall»-Caps und vereinzelt auch Edelmetallproduzenten. Natürlich kann man mit der geringen Gewichtung im Portfoliokontext argumentieren, sofern man als Investor jedoch mit gewissen Einschränkungen konfrontiert ist (beispielsweise kein Exposure zu Russland o.Ä.) kann auch eine geringe Allokation zu ungewünschten Positionen führen.

 

 

Industrial Metals Champions Fund (IMC)

 

 

Obwohl sich das Portfolio des IMC aus nur 25 Titel zusammensetzt, erhält ein Investor gegenüber den ersten beiden Varianten sowohl auf Produktebene wie auch aus geografischer Sicht eine weit bessere Diversifikation.

 

Auch hier fällt auf, dass Kupfer, Stahl und Eisenerz die Spitze des Portfolios bilden, nichtsdestotrotz unterscheidet sich die kumulierte Gewichtung der Top 3 um über 10%-Punkte gegenüber dem ETF. Ein Investor erhält einen Rohstoffmix aus insgesamt 15 verschiedenen Rohstoffen, die eine Mindestgewichtung von über 1% ausmachen – auf der Länderebene sogar 20.

 

Das gleichgewichtete und aktiv verwaltete Portfolio setzt auf produzierende, finanziell gesunde Firmen, die einen langjährigen Trackrecord ausweisen. Mittels «ICG Alpha Scorecard» werden Firmen favorisiert, die basierend auf den 6 Säulen «Assets», «Value», «Sustainability (ESG)», «Dividends», «Balance Sheet» und «Behavioral Finance» die relativ besten Werte ausweisen. Dieser Ansatz bewirkt, dass grundsätzlich keine Firmen in der Explorations- oder der Entwicklungsphase ausgewählt werden. Ausserdem werden gewisse Ausschlusskriterien definiert, beispielsweise keine Investitionen in pure play Kohlefirmen.

 

 

Critical Minerals Intensität

 

 

Im Kontext der Energiewende stehen einige Rohstoffe besonders im Fokus. Um den Wandel von der fossilen Gegenwart in eine grüne Zukunft zu bewältigen, werden immense Mengen an Industriemetallen gebraucht.

 

Dieser langfristige Trend sollte im Rohstoffmix eines Portfolios berücksichtig werden. Auch im Hinblick auf dieses Thema profitiert ein Investor von einer optimaleren Exponierung mittels PICK, respektive dem Industrial Metals Champions Fund gegenüber der «Top 5».

 

 

Finanzielle Kennzahlen

 

 

Grundsätzlich sind die finanziellen Kennzahlen im Minensektor sowohl auf Bewertungsebene wie auch mit Fokus auf die Rentabilität sehr attraktiv. Die Minenfirmen befinden sich momentan in einem “Sweet-Spot” – dank der tiefen Verschuldung und den historisch hohen Rohstoffpreisen können die Firmen rekordhohe Aktionärsrenditen bezahlen.

 

Im Vergleich liegen die Kennzahlen nahe beieinander. Die Top 5 weisen für Majors typischerweise eine höhere Dividendenrendite aus, während der Industrial Metals Champions Fund über eine signifikant tiefere Verschuldung verfügt.

 

 

Konklusion

 

Das Thema Rohstoffe wird in der Asset Allokation gerne zusammengefasst, dies, obwohl jedes einzelne Produkt eigenen Fundamentaldaten folgt. Besonders wenn die Rohstoffallokation über Aktien erfolgt, ist ein optimaler Rohstoffmix mit einem Einzelinvestment nicht möglich.

 

Einerseits sind gewisse Rohstoffbestände geografisch konzentriert (z.B. Kobalt im Kongo), andererseits gehört der Bergbau zu den kapitalintensivsten Industrien überhaupt – von der Exploration bis zu der kommerziellen Produktion können 10-20 Jahre vergehen und Milliarden von Dollar kosten. Deshalb ist es wenig überraschend, dass viele Firmen eine gewisse Konzentration aufweisen und sich nur sehr schwerfällig diversifizieren. Obwohl sich zum Beispiel grössere Firmen Übernahmen leisten, um sich hin zu den kritischen Metallen zu diversifizieren, fallen diese Rohstoffe im Gesamtmix vorerst kaum ins Gewicht und führen in der Asset Allokation des Investors zu einem vernachlässigbarem Exposure.

