Base Metals: Time For Greater Optimism?

Panellists:
Stuart Ausmeier, Director, Concentrate Capital Partners
John Meyer, Partner & Mining Analyst, SP Angel
Ian Pearce, Director, Outotec

121 Group: Now we are going to have a discussion on base metals, and the outlook for the base metals market. We’ll start this one off with John – if you’d like to give us your thoughts on what are the key drivers, key factors, creating excitement in the base metals space and creating opportunities for investment?

John Meyer: The way I see it is, they’re four legs to the market. There’s supply. There’s demand. Demand is what generally leads pricing. And then there’s China and the United States, and clearly they’re related to the demand side of things.

It’s very interesting, I went to a conference given by an economics group, Capital Economics. They’re a bunch of economists, and they look at the global economy and how that’s working. They were quite enthusiastic, and they were brave enough to talk about commodities to an audience of commodity traders and mining guys like myself. They were focused on the demand side, which is critical in saying, we’re seeing coordinated global growth now. The US, China and the rest of the world all seem to be growing. I know there are some small, negative places, but they’re really not relevant at the moment. They were pretty positive, in general, about the market, which was good. What they were highlighting really, was China is not growing as fast, and they were very consistent in this message. China isn’t growing as fast as the Chinese say, and of course, if you know any economists very well, you will know that economists are always slightly negative creatures. The glass is always half full, and they never want to buy you a pint, which is always a shame because they think the world’s going to get worse. For these guys to say the world’s getting better is quite good. But they don’t know an awful lot about the supply picture, which is key because what happens is, demand will increase, and people will be buying lots of stuff. The price only really goes up when there’s a bit of a supply shock, generally, and this is where we come in. This is where our understanding of the granularity of commodity producers is important.

China, of course, has been a massive driver for demand and still is, even though Capital Economics would reckon that it might not be growing quite as fast as everybody thinks. But the United States, which we’ve all forgotten about for years and years, because it’s all been a bit quiet in the USA, is actually growing. Now is it Donald Trump? Or was it really the policies of Obama before him? Regardless, the United States is growing. There’s a lot of construction going on over there, and I think there’s going to be a lot more. A lot of it is driven by the success of their new economic policy. It’s like they’ve all woken up. There’s new finance back in the system. Construction companies are going as fast as they can, and these guys are buying commodities.

To use a non-base metal example, the Americans put a lot more vanadium into their steel than anyone else in the world. In fact, their numbers are twice what the Chinese put into their steel, and a bit more than we use as well. They’re big, big consumers of, not just base metals, but everything else.

If you’d use the expression about Texas, everything’s bigger and better in Texas, and that sort of applies to the US in general. There’s a lot of demand that people haven’t really factored into their models coming from the US, and that is really helping to drive markets.

“It’s like they’ve all woken up… there’s new finance back in the system.”

Now whilst we talk about this, let’s not forget what’s going on, on the production side of things. Producers are struggling. The super cycle exhausted the easy growth within the big mines in the world, and that’s something we should think about. One of the examples is copper grades. We now see copper mines mining 0.3% copper. You wouldn’t have thought about that 10-15 years ago.

It’s a changing environment, and let’s not forget about CapEx Finance. The lending banks are not what they were. After the global financial crisis, the regulators decided they were going to chop the banks up. For example, Barclays has cut out a lot of its commodity stuff, and they supply to a whole bunch of banks. The money that was in commodities on the banking side just isn’t there at the moment. It’s created a market opportunity for traders, and I’m sure we’ll be talking more about that to bring in new money.

I think the finance side is worth watching, but I think this is really over to the balance between the producers and consumers. There are significant deficits forming in a lot of the metals right now.

121 Group: Fantastic. Stuart, let’s move onto you for a moment. Can you tell us a little bit about Concentrate Capital Partners? What you do? And then also, your feelings on the base metals space at the moment.

