It's that time of the year again when we look back at the last twelve months of 2021 to reflect on developments and trends and then try to peer into our crystal ball to make some predictions for what's to come in 2022. I'm glad we're not fortune tellers. It's actually very taxing to make predictions and do up today's Insights. Thing is, every publication, every "influencer" and every blog post has already done something, which makes this Samso Insights a bit of a late comer to this stage.
Still, in spite of that, it's useful to look back and also see what's happening right here, right now and be open and curious to what could come in 2022.
2021
What a year we have had on the Australian Stock Exchange (ASX). I believe the current count of IPOs in 2021 is around the 120 mark and rising. Even as I write this article, there is another one listed today.
I remember a time when it was just a fraction of that number. In fact, we could count them and probably even name the companies. As in so many industries around the world, the COVID factor played a huge part and it has driven one of the best bull runs for the small-cap mineral explorers that I have seen in more than thirty years of being in this sector.
Looking at the upcoming list on the ASX as of 23rd December 2021, I can count 38 IPOs of which I think two or three have just been listed yesterday. If you assume an average capital raise of AUD$6M per listing, you are looking at nearly AUD$220M to be raised in the next couple of months. Hence, with over 120 IPOs in 2021, that is over AUD$720M raised in 2021. And this is excluding placements and Rights issue.
Figure 1: (Source: GESB Superannuation)
Looking at Figure 1, it is obvious where returns are coming from in terms of investments, for 2021. The returns from equities have gone through the roof and the number of participants have greatly increased. I don't think there are any arguments about the influx of new investors, new type of investors and new ideology of investors into all sectors of the Australian Stock Exchange.
Over the last three years, the returns are just below 10%. However, the twelve-month return is over 35%. This is actually a spectacular result, and if you were to take parts of the mineral sector, the returns have been in the 100s to 100s of percent. This is not what you would get in the sensible investing ideologies, but it is the common reality and the expected realities over the last twelve months.
Figure 2: (Source: GESB Superannuation)
This is backed up with the data in Figure 2. Look at the steep incline in ASX curve. The steep returns are not well represented but if you take into account that this curve includes all the boring "blue chips", this is a significant information.
Market Expectations for 2022
I think 2022 is going to be better than 2021. Volatility will definitely be a common feature but I think the next twelve months could be even better. I was told that there was nearly AUD$400M raised in the second half of 2020. In 2021, the ASX raised over AUD$700M. In my opinion, the capital market is going to either burst out of the gates in 2022 and create a bubble for investors to be concerned about, or it will just plough on to 2023.
I think the later will happen as there are just too many things happening and the shift to No Emission will be the main driver of activities. Capital is still abundant outside the game and the uncertainty of the changing landscape of the post-pandemic scene will drive the narrative. Asset allocation will be trying to find some form of normality and this will create a "race" to be in the right place. A flight of capital to compete for the best investment.
Figure 3: (Source: E& MJ)
I saw a great article recently which expressed my sentiments perfectly. It is written by E&MJ - Engineering and Mining Journal (Figure 3) where they talk about the restarting of projects globally. When you look at the delayed projects, capital requirement will rise just for that portion of the market.
To conserve cash, most mining firms deferred capital expenditures and halted or slowed project activity in 2020. GDP growth, an important leading indicator for capital spending in the mining industry, is estimated by the International Monetary Fund (IMF) to have declined by about 4.9% in 2020.
As of the end of 2020, the number of metals and mining industry projects impacted by the pandemic exceeded 1,600, representing $212 billion, according to surveys conducted by Industrial Info. About 66% of that is for mining projects, with the remainder being for downstream processing and smelting sectors.
The good news is that most of these projects are merely being delayed as opposed to cancelled. Most delays range from three to 18 months, with a lot of project development being pushed into 2021-2022 timeframe.
----- (Source: E&MJ)
The renewed interest and the increased opportunistic interest in the mineral sector will push the current "bull" run for a longer period. How long this period will be is hard to say but if the general curve of interest remains smooth, then I think this will be a three to five-year run. Would this become the next super cycle? I think there is a chance that could happen.
If you compare my thoughts in June 2019 with the Insight I wrote (Is the Commodities Shortage a Mirage?), with what is happening now, you can see why I am optimistic about the path ahead. My confidence in this optimistic narrative is entirely based on the EV-No Emission Revolution. This is the Industrial Revolution of our current times.
At that time of my Insight in 2019, there were no rumblings of the impending lithium run. If you look at Figure 4, the sentiment was still going down.
Figure 4: The 5 year chart for Lithium Carbonate. (Source: Trading Economics)
The sentiment for lithium was at its all time low in September 2021 and it took off like a greyhound chasing a rabbit on the racecourse. That has changed the entire dynamics of the No Emission narrative.There was already a movement for Green-EV-Reduced / No Emission but as the sharp price movement happened, it is as if the world woke up suddenly and decided this was the way to go. And this movement is now going at break-neck speed.
What will Drive the Growth in 2022
It is an obvious statement to say that lithium is the driver but it would be foolish to believe that lithium is the only or main component.
In June 2021, I wrote - The Mystical Journey of the Commodity Price - Will it Continue? - as an Insight, and I came across Figure 5. This was the light bulb moment for me in trying to narrate the ongoing space.
Figure 5: The elements that are required to have a renewable industry. (Source: www.elements.visualcapitalist.com)
When investors get all excited about lithium, one must also get excited about the things that support the lithium products i.e. the buildings, the casing, the products that require lithium etc. As seen in Figure 5, there are a lot of other metals that are required and are more in demand now than in the previous industrial community.
