CHRIS JUDD Invest
By Thomas Galanti.
With commodity markets red hot across the board, investors might be led to believe it’s too late to increase their resource exposure, fearing they’ll be left holding the bag. With iron ore trading ~100% higher over the year, copper ~55%, and crude oil at a multi-year high, you wouldn’t be blamed in thinking we’re already deep into a commodity bull market. Whilst commodities have definitely felt the impact of Quantitative Easing (QE) programs, record fiscal stimulus, and supply chain disturbances, investors are now left with two ways of extracting value from this market.
- Correctly estimate the length of the commodity bull-market.
- Look where others aren’t looking.
Many analysts have been drawn into the discussion of a potential ‘commodity super cycle,’ an incredibly rare phenomenon where structural shifts create long periods of high commodity premiums. Whilst most of the discussion has been centred around the super cycle, it isn’t a requirement to generate significant abnormal returns in the short to medium term. For example, substantial value could have been found in the ‘contrarian’ bets surrounding the iron ore market in 2021, with most analysts in early CY2021 estimating a spot iron ore price of US$140 by June, far below the actual US$210/t. There’s significant evidence to suggest commodity prices will remain higher for longer, primarily through the record level of fiscal spending globally and potential for heightened business investment facilitated through low interest rates expected until 2024.
The second option is to look where the masses aren’t, and the masses aren’t looking at Tin. A commodity that fits most of those strong underlying thematics backing copper, lithium, and nickel, with only a fraction of the attention. Whilst the commodity has had a stellar run YTD, climbing 236% to US$33,400/t, the share price of Tin miners is yet to reflect this price appreciation.
Tin will be the big winner of the ‘smartification’ of technology and the Internet of Things (IOT), given its role as a key input to the creation of silicon chips through solder. It has exposure to the EV market, renewable energy through solar panels, energy storage, and advanced computers. The importance of Tin over the coming decade cannot be overstated, Boston’s MIT ranked it the number 1 metal best placed to benefit from the advent of new technology, yet its hype continues to fall short of its other technology/battery metal counterparts.
The primary reason Tin hasn’t appeared on most investors’ radars is the very limited opportunity for exposure in the Australian market. There aren’t many producers with a majority focus on the resource, typically making up a small percentage of total operations. Of that tiny subset of Tin producers, Metals X (ASX: MLX) and Elementos (ASX: ELT) are two companies worth exploring. For those risk seeking investors, looking for exposure to a pre-production Tin opportunity, Elementos is an interesting one to put on the watchlist at a $70m market cap.
Elementos has two Tin projects, the Oropesa Project located in Andalucia, Spain, and the Cleveland Project located in Tasmania. The Oropesa Project is one of the largest, highest grade Tin resource globally, with 9.01Mt of indicated JORC resource and 3.2Mt inferred, totalling 12.54Mt of 0.54% Sn. Management have announced that they expect a Definitive Feasibility Study (DFS) for the project to be completed by the second half of 2022, bypassing a PFS to more quickly advance to the production stage. Elementos CEO, Joe David, said the ‘direct-to-DFS’ puts the company in “the best possible position to develop Oropesa rapidly into a tightening tin market,” looking to capitalise whilst prices are high.
To illustrate the potential of a low-cost Tin producer whilst prices remain hot, we can use ELT’s Oropesa Economic Study from May 2020, when Tin prices were US$19,750/t. At the time of the study, assuming an all-in-sustaining cost (AISC) of US$11,800/t, putting it in the bottom quartile of cheapest Tin producers, and CAPEX of US$52m (including a 20% contingency), the project had a NPV of $94.3m and a total project EBITDA of US$281m over a 14-year life of mine (LOM). Using the same AISC and CAPEX and updating to the current tin spot price of US$34,607/t, investors might expect a NPV closer to $380m and total project EBITDA of US$779.1m over the LOM.
Elementos had $7.56m cash at the end of the March quarter, with a burn rate indicating they're well resourced to maintain their drilling program and complete their DFS without the need to tap the market. The potential to generate ~AU$74m EBITDA p.a. on revenues of AU$110m, whilst sitting on a modest ~AU$60m EV shows there is plenty of room for substantial rerates if Tin prices remain strong and management is able to deliver on the Oropesa project. What makes this even opportunity even more exciting is that this analysis doesn’t include the second project, leaving plenty of room on the upside, whilst limiting potential downside risk.
The Cleveland Project in north-west Tasmania contains significant tin-copper tailings on an open-cut and underground JORC resource. With a total JORC resource of 7.47Mt (0.75% Sn, 0.30% Cu) and an indicated 6.23Mt, investors should be confident that management has secured sufficient resource for Elementos to become a serious Tin producer in the near future.
Tin Market Dynamics
As with all single-resource operations, understanding the supply and demand trends underlying Tin is key to predicting the future profitability of the company. Strong demand for consumer electronics in 2021 and the closure of refineries lead to both surges in demand off the early 2020 lows and a dip in supply, leading to the strong prices supported above US$30,000/t. Forecasts show the growth in demand of Tin is likely to remain steadily above its long-term growth rate of 1.8% over the next decade, with significant underinvestment to fill the gap, likely leading to a growing supply deficit over the 2020s. Using the conservative long-term growth rate of 1.8%, the market is still expected to be in a 30-40kt deficit by 2025, and likely to accelerate on the back end of the decade as ESG projects are expected to pick up pace.
For investors bullish on commodities as a long-term play or looking to add exposure to ESG linked metals, Elementos might be a solid addition to your watchlist. As with all small-cap miners with exposure towards a single resource, look out for significant moments of de-risking along the way. Some risks to consider include: the dilution of shares through capital raises, the commodity market’s exposure to China’s uncertain future, and the obvious reliance on the price of Tin. With still a few years until any receipts are registered, plenty of value can be found the closer we get to production, with resource upgrades a potential along the way and the DFS likely to be the big kicker in 2022.
Disclaimer: This article should not be construed as investment advice and is for information purposes only. It does not take into account your investment objectives, particular needs or financial situation. Before making an investment in anything, do your own research and contact your investment advisor.