 

Der Industrial Metals Champions Fund weist gegenüber den Top 5 und dem PICK ETF sowohl in Bezug auf den Rohstoffmix als auch geografisch eine bedeutend bessere Diversifikation aus, ohne bei den Bewertungsparametern Kompromisse zu machen. Das IMC Portfolio ist praktisch schuldenfrei, reduziert vis-à-vis einem Top 5 Portfolio das Einzelfirmenrisiko ganz wesentlich und ist im Vergleich zum PICK ETF fokussierter.

 

 

Informationen

 

Die Independent Capital Group Basel befasst sich seit über 20 Jahren mit Rohstoffinvestments. Unsere Anlagelösung, der Industrial Metals Champions Fund (IMC), setzt auf den Megatrend Energiewende und probiert anhand eines systematischen Investmentansatz die best-in-class Minenfirmen auszuwählen, die von der steigenden Nachfrage nach Industriemetallen profitieren können. Das Portfolio des IMC setzt sich aus 25 Aktien des Industriemetall-Sektors zusammen und bietet rohstoffspezifische aber auch länderspezifische Diversifikation. Unser Investmentprozess basiert auf einem quantitativen Ansatz und versucht mittels eigens entwickelter Scorecard emotionale Entscheide konsequent auszublenden. Die Scorecard beruht auf standardisierten Daten um Firmen im Rohstoff-Universum einordnen und vergleichen zu können, wobei sie anhand von verschiedenen finanziellen, unternehmensspezifischen aber auch operativen Kennzahlen verglichen werden.

 

 

 

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This research paper used Bloomberg and ICG internal data based on the companies’ respective 2021 and 2020 public disclosures. If you would like to see a specific dataset, please do not hesitate to contact us at research@independent-capital.com.

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ICG Commodity Update – January 2023

The ICG Commodity Update is our monthly published comment on the energy, industrial metals and precious metals market.

 

Energy

Oil has been bumpy in recent months – supported by demand expectations from China but with pressure from contraction fears in western economies. Nevertheless, China’s rapid shift to reopen its economy following lengthy lockdowns should help oil demand rise to a record level this year, the IEA said, lifting its forecast for oil demand growth this year by 200kboe/d to 1.9mboe/d. Traders expect China to resume buying high quantities of oil through the spring. Indeed, preliminary announcements by various agencies suggest that the Chinese New Year celebrations boosted mobility – domestic travel jumped to 90% of 2019 levels. Analysts expect that China alone could add 1.5mboe/d in 2023. A similarly sudden turnaround for the fortunes of economies in Europe and the US is also boosting oil-demand expectations, according to the IEA. Europe’s economy this year is expected to fare better than previously forecast, as warmer temperatures have eased its energy supply crisis. The US had also a mild January that caused natural gas prices to fall to $3/mcf. The extra oil demand means that the IEA now expects total oil demand this year to average 101.7mboe/d, well above pre-Covid levels and a record amount. The EIA (US) expects 1.0mboe/d and OPEC 2.2mboe/d growth this year. Global oil supply is also expected to grow, led by the US and Iran. Markets could be in deficit until 3Q23 resulting in a decline in already low inventories, thereby tightening the oil market – while SPR releases were an effective tool to help control oil prices in the 2H22, President Biden’s ability to use them as effectively in 2023 is probably more limited. Over the next weeks oil and gas companies will report their 4Q22 results, highlighting the record-high profit generated last year. Oil and gas companies’ contribution to the S&P 500 Index’s earnings has nearly doubled compared to 2022. Energy now represents more than 10% of the S&P 500’s estimated net income, up from 6.5% a year ago. Still, energy makes up only 5.3% of the index’s market capitalization even after a big outperformance in stock prices last year. Disciplined reinvestment and capital return remain key drivers for the industry. Shell reported $40bn net profit last year, 70% higher than eight years ago in 2014, when prices were at similar levels and the ECF was launched. That says something about how the industry has changed over that years.

