A “Perfect Storm” for the Metals
It’s not often that virtually all metals—precious and base—experience a synchronized boom, but thankfully for investors, this is one of those rare events. Due to the inherent cyclicality of the sector, however, we’re forced to pose the question: How long can the metals defy gravity before the inevitable mean reversion sets in?
From the standpoint of the short-term trend, a pullback or “correction” could happen at any time given that most metals (and related commodities like steelmaking coal) have had extraordinary upside runs in the last few months. But from a big-picture perspective, there are compelling reasons for believing the major uptrends in the metals can continue well into 2022 and perhaps beyond.
One of the main drivers of the precarious supply/demand situation for the metals is the current geopolitical outlook. As war looks to be a recurring theme in the foreseeable future, military consumption of metals like steel and copper (the most used metal by the U.S. Defense Department) should increase. At the same time, war-related demand for base metals will continue to weigh heavily on private sector supply availability.
Another consideration is the increasing demand for all varieties of industrial metals as the global economy kicks into a higher gear after the last two years of Covid-related restrictions. The U.S. steel industry’s capacity utilization rates are predicted to be around 80% in fiscal 2023 after a gap of eight years, boosted by anticipated infrastructure spending in several countries. Ratings agency ICRA expects fiscal 2023 domestic steel demand to increase by a healthy 7% to 8%, on top of the 11% growth rate for fiscal 2022.
Meanwhile, in order to address what some analysts have projected as an annual supply deficit of nearly six million tons by 2030, the global copper industry will need to spend more than $100 billion to build mines that will meet the world’s exploding copper demand. This means the world will need to build eight projects the size of BHP’s Escondida mine in Chile (the world’s largest) in order to satisfy the projected consumption, according to industry analyst Erik Heimlich.
For the world’s second-most commonly used metal, the London-based International Aluminium Institute (IAI) finds that world demand for the white metal will increase nearly 40 percent by 2030. IAI also said the aluminum industry will need to produce an additional 33 million metric tons to meet demand growth in all industrial sectors. This suggests the need for aluminum producers to increase production from 86 million metric tons (mmt) in 2020 to 120 mmt by 2030, as pointed out by Recycling Today.
Then there’s gold, which has a demand profile that is unique among the metals. Safe-haven demand is the main driver for gold, and thankfully for precious metal investors, safety demand for gold doesn’t look to abate anytime soon. The aforementioned war factor is a main reason for the steady buying interest in gold bullion and numismatic coins globally.
Continued supply-chain bottlenecks in the agriculture sector (read food shortage fears) are another driver for the yellow metal going forward. The fear of continued inflation pressures itself should also serve to bolster gold’s demand profile.
Finally, Goldman Sachs has given attention to the specter of a “perfect storm” for a gold bull market. The investment bank recently upped its price target for the metal to $2,500 per ounce for the next six months ahead, based on increasing investor demand for “inflation-hedged assets and resilient consumption in Asia.”
All told, we’ll likely have an exciting ride in the metals market for the rest of 2022 and, as long as we keep our eyes firmly fixed on the main trend, a profitable one as well.
Note: In the portfolio, we have no new additions this week.
Updates
Uranium and uranium miners were in the doldrums for several months after prices peaked last fall, as the industry fell out of favor on Wall Street along with the overall alternative energy group. But the energy metal is attracting new interest among investors in the wake of Russia’s invasion of Ukraine, while prices for uranium have lately firmed up. Consequently, the most actively traded uranium fund—the Global X Uranium ETF (URA)—recently provided us with another attractive entry point after correcting almost 40% between November and January. Participants subsequently purchased a conservative position in URA on March 1, using an initial stop-loss slightly under the 20 level. After the 13% rally in URA from our initial entry point, I recommended locking in 50% profit on the remaining position in late March. I further suggest raising the stop-loss on the remaining position to slightly under 24 on a closing basis. HOLD A HALF