Stuart Ausmeier: Yeah. Thank you. We have a setup as a key investor and technical investor into projects, both early stage and later stage, so funding everything from feasibility all the way through into execution. We’re globally focused, pretty much commodity agnostic – as long as we, through our technical partnerships, can add value. We really look at the supply and the global market – you touched on something like zinc earlier. Through our partnerships, we actually see a lot of these projects get reawakened, particularly in the zinc market, as an example. People are saying, “Well now at current prices, this becomes very attractive.”

As your supply sides start increasing and such, your prices start shrinking. We’re looking five years in advance, so if we’re going to progress something through feasibility all the way into the bulk, we’re looking at what the price is going to be then, by the time we bring it online. When someone brings a zinc project to us, we need to understand: how does it fit in with what we know is going to get developed, and what is it likely to look like? As you know, you don’t build a project in a year or two. It takes a fair amount of time.

121 Group: Given the supply side seems to be driven so much by policy decision, either by the Chinese government or by companies such as Glencore – when you’re making an investment decision, which involves a long investment period, how do you take into account the risk that maybe the government in China will change their mind?

Stuart Ausmeier: I think naturally, in the absence of information or policy uncertainty, you’re really taking a cautious approach. Warren Buffet’s famous for saying, “You invest in things you know, and if you don’t know, you shouldn’t be investing in it.”

So we naturally take a more cautious approach, but through discussions and relationships you’re able to delve into what these people are thinking and what their development plans are. If you chat to a Glencore, and you say, “So what are your plans for zinc?” you get a bit of a clearer, though still fairly cloudy, picture. But at the end of the day, anyone that says they know what’s going to happen in China, is fooling themselves. I don’t think Chinese politicians know what they’re going to do in five years’ time. So naturally, you’re going to take a bit of a more cautious approach.

121 Group: I guess you’re going to be looking for projects that will be sustainable even at a lower price.
Stuart Ausmeier: Exactly – can it sustain itself through the down cycle and at least break even so you can continue running the project? You then have to have patient capital that you can pull all the way back through.

121 Group: Ian, if we can bring you in here. From your point of view, how’s your project pipeline looking at the moment in the base metal space? Which projects are you seeing getting funded? Getting put into construction? Take us through that.

Ian Pearce: Sure. We’re at the tail end of the process whereas you know, we’ve gone through this cycle. There’s been a downturn. A lot of companies had to fix their balance sheets, get their businesses in order through that last downturn, and so we came through that and we have seen a change in the market and how the market has responded. What we’ve seen is a resurgence. Certainly it came through in ’16, then came through stronger in ’17, and customers are actually deploying capital to improve the upbringing of assets.

Green field type investments, bottle necking, improving the cash position, that’s the sort of capital span we’ve seen, typically in the upstream side of the business. Not so much in the downstream, which is the smaller side and the refinery side, but what we have seen is a change in that as well now. Recently, we’ve seen a stronger order book where we are seeing some of the spending that’s going into the downstream side, and what we’re now looking for is the big capital spend.

So we’ve got those different pieces of our business where we’re looking for upstream, downstream, and then that’s really been round the renewal and replacement capital that you see in the base businesses. Now we need those projects to come through, which is going to be that green field type work, and that’s what we’re seeing now. That base spend is what’s encouraging for us. It says there’s a resurgence of spending in the sector.

121 Group: Are you seeing any particular metals leading the charges?

Ian Pearce: Certainly. I think it’s following the trend that you see out there. Copper leading the pack. Strong base metal commodities, zinc of course – a great business. We’re seeing metals like aluminium. We’re seeing it in metals like nickel. So we’re seeing across the spectrum actually. And then some of the exotics, where you’re getting some spending in the lithiums, and some spending around cobalt even. Copper mines are starting to relook at cobalt as being a valued driver in their businesses, where before it wasn’t a big bottom line. Now with cobalt priced where it is corporates are starting to focus and say, “Can we actually improve our cobalt recoveries and our cobalt position?”

121 Group: Is the bank financing catching up now in this space?

Ian Pearce: On the financing side, I think you’re also seeing some innovative financing. So you’ll get, what came through the last down cycle, which caused the streaming method of financing by selling your stream. We’re also seeing traders actually taking a position where they’re looking to secure concentrate, which is a positive sign for the market again.