 

Industrial Metals

After strong commodity prices seen through the first half of 2022, the second half of the year was significantly less exciting, with generally lower commodity prices into Q4 and cost inflation concerns taking some of the free cash flow margins out of the sector. According to analysts and seen in some of the most recent Q4 reporting, mining companies continue to generate strong cash flows and given strong balance sheets, the potential to provide attractive returns to shareholders. Miners have rallied into the new year, buoyed by higher commodity prices, lower inventory levels and improving sentiment on China, with economic expectations now appearing higher than previously thought. According to BMO, relative to industrial metal peers, copper demand in China performed well in 2022, with 2.9% year over year growth to ~14.4Mt (refined copper basis). While below the average for the past ten years, this did mark acceleration from 2021’s negligible growth. Meanwhile, copper inventory also dropped for the second year in a row. A group of base metals led by tin, zinc and copper have surged more than 20% in three months, further supported by the US Federal Reserve signalling a slowdown in the pace of interest rate rises and a softening in the US dollar, which importers use to buy commodities. Another upside risk for already tight copper markets is the social unrest in number two miner Peru (10% of total world mined supply). Protests have rocked the country for almost two months following the impeachment and replacement of former President Pedro Castillo. About 30% of Peru’s copper production is at risk. One of the largest mines, the Las Bambas facility, is currently shut amid a shortage of critical supplies caused by road blockages in the area. There are also supply risks in neighboring Chile, the world’s largest copper producing country. Project delays prompted a Chilean government agency to tone down its projections for copper output in the top-producing nation, the latest sign of the challenges facing the industry as demand for the wiring metal increases. Developing new projects is getting trickier and pricier given increased scrutiny on environmental and social issues and the need to dig deeper. In the case of Chile, permitting difficulties combined with efforts to increase taxes and re-write the constitution have led companies such as BHP, Antofagasta and Freeport-McMoRan to put off decisions on major investments.

 

Precious Metals

According to the World Gold Council, 2022 was one of the strongest years for gold demand in over a decade. Annual gold demand (excluding OTC) jumped 18% to 4,741 tons, almost on a par with 2011 – a time of exceptional investment demand. Two years on from dropping to its lowest level in a decade, central bank demand has rebounded strongly. 2022 saw the second consecutive year-over-year increase in demand from this sector, with net purchases totaling 1,136 tons. This marked a banner year for central bank buying: 2022 was not only the 13th consecutive year of net purchases, but also the second highest level of annual demand on record back to 1950. Mine supply on the other hand increased by only 1% year-over-year to 3,612 tons. Chinese production rebounded, but this was mostly attributed to base effects after wide-ranging shutdowns in 2021. Recycling volumes were also subdued, which meant total gold supply rose only 2% year-over-year to 4,755 tons over 2022. Looking at Silver, Endeavour Silver said there was a supply shortfall of nearly 200 million ounces in 2022. In general, Primary silver reserves are declining as mining depletion exceeded additions. However, silver is a green metal which supports rising industrial demand, placing upwards pressure on the price of silver. While 80% of supply is sourced from mining, 20% comes from scrap – according to the company, silver scrap recycling is at a 25-year low and over the past 10 years, the silver industry has been in a 500m ounce physical deficit. Investors should be aware that an average solar panel uses about 20 grams of silver, meaning, every Gigawatt of solar power needs 2.8 million ounces of silver. Also, battery powered electric vehicles have twice as much silver as internal combustion. With silver being produced primarily as a by-product of base metals mines, grades falling for years, and new deposits are scarce, silver prices could rise in the future. On the company side, the worlds largest gold producer, Barrick Gold, announced that the company’s output in 2022 slid to its lowest level since 2000, missing analysts’ expectations and its own target as operational woes curbed production. Acquisitions could help lift Barrick’s metals output while awaiting longer-term projects to come to fruition. The CEO said in an interview that he’s focusing on deals in “the junior part of the market” this year.

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ICG Commodity Update – December 2022

The ICG Commodity Update is our monthly published comment on the energy, industrial metals and precious metals market.

