It is no secret that commodities have been doing well since the bottom of the crisis last year. Trillions of dollars have been printed all over the world, deficits are ballooning at an increasing pace, and we've only just started. Last week, a new $1.9 trillion stimulus package was signed by President Joe Biden to provide relief to the U.S. citizens. All of these measures are extremely inflationary and will push up commodities. But there is more.
What many people don't appreciate yet is that the crisis has also created a huge shift in the global economy in favour of China.
First off, China once had a services trade deficit which was mainly attributed to tourism. That deficit has completely vanished now due to the lockdowns as Chinese tourists need to stay at home. China now has a massive trade surplus which will be used for more productive endeavours like construction, infrastructure and manufacturing. On top of that, China is increasingly pulling money out of U.S. Treasury bonds as reported by the U.S. Treasury.
Second, China is the largest consumer of commodities in the world and it has very little copper, nickel, iron ore, oil, etc. It will need to import all of these commodities and we are seeing signs that this is happening. Dry bulk shipping rates have soared in the last few months and confirm that the bull market in commodities has started.
Finally, latest China power consumption data also evidences that China is growing at a rapid pace. China power consumption grew by 23% in the first two months of 2021. Charts below have been compiled by Correlation Economics.
The CRB index shows that we had a rebound from last year's low and we are on track to ride a new bull market cycle upwards.
The top 3 commodities I recommend are copper, iron ore and PGMs.
Copper will be an important ingredient for the electrification of the world as more people shift to electric vehicles and renewable energy sources. Citigroup reports that 2021 will see a massive deficit in copper. Goldman Sachs raised its price target of copper to $4.75/lb by the end of this year.
Iron ore is the most important source for steel production which is in a shortage right now. China relies heavily on iron ore/steel for its infrastructure projects and it doesn't produce a lot of it.
PGMs are in a structural deficit as China implemented its six emission standards last year. Palladium and rhodium are widely used in these auto catalysts, but platinum is making an entry here due to the shift to three-way catalysts.
To play these three commodities, I recommend the following three mining companies.
Capstone Mining is a primary copper producer with two producing mines in the U.S. (Pinto Valley) and Mexico (Cozamin) and one development project in Chile (Santo Domingo). The company is trading close to book value at a market capitalization of $1.3 billion and is targeting to become debt free in 2021. The valuation is very cheap at a current price to EBITDA of 4. Production is expected to more than double in the coming years and costs are expected to fall dramatically when Santo Domingo comes online in 2024. Near-term catalysts will come from production improvements on its producing mines and a financing deal and construction decision on Santo Domingo this year. Based on a 5x multiple price to projected EBITDA, this company is a multibagger even at the same price of copper today ($4.1/lb).
Vale is a global iron ore producer primarily focused on the Asian market with a market capitalization of $90 billion. The company is trading at 2.5 times book value but has an attractive P/E of 4. The latest Q4 2020 earnings beat estimates at an adjusted $1.09/share. Near-term catalysts come from the increase in iron ore and copper production which is expected to grow 30% over the next two years based on company estimates.
Other than iron ore, Vale also produces copper and nickel which will gives investors exposure to battery metals (see figure below based on Vale production numbers).
Sibanye-Stillwater is a global mining company producing rhodium, palladium, platinum and gold in South-Africa and the U.S. The company is trading at 2.5 times book value but has an attractive P/E of 5. Net debt is expected to be paid off this year. Earnings were boosted due to the massive rise in the price of rhodium, which contributed 46% of total revenue in H2 2020. Overall production is expected to rise 13% in 2021. Most recently, the company entered the lithium space with an investment in Keliber Oy.
The near-term catalyst for this company is a continued rise in the price of rhodium and palladium due to structural deficits and a bull market in platinum as three-way catalysts make their way into the auto industry.
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Disclosure: I am/we are long CSFFF, SBSW, VALE. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.