Molybdenum - Who Would Have Thought?
Let´s look at something that is so unknown and unloved but is now garnering a place in the spotlight - molybdenum. Molybdenum is a component of stainless steel and its claim to fame is that it is what makes stainless steel anti-corrosive.
When you look at Figure 6, you get a sense that there is renewed interest and there is a correlation of increasing demand for lithium and molybdenum. Is it a coincidence that the sharp increase in Molybdenum price is at the same time frame as Lithium?
This resurgence is another reason that makes me feel the mineral "bull" run will stay around for a lot longer. The short cyclical range that we are used to in the past may be on the verge of breaking into a new range.
Figure 6: 25 year chart for Molybdenum. (Source: Trading Economics)
Why is Molybdenum going through this new phase is still a mystery to me. The research I have done do point to a correlation to the rise of the oil and gas industry. The increased need for structures that are not corrosive is a factor but if you look at the diagram in Figure 5, the increasing use of renewable energy source could be driving up the pricing as well.
Then there is Nickel
In my opinion, this metal is going to have a better future. The reason is mainly due to the fact that the EV industry is always seeking for better and more cost effective components. There are now commentaries of how the industry is actively looking at Nickel Solid State batteries.
If this is going to be the future, then the demand for the metal will far exceed existing supply. Users are going to struggle to find reliable sources of nickel sulphides and if they go towards the Green space, that market will be even tighter.
Figure 7: 5 year chart for Nickel. (Source: Trading Economics)
The need for nickel sulphides is going to be a struggle as there is a little problem of finding the source and then mining it. For those who are not proponents in this industry, the mining process is a not an overnight process. It takes time and that is going to cause an even greater strain on demand.
Copper - Old faithful Doctor Copper.
Copper is the main stay of our civilisation and there have been countless commentaries on the need for more copper. I don't think we are going to have a sky-rocketing price surge as the supply of copper is pretty good. When I say pretty good, I mean that we can get to a source more easily as the price will get to a point where it allows the not so economical projects to become viable.
Supply will kick in and that will stabilise the price rise. Unlike cobalt and in some case nickel (at some point in the future), there is a supply issue and the price will get to a point where it is uneconomical to use as a component.
Figure 8: 5 year chart for Copper. (Source: Trading Economics)
This is like using gold as an industrial use. It just won´t happen with the price. There is indeed a need for more copper but I think the shortage will not be as bad. This is not saying that there may not be pressure on the price. I just don't feel a great fear of not finding copper.
And then there is Lithium
There is no need to elaborate on the need of this metal. It is a well-known story but the latest price surge is pretty vertical. I will think that there is going to be a coming back to reality at some point.
In late 2019, I was talking to an associate who was trading in spodumene and he told me that the turning of lithium is close. I agree with him but the rate at which it turned is what really surprised me.
Figure 9: 5 year chart for Lithium. (Source: Trading Economics)
I am not entirely sure where the price will end up, but what I can say is that the projects that are near to the market will be beneficial. With these last two years of shifting economics, shifting logistics, shifting politics, I feel that there is a balanced shift of reliance on world supply to one of domestic supply.
The position I have on lithium is no longer that of whether the price will rise or if there is a demand, but rather one of location of the project. What I am saying is that if you have a project that is in the right jurisdiction, you will be closer to your market.
I have one thought which may raise some eyebrows. The "shortage" of lithium may be due to the lack of plants to produce the end product. The bottleneck in the supply chain is the plant and not the raw material. If I am right, this is not going to sorted out in the near future.
There is no doubt that the critical nature of lithium is going to play a big role in the coming years, maybe even extending decades. This will shape political and economical boundaries. These boundaries will become the balancing powers. Hence, the jury will still be out but I suspect we will have the answer soon.
These are simply my observations based on experience, past and current happenings.
Conclusions
The mineral exploration industry is experiencing a state of euphoria which have never existed in my thirty years of participating in this industry. Geologists are in great demand and are being paid handsomely. I have never heard nor seen anything like this kind of fortune for the rock lickers. We have had a long period of suffering with a lack of capital and been seen as not as important as the corporate participants.
When you take into account that there was nearly AUD$750M raised in 2021 and about AUD$400M to AUD$500M raised in 2020, you can't help but think that exploration activities will continue to be strong. The outlook for the metals is also strong with the EV / No Emission story that is dominating in every aspect of the resource industry.
Another factor which we have not covered is the onset of Environmental, Social and Governance (ESG) requirements and participation. This will be a big driver for the industry as companies look to bring their businesses in line with the ESG bracket. The emergence of a strong ESG requirement is also creating more opportunities and allowing more capital to be allocated.
When I quote the metal pricing and potential demand in this Insight, I want to highlight that there is a shift in the use. This shift is what makes up the building blocks of the coming decades. 2022 is most likely at the starting blocks. This shift will create more opportunities and more demand for capital and resources which will fuel economic activities.
In 2020, everyone was surprised at the rapid rise in equities. In 2021, investors were trying to work out when the cycle will end.
In 2022, I feel that investors are more accepting of the potential of the bull run and may push the pedal closer to the floor. I think investor confidence of a continued surge in mineral equities will be higher. It may be a case of investors doubling down on their expectations.
It is as if investors were expecting a slow down. With a slowdown no where in sight, their excitement has been validated and they are speaking with their increase eagerness and money.
What I like about the coming Year of the Tiger, 2022, is that the new world is just beginning to start. There is no going back to the old world. This is not a COVID issue. This is a new "industrial revolution" and I feel excited to be part of the process.
Disclaimer
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