 

Energy

Crude oil prices started the year 2023 at same levels as a year ago despite what happened during 2022. Indeed, according to UBS the energy problems of 2022 – redirected Russian supply, chronic underinvestment in upstream capacity – are here to stay. And with demand recovering in China as well as in emerging markets overall, energy prices should continue to climb in 2023. With China reopening, oil demand looks set to exceed 2019 levels and hit a record high of 103mboe/d in 2H23. Emerging Asia, including India, should return to driving oil demand growth in 2023. Meanwhile, Russian oil production should fall in 2023 due to the EU’s embargo on Russian crude and refined products (to come into force on 5 February). While production outside the OPEC+ group, which is primarily driven by the US, will likely grow again in 2023, the increase should only be modest following years of underinvestment in building new supply. With OECD oil inventories (commercial and strategic) standing at the lowest level since 2004 and spare capacity set to keep dwindling in 2023, UBS believes higher prices are needed to slow down oil demand growth and encourage investments in new production. 2022 has proven to be another strong year for the oil and gas players. According to Rystad, revenues of public E&P companies increased 55% in 2022, reaching $2.4tn in total. This is about 40% higher than the previous record from 2013. This is not, however, as impressive as the growth in profit, where profit is defined as revenue minus all operational costs, cash to governments and investments. Combined profit reached $800bn, 76% higher than in 2021, which was the previous record year in terms of profit. On the other side, total investments grew by 18%, or $45bn, over 2021. The global upstream investment ratio dropped to about 27% this is a new all-time low. This shows that oil and gas companies remain cautious and the shift in industry behaviour of return vs. growth may continue. Nevertheless, the E&P energy weighting in the S&P500 remains well below historical averages (even after this year’s outperformance), but it is attracting attention. What’s particularly interesting is the gap between earnings contribution and market cap weight is essentially as high as it was in 2007-2008. In fact, looking at P/E, there are few periods where energy has traded this cheap (mid -1980s post oil collapse, 2005-2009, 2011-2012, and today). The ECF has now a record low P/CF of 2.8x.

 

Industrial Metals

Despite growing economic headwinds, most metals prices remain at healthy levels by historical norms. While most analysts expect 2023 metals demand unlikely to be stellar, the reopening of China and therefore its demand will offset weakness in the developed world. Goldman Sachs recently published its 2023 commodity outlook, where the bank states that the setup for most commodities next year is more bullish than it has been at any point since they first highlighted the supercycle in October 2020. What most banks point out are the broadly depleted inventories – with geopolitical tensions high, and security of commodity supply into core value chains rising in terms of strategic importance, the world has fundamentally shifted from a “just-in-time” to a “just-in-case” model. For most raw materials, visible exchange inventory cover is much lower than seen at the start of 2022. This has not only left commodity prices more susceptible to financial positioning, and ultimately outsized price swings, but it also means that prices will likely broadly remain at a premium to cost curves until inventory levels replenish to more usual levels. Looking at China, the country is reopening rapidly and people have more cash in their bank account than ever before. Chinese households currently hold 50% more money than before the pandemic started 3 years ago – analysts expect the release of pent-up demand to be similar if not bigger than it was in the western world when governments relaxed strict covid-rules. In general, supply chain pressures have eased markedly from earlier in the year, but metals and mining output has been hampered by the surge in costs and underinvestment over recent years. Despite a near doubling year-on-year of many commodity prices by May 2022, capex across the entire commodity complex disappointed and continues to do so – even the extraordinarily high prices seen earlier this year cannot create sufficient capital inflows and hence supply response to solve long term shortages. Despite the recent price declines, commodities still finished the year as the best performing asset class – analysts highlight that commodity supercycles never move in a straight line, rather, they are a sequence of price spikes with each high and low higher than the last. Once high prices have rebalanced the market in the short term, the high prices are no longer needed, and prices come crashing back down as we witnessed late this year – but it takes years to resolve long-run supply issues.

 