South Africa’s Gold Fields (GFI) is one of the world’s largest gold miners with total attributable annual gold-equivalent production of over two million ounces and attributable gold-equivalent mineral reserves of 52 million ounces, providing the firm with plenty of exposure to rising prices. Looking ahead, management said it expects total production to grow by an additional 20% to 30% over the next three to four years and expects growth to be “more or less linear” in the years ahead, with 2022 production forecast to increase around 7% from last year. Per the rules of my trading discipline, I recently recommend taking 50% profit and raising the stop-loss on the remaining position. Let’s further raise the stop to slightly under 14.30 (closing basis). HOLD A HALF
With inflation likely to persist, not only industrial metals but commodities in general should generally outperform. One way of playing the bullish trend in natural resources is the Invesco DB Commodity Index Tracking Fund (DBC), an actively traded index ETF which is based on several major commodity futures contracts ranging from metals (including gold, silver and copper) to grains (including corn, wheat and soybeans) to energy products (including oil and natural gas). A combination of strong global demand for farm commodities, exceptionally volatile weather in many food growing regions around the globe and rising input costs (i.e., fuel and fertilizer) should contribute to rising hard asset prices in the months ahead. Additionally, crude oil prices are expected to remain elevated in the coming year, and for that reason, I expect DBC—which is heavily skewed toward the energy sector—to continue to outperform. Traders recently purchased a conservative position in DBC using a level slightly under 21.50 as the stop-loss on a closing basis. After the 21% rally since our initial entry, I previously suggested taking 50% profit in this position. I also suggest raising the stop at slightly under 25.50 (closing basis) on the remaining position. HOLD A HALF
Kronos Worldwide (KRO) is a leader in the production of titanium dioxide pigments, the world’s primary pigment for providing whiteness, brightness and opacity (used in two-thirds of all pigments). In Q4, the company reported net income that was 220% higher from a year ago (28 cents per share) on revenue of $496 million that was up 20%, driven by higher titanium dioxide prices. Titanium dioxide segment profit was 55% higher for full-year 2021 and a whopping 143% higher for Q4. Going forward, analysts see sales rising 9% and earnings soaring 31% for 2022, which will likely prove conservative. A 5% dividend yield ties a bow on this package. Participants can purchase a conservative position in KRO using (an admittedly tight) stop-loss slightly under 14.75 on a closing basis. BUY A HALF
Natural Resource Partners (NRP) is a master limited partnership engaged in owning and managing a diversified portfolio of mineral reserve properties, including coal and other natural resources (mainly gas and timber). Approximately 65% of the firm’s coal royalty revenues and around 45% of coal royalty sales volumes were derived from metallurgical coal in the latest quarter, making the stock a good proxy for steel demand. Management is sanguine about the year-ahead outlook, with plans to generate even more “robust” free cash flow in the coming months while paying down debt and solidifying its capital structure. The company also recently declared a 45-cent per share quarterly dividend (4.7% yield). Participants recently purchased a conservative position in NRP, and after a 10% rally, I recommended selling a half and raising the stop on the remaining position to slightly under 34.50. I now suggest raising the stop a bit higher to slightly under 40 (closing basis) where the 50-day line comes into play. HOLD A HALF
Nucor (NUE) is a leading steel company with a massive market share in North American structural, cold finish and bar steels. Management said it was “overwhelmingly positive” for 2022 based on pent-up demand, predicting the end-use market would remain strong for steel and steel products and expecting another year of “strong profitability.” Shareholder returns remain another focus going forward (returns averaged 55% of net income last year), and Nucor just hiked its quarterly dividend by a healthy 24% (1.3% yield) with plans to repurchase additional shares in 2022. For Q1, analysts see sales and per-share earnings jumping 50% and 132%, respectively. Participants recently purchased a conservative position in NUE using a level slightly under 134 as the initial stop-loss. After last week’s 11% rally in this stock, I suggest taking 50% profit and raising the stop on the remaining position to slightly under 147.40 (closing basis) at the 25-day line. SELL A HALF
Peabody Energy (BTU) is the world’s largest private sector coal company, engaged in the mining and distribution of steelmaking and thermal coal. The company has lately benefited from significant price increases for seaborne metallurgical (met) coal used for making steel. The company has made it clear that it expects the steelmaking coal segment to lead the way in 2022. Management has guided for the strong conditions in the coal market to persist, while expecting that export volumes of met coal will increase “substantially” due to recent mine expansions. Participants on March 22 bought a conservative position in BTU using a level slightly under 19.75 as the initial stop-loss (closing basis). After the 19% rally from our initial entry point, we sold half the position on March 29 and raised the stop on the remaining position. I suggest raising the stop further to slightly under the 25 level (closing basis) where the 25-day line comes into play. HOLD A HALF
