Revenge of the Miners: A One-Stop Shop for Electric Metals?

Eric Fry By Eric Fry
Macro Strategist, The Oxford Club

Metals

If an electric vehicle (EV) manufacturer were to post a dating profile on Tinder, it might look something like this…

Sexy, young, eco-conscious company with big dreams. Seeking polyamorous relationships with mature polymetallic miners. Swipe right if you want to hook up and reduce your carbon footprint.

Because EVs require large quantities of metals like lithium, cobalt, copper, manganese and nickel, mining companies have become the newest heartthrobs of the global auto industry.

The car companies are realizing that if they want to ramp up EV production, they must secure long-term supplies of the “electric metals” that make their sexy new autos possible.

The average EV, for example, uses almost half as much copper as the average American house.

“Interest in the electrification trend really took off in 2017,” a recent report from J.P. Morgan Cazenove observes, “leading to significant price increases for those commodities seen as having the greatest role to play in battery technology, particularly lithium, cobalt, manganese, copper and nickel.”

“Our base case forecast,” the report continues, “calls for plug-in electric vehicles to grow from just 1% of global auto sales in 2016 to more than a 5% market share by 2025. The most robust growth should come from hybrid electric vehicles, as Europe moves aggressively away from internal combustion engine vehicles. This [hybrid] sector is forecast to grow from around a 2% market share last year to 26% globally by 2025.”

As the EV boom gains momentum, the prices of electric metals are likely to continue moving higher.

Mining companies are delighted by the trend. “Revenge of the miners” is the phrase one billionaire mining company executive uses to describe the newfound prosperity and negotiating power the mining companies have obtained.

“Automakers are finding themselves in unfamiliar – and uncomfortable – terrain,” Bloomberg News reports, “where miners such as Glencore PLC and China Molybdenum Co. for the first time have all the bargaining power to dictate supplies.”

Auto manufacturers are not yet panicking about their access to long-term supplies of electric metals, but they are becoming mildly concerned…

“When BMW AG revealed it was designing electric versions of its X3 SUV and Mini,” Bloomberg continues, “the going rate for 21 kilograms of cobalt – the amount needed to power typical [electric] car batteries – was under $600. Only 16 months later, the price tag is approaching $1,700 and climbing by the day.”

The rising price of cobalt is providing plenty of incentive to auto manufacturers to obtain supplies under long-term contracts. It is also providing plenty of incentive to investors to find “cobalt plays” that could cash in on the boom.

Unfortunately, investing in cobalt is easier said than done. Most so-called cobalt companies are not yet mining any of the metal. They simply own properties that might begin mining cobalt in the future.

A few of the large diversified mining companies are producing cobalt, but only as a byproduct of mining copper or nickel. Glencore PLC (OTC: GLCNF), for example, is the world’s largest cobalt miner – producing a whopping 20% of the global supply. But the company also mines significant quantities of copper and nickel. So it is not a “pure play” on cobalt.

Nevertheless, I consider Glencore to be the best one-stop shop for electric metals. Among the major diversified mining companies, Glencore offers the highest exposure to battery technology commodities, with copper, cobalt and nickel accounting for about half of the company’s gross earnings.

Due to the company’s cobalt production, it is benefitting already from the EV boom. But since Glencore also mines copper, manganese and nickel, it stands to benefit immensely in the future, as EV demand for these metals continues pushing their prices higher as well.

And EVs aren’t the only “green” products that require electric metals. Wind energy, for example, uses five times more copper per unit of electrical energy than does conventional coal burning. Photovoltaic solar power uses six times more copper per unit of electrical energy. The nascent energy storage industry could become another major source of demand for electric metals.

Glencore is well-positioned to prosper from the world’s growing demand for EVs and other green technologies. That’s why I recommended the stock last summer to the subscribers of my trading service, Fry’s Pinnacle Portfolio.

At the time, I stated flatly that the consensus estimates for Glencore’s 2018 and 2019 earnings were way too low and, therefore, that the stock was even cheaper than most folks believed.

That analysis seems to be on track.

The research team at J.P. Morgan just revised its 2018 earnings estimates for Glencore from $5.5 billion to $6.7 billion – a jump of 20%.

I believe the new estimate is still too low based on the current strength of the base metals markets and the likelihood that prices for electric metals will continue trending higher.

Glencore stock has advanced around 35% since my recommendation. But I still consider it to be a very attractive long-term “Buy” and one of the very best ways to play the EV revolution.

For miners of electric metals, revenge is sweet.

Good investing,

Eric