Precious Metals

The precious metal complex, has struggled for much of the year amid one of the fastest rate hike cycles on record, combined with the surge in US-dollar to a record high, despite inflation spiking to a multi-decade high. Since the autumn extremes the dollar and 10y treasury yields are down, which has seen gold rally to bring the annual average in line with 2021 – the annual average record in terms of nominal price. The likelihood of recession in major markets threatens to extend the poor performance of equities and corporate bonds seen in 2022. Gold could provide protection as it typically fares well during recessions, delivering positive returns in 5 out of the last 7 recessions. While macro factors form the basis for much of the impact on gold, geo-political flare-ups could lend support to gold investment, as in Q1’22, where investors look to shield themselves from any further turbulence. Analysts attribute a large proportion of gold’s resilience in 2022 to a geopolitical risk premium, with gold’s return not fully explained by its historically important drivers. On the company side, the pressure to adopt the green revolution, there has been a declining interest from miners in deploying capital to gold projects – Barrick Gold for example, the world’s largest producer, is not the only precious metal miner that has voiced its interest in diversifying into copper and sees Indonesia as a possible site for exploration as it hunts for gold and copper deposits across South Asia. Global gold production has been falling since 2019 and is likely in the early stages of a new downtrend. Miners that have traditionally focused on precious metals have been redirecting their capital to battery metals and other mineral resources that comply with the green agenda. Many gold-focused miners have significantly shrunk their production. According to analysts, it is important to highlight that during prior periods of similar significant decline in total global gold production, like that which began in 2020, related mining stocks performed exceptionally well for the next decade. The aggregate number of ounces being added to global reserves has been peripheral compared to prior decades. It is becoming increasingly challenging to find precious metals. As a result, the reserves of the top 10 mining companies are down 33% over the last 15 years.

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ICG Commodity Update – November 2022

The ICG Commodity Update is our monthly published comment on the energy, industrial metals and precious metals market.

 

Energy

Markets have experienced intense headline volatility the last few sessions in advance of the OPEC meeting this weekend. Signs of an oversupplied market in recent weeks briefly pushed oil prices to lows not seen since last year, leading to speculation that the production cartel could cut output further to tighten supplies. Many forecasters expected that cut would spur a period of sustained oil price strength given a significantly bullish backdrop. In particular, analysts have pointed to sanctions on Russian oil production, weakening US production growth, and persistent global demand growth, with Morgan Stanley and Goldman Sachs expecting oil prices of >$100/bl by 1Q 2023. However, last week, the G7 implemented a Russian oil price cap at $67-$70/bl (i.e. above the current Russian oil price). As such, that has eased the pressure on global market participants that were expecting a more aggressive price cap, and a related reduction in Russian oil flows. On the other side, there are growing expectations/rumours that China is seeking to shift away from “Zero Covid” measures, towards a more relaxed policy/re-opening (albeit gradually). This is important as a substantial proportion of Chinese oil demand is used in the transportation sector (i.e. over 55% of Chinese oil demand, particularly consumption of diesel in trains and delivery trucks). Interestingly, the US moved to grant Chevron a license to resume oil production in Venezuela after sanctions halted all drilling activities almost 3 years ago. The increase in oil supply in the short term is limited (~ 0.2mb/d over a 6-12 months according to Credit Suisse) but is a change in narrative around US sanctions on Venezuela. No new investments are expected by the company in the country until certain debts are repaid by PDVSA to Chevron. Oil and Gas equities have outperformed the commodity recently and this resulted in some multiples expanding. Nevertheless, they don’t screen poorly in our eyes. According to analysts they continue to price-in high $60/bl WTI and low $3/mcf. Another perspective is the following: We launched the Energy Champions Fund in March 2014 with a NAV of $100/share and oil prices were around $100/bl. At that time the EV/EBITDA was at 5.5x, dividend yield at 2.6%, ROE at 13.3% and cash costs at $22/boe. Today we have an oil price of around $85/bl and the NAV is still at $68/share with an EV/EBITDA of 3.1x, dividend yield of 5.7%, ROE 34.6% and cash costs of $13/boe.

 

Industrial Metals

Commodities surged last month, with bullish investors emboldened by signs that China will take a softer line on Covid and the Federal Reserve will slow rate hikes. China’s top official in charge of its Covid response said the fight with the virus is entering a new stage, in remarks that hinted at more easing of stringent curbs. In Washington, the Fed signaled a slower pace of monetary tightening from December on. Both developments offer hope that two of this year’s major headwinds for industrial commodities may be at a pivot point. When it comes to copper, the warnings keep getting louder: the world is hurtling toward a desperate shortage of the metal. Humans are more dependent than ever on a metal we’ve used for 10,000 years. New discoveries in copper are increasingly unlikely, given the long history of mining – that means most of the world’s great deposits have already been found and exploited, more than half the world’s 20 biggest copper mines were discovered more than a century ago. Mines globally continue to grapple with logistical challenges exposed by the pandemic and exacerbated by Russia’s invasion and Chinese lockdowns. In the case of Chile, the top copper-producing nation, just registered its first year-on-year output increase since mid-2021, a sign the industry may be recovering from a string of operational disappointments – a rare sign of supply relief, although ore quality has been falling and some mines face water restrictions in a prolonged drought. On the company side, Rio Tinto announced it plans to spend up to $3 billion in each of the next three years to develop new capacity for commodities needed in the global economy’s energy transition. The investments will target commodities like copper and lithium, where demand is expected to grow rapidly in the coming decade, as well as iron ore, which is facing sweeping market changes as the steel industry tries to cut carbon emissions. The top global miners are all trying to embrace new sources of demand thrown up by decarbonization. Rio said it expects the energy transition to add as much as 25% in demand across the firm’s key products by 2035. On the ESG front, Rio is aiming to halve its emissions by 2030. It plans to invest around $7.5 billion globally to halve its total operations emissions by 2030, a clear commitment to achieve a more sustainable and environmental friendly business.