Sigma Lithium (SGML) is a Canadian company that develops, through its subsidiary Sigma Mineracao S.A., hard rock lithium deposits in the Americas. Sigma’s properties are located in Brazil’s Minas Gerais State in the municipalities of Aracuai and Itinga, and the company holds nearly 30 mineral rights in four properties spread over 120 miles, including nine past-producing lithium mines. The firm is focusing on producing battery-grade lithium concentrate from its Grota do Cirilo property—the largest lithium hard rock deposit in the Americas—to support the booming electric vehicle (EV) industry. Analysts expect Sigma will begin generating revenue by the end of 2022 as its lithium production commences at half scale, bringing the company one step closer to its goal of being the world’s largest low-cost lithium producer. Additionally, Bank of America recently picked Sigma as one of its top “scarcity plays” in the face of a tight supply backdrop in the global lithium battery space. Participants on March 22 bought a conservative position in SGML using an initial stop-loss slightly under 10.50 (closing basis). Last month, I suggested taking 50% profit in this stock after it rallied 14% from our initial entry point. I also recommend raising the stop-loss in the remaining position to slightly under 14.20 (closing basis) where the 25-day line comes into play. HOLD A HALF
SSR Mining (SSRM), formerly Silver Standard Resources, operates Argentina’s largest commercial silver project (Puna) and also produces gold, zinc, lead and tin. SSR also boasts a pipeline of high-quality development and exploration assets in the U.S., Turkey, Mexico, Peru and Canada. The company recently guided for its combined properties to produce around 740,000 gold equivalent ounces annually through 2024. In last year’s fourth quarter, SSR posted revenue of $408 million, which was 10% higher than the year-ago quarter and 5% above analyst expectations. For gold, the company also delivered Q4 production of 211,717 gold-equivalent ounces at an all-in sustaining cost of $961 an ounce (well under the current $1,950 gold price). Management emphasized that SSR’s excellent cost profile ensures strong free cash flow and capital returns going forward. In view of the stock’s excellent relative strength profile, participants purchased a conservative position in SSRM on April 12 using a level slightly under 21 as the initial stop-loss on a closing basis. I suggest raising the stop to slightly under 22 on a closing basis (the 25-day moving average) after last week’s rally. BUY A HALF
In view of copper’s strong near-term fundamentals (inventories are near record lows while global demand remains high), we added Teck Resources (TECK) on February 8. The company plans to start up its Quebrada Blanca Phase 2 project in Chile during the second half of this year, which will double its consolidated copper production by 2023. Teck also raised its annual base dividend to 50 cents per share (from 20 cents) and declared a dividend of 63 cents per share. Going forward, Wall Street expects high double-digit, top-line and triple-digit, bottom-line growth for Q1 and Q2 2022. For the full year, management expects copper production to average about 280,000 metric tons, (down 2% from 2021), while forecasting steelmaking coal sales of around 6.3 million tons for Q1 (up 2% from the year-ago quarter). After Teck’s recent 11% rally, I previously suggested booking 50% profit. I also recommend raising the stop-loss on the remainder of this trading position to slightly under 38 on a closing basis. HOLD A HALF
Portfolio
| Stock | Price Bought | Date Bought | Price on 4/18/22 | Profit | Rating |
| Global X Uranium ETF (URA) | 22.7 | 3/1/22 | 28 | 23% | Hold a Half |
| Gold Fields Ltd. (GFI) | 12.8 | 2/17/22 | 15.4 | 20% | Hold a Half |
| Invesco Commodity Tracker (DBC) | 22.35 | 2/1/22 | 28.1 | 26% | Hold a Half |
| Kronos Worldwide (KRO) | 15.25 | 4/12/22 | 16 | 5% | Buy a Half |
| Natural Resource Partners (NRP) | 34.75 | 1/16/21 | 45 | 30% | Hold a Half |
| Nucor Corp. (NUE) | 149.25 | 4/5/22 | 165.3 | 11% | Sell a Half |
| Peabody Energy (BTU) | 21.9 | 3/22/22 | 32.5 | 48% | Hold a Half |
| Sigma Lithium (SGML) | 13 | 3/22/22 | 15.9 | 22% | Hold a Half |
| SSR Mining (SSRM) | 23.2 | 4/12/22 | 24.1 | 4% | Buy a Half |
| Teck Resources (TECK) | 33.25 | 2/8/22 | 43.1 | 30% | Hold a Half |
Buy means purchase a position at or around current prices.
Buy a Quarter/Half means allocate less of your portfolio to a position than you normally would (due to risk factors).
Hold means maintain existing position; don’t add to it by buying more, but don’t sell.
Sell means to liquidate the entire (or remaining) position.
Sell a Quarter/Half means take partial profits, either 25% or 50%.