 

Precious Metals

Gold extended its advance after Federal Reserve Chair Jerome Powell signaled the pace of tightening would slow at the next meeting, ahead of economic data that could bear on the central bank’s future rate hikes. Powell was optimistic inflation could be contained without the US economy tipping into recession, but said borrowing costs would still need to keep rising and remain restrictive for some time. Monetary tightening has weighed on non-interest bearing gold throughout the year by pushing up bond yields and the dollar, though bets on a slowdown and China’s Covid loosening saw it rise 8% in November – but is still down 14% from a peak in March.

On the company side, Newmont, the largest gold producing company, hosted an analyst update where the company reiterated that it expects to reinvest around $2.5bn/year, comprised of $1-1.5bn sustaining capex, $0.8-1bn growth capex and the rest allocated to exploration. The company said they are reviewing the inputs to its dividend framework and will likely use a $1’700/oz gold price assumption. Also, the company is willing to use cash on the balance sheet to fund the dividend – since 2019, the company has paid-out around 60% of its free cash flow. Newmont is expected to achieve its 2022 guidance. In the PGM sector, Northam fires up South Africa platinum takeover battle with another bid for smaller Royal Bafokeng (RBPlat) – Northam already holds about 34.5% of RBPlat, with options to raise its stake to 37.8% after buying out the company’s largest shareholder a year ago. Rival Impala Platinum has acquired around 41% of RBPlat as it seeks control of low-cost mechanized assets that are essential to maintaining the profitability of its adjacent Rustenburg operations. For Northam CEO, purchasing RBPlat would help close the gap on the country’s top tier producers and notes that the offer is aligned with Northam’s growth strategy and presents a unique opportunity to acquire a controlling interest in a scarce, high quality ore body with established and well capitalized infrastructure. Before making its offer, Northam had tried to block Impala’s bid for RBPlat on antitrust grounds.

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ICG Commodity Update – October 2022

The ICG Commodity Update is our monthly published comment on the energy, industrial metals and precious metals market.

 

Energy

Energy performance has remained strong following record 2Q results – most analysts expect 3Q earnings to show sustainable and competitive profitability and capital return while broader market struggles. Solid fundamentals have led Energy to regain lost ground with sector performance now in line with Materials, Industrials, Financials and Utilities since 2015. According to BMO, energy has further upside potential with companies still trading at a 2-5x P/E discount to other value sectors. Most recent OPEC+ cuts should support oil prices into year-end with underinvestment in the industry translating to higher long-term prices. Higher commodity prices, capital discipline, reduced costs and leverage has been a driver of share prices which is expected to continue by most market participants. With balance sheets repaired, a meaningfully higher percentage of FCF is expected to be returned to equity holders. Corporate returns (ROE) are increasingly competitive with the broader market at current commodity prices and given this outlook, analysts believe oil and gas companies can outperform in even a range-bound commodity market. The pullback in oil prices from peak levels has led to a flattening of the curve, although it remains steeply backwardated with the long-term price ~$60Bbl – there are some key upside risks to oil prices, supply could surprise to the downside given global underinvestment, U.S. producer discipline and peak shale productivity, Russia sanctions, the SPR having nearly run its course, and OPEC+ willingness to support price could all lead to higher prices in 2023 and going forward. Rystad scenario analysis show that under a most extreme (but unlikely) scenario, where geopolitical situation escalates to the point Russia restricts exports, and OPEC+ cut 1mbbld in Jan 2023 in addition to 1mmbbld in Dec, the supply shock could see prices hit US$230/bbl. On the negative side, for oil companies at least, President Biden says he is seeking to impose higher taxes on oil firms who do not boost their US production and refining capacity. This comes on the back of Exxon and Chevron reporting a combined 3Q net income of over $30bn and revenue of close to $180bn. The top 4, Exxon, Chevron, Shell and Total, are paying nearly $100bn to shareholders annually in the form of buybacks and dividends while reinvesting just $80bn in their core businesses this year.

 

Industrial Metals

Macroeconomic headwinds have pushed copper futures down almost 30% from a peak in March, despite brisk demand and shrinking inventories that are nearing historical lows. According to Freeport-McMoRan, the world’s largest publicly-traded copper producer, the copper markets don’t reflect a strikingly tight physical market. The company says, customers are not scaling back orders and are really fighting to get products. The decline in copper prices this year reflects investor concerns about the global economy, weak economic data from top consumer China, the European energy crisis and a strong dollar. Such a pricing environment will defer new projects and mine expansions just when the world’s epic shift to electrification requires a massive amount of all sorts of metals, including copper. Indeed, WoodMacenzie recently published a study that states the mining industry would have to deliver new projects at a frequency and consistent level of financing never previously accomplished to meet zero-carbon targets. For copper, the additional volume needed means that 9.7 Mt of new mine supply will be required over the next decade from projects that have yet to be sanctioned – equivalent to nearly a third of current refined consumption. To date, a shortfall of this magnitude has never been overcome within a decade. The study is underlining that more than $23bn of investment a year in new projects or 64% higher than the average annual spend over the last 30 years has to be made by miners to meet demand. In theory, higher prices should encourage project sanctioning and more supply. However, the conditions for delivering projects are challenging, with political, social and environmental hurdles higher than ever. But copper is not the only metal which will be key in the future – the world needs lithium supplies to grow fivefold by the end of the decade to meet projected demand as the electric vehicle revolution gets into full swing. This looming shortage has seen miners engage in bidding wars for assets. Rio Tinto for example is asking for pitches from some of the biggest investment banks for lithium companies and projects it could buy as the mining giant looks to expand into the key battery metal. Rio already bought a lithium mine in Argentina for $825 million and is looking to bring it into production as soon as 2024.

 

Precious Metals

Gold headed for its seventh straight month of declines, the longest losing streak since at least the late 1960s. Attention is now firmly on the Fed, whose aggressive rate hikes have caused bullion to drop more than 20% from its March peak. Gold slipped as US economic data set the stage for another 75 basis point rate hike, pressuring the metal. A core gauge of US inflation accelerated in September, while consumer spending stayed resilient. On the positive side, evidently for both gold and silver, physical investment demand remains incredibly robust, and mints are struggling to keep pace. Investment silver product markets seem to be experiencing the most acute tightness. Expected record silver imports into India, logistical issues, lack of Chinese supply, and demand for prompt delivery, has seen silver uncharacteristically flown by air. On the PGM side, lower than expected mine production from South Africa and lower PGM recycling supply has tightened balances for both platinum and palladium. On the back of a stronger outlook for global light vehicle production and sharp cuts to both mine and scrap supply, palladium balance has tightened up significantly this year, moving to around a 740 k oz deficit – according to JP Morgan. Also, top PGM producers expect to see strong demand growth in platinum markets going forward, owing to its vital role across the hydrogen value chain. PGM markets are in a chronic deficit but are driven by the ICE vs. EV story – analysts expect that demand for fuel cells will more than replace the demand from ICE catalysts by 2040, although innovation is a wildcard in both directions. Ruthenium, also a platinum group metal, was flagged for its potential in the catalytic conversion of bio-based feedstocks, and applications in next generation semiconductor wiring. On the company side, Newmont reported profits that trailed estimates as the world’s biggest gold producer struggled amid lower prices. The company has been grappling with higher costs of labor, energy and supplies this year as inflationary pressures wash through the industry amid lingering supply-chain disruptions. In mid-September, Newmont delayed a decision on a major investment in Peru until the second half of 2024, citing war in Ukraine, rising prices for materials, supply-chain disruptions and competitive labor markets.

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