The Rational Cloning: Mosaic Musings #1
Tin [Molecule Crisis Series]
Mosaic Musings is a new weekly edition that dives into one topic (probably one I am currently obsessing over). While doing research, I like to gather information from a variety of sources and collect it in one place, so Mosaic Musings will be exactly that: a collection of ideas from various sources about one topic that weave together to form an investment thesis.
As a caveat, when a lot of smart people are reaching the same conclusion, it could either be a:
Sound, logical conclusion that was reached independently or a
Massive echo chamber
So please do your own due diligence.
Hopefully you can go to bed a little smarter after reading and maybe even make a few bucks.
Table of Contents
Investment Thesis
Bits and Pieces From Various Sources
Relevant Tweets
Tin.
After highlighting Pete Panda’s: The Case For Tin in Weekly Ideas #19 and follwing a few “Tin Barons” on Twitter, I decided to take a closer look and read/listen to everything I could get my hands on.
Below is my distilled investment thesis for tin and below that is a collection of sources to learn more.
Investment Thesis
Tin is critical to the modern economy and is mainly used as solder (~50%), the conductive material which connects electronic components in printed circuit boards.
It is a niche commodity and is underfollowed by the investment community. For comparison, tin’s market size (~$6.72B) is ~3% of copper’s (~$230B) and 0.14% of oil’s (~$4677.45B).
There exists a supply/demand imbalance.
There is strong future demand coming from the development of 5G networks, Internet of Things, more data centers, semiconductors, electric vehicles (requires 2x tin as ICEs) and the transition to renewables.
Yet the future supply of tin remains shaky and fragile to disruption. The top producers (China, Indonesia) produce ~50% of the market but have seen production decline over the past few decades. Myanmar (~17% of production) is politically unstable and is currently in the midst of a coup. A common thread for these major producers is that high grade mines have been depleted, which forces them to mine lower grade material.
Global inventories are near all-time lows and there are very few high quality development projects to fill the growing supply gap.
Even if you wanted to invest in tin, there are few investment options. The major producers trade on local exchanges (Shenzhen, Jakarta, Kuala Lumpur and Lima) and the ones that trade on Western exchanges have assets in challenging places or have low liquidity.
There seems to be 3 investable names on western exchanges: AFM.V (~3-4x EBITDA), MLX.AX (~2x EBITDA), CUSN.L
Bits and Pieces From Various Sources
(a) Old West Management: 2021 Q4 Letter [January 18, 2022]
Of specific interest to us are niche commodities where supply/demand imbalances can form with relative ease, leading to either current or expected shortages. This could be from falling supply due to natural depletion or lack of investment during a low price environment. Alternatively, technological developments may lead to an increase in demand for certain materials faster than supply can respond. This has certainly been the case for a wide variety of specialty metals necessary to enable the global transition to clean energy. At a recent conference in Glasgow, Treasury Secretary Yellen referenced an estimate of $150 trillion in spending needed to achieve climate goals. We have already begun to witness significant price increases for many of the raw materials that will be needed.
Tin is a fairly small market, only about 2% the size of copper, but essential to the functioning of electronic devices that are ubiquitous in an increasingly digital world. The largest use of tin is in solder, the conductive material which connects electronic components in printed circuit boards. Demand received a boost around the turn of the millennium with the switch to lead-free solder in many regions for environmental reasons. Semiconductor demand has also been strong, especially recently as the pandemic forced people into their homes and spending increased on electronic goods like laptops and cell phones. TSMC, the world’s largest semiconductor manufacturer, recently raised their growth guidance amid surging demand from what they call a multi-year industry megatrend.
Two major areas driving this growth are the push to 5G networks and the development of an Internet of Things. 5G networks require more densely distributed transmission equipment and an Internet of Things would see billions of objects interconnected, each requiring additional circuitry to operate and communicate with one another. More data centers will also be required to process the large increase in information generated. Another area of increasing demand is electric vehicles, which typically require twice as much tin as an internal combustion engine vehicle. One of the newest demand drivers is solar ribbon, copper wire that has been coated in tin and used to connect individual solar cells together into panels. As renewable energy continues to be deployed widely, this is expected to become a major demand driver for tin in the future.
Against this backdrop of strong demand is a supply situation that is quite fragile. The two largest producers, China and Indonesia, control roughly half the market and have seen their production decline over the last two decades. In China much of the production comes from the southwestern province of Yunnan, where extreme weather and rising coal prices have led to power rationing that has impacted supply. Indonesia has mined much of their onshore resource and miners have been forced into shallow offshore waters to dredge alluvial tin from the sea floor. The country has also considered an export ban on mineral concentrates as a way to capture more of the value chain locally, a move which would further tighten global supplies. The third largest producer, Myanmar, is politically unstable and was recently beset by a coup. A relatively new entrant to the major producers, large scale production only began in the last decade and peaked after several years of rapid growth. Much of their high grade discovery has been depleted and they will be forced to go into more complex underground mining of lower grade material to halt further production declines.
Tin is attractive to us because there are not many high quality development projects to fill the growing supply gap. Lower quality projects require a higher price to be economic, and recently the tin price has been setting record highs suggesting that such projects may actually be needed. Global inventories are near all-time lows and consumers are forced to pay high premiums for immediate delivery. One need only look at the extremely low grades of projects being floated to see how dire the supply outlook truly is. Some companies are considering reopening centuries-old mines, and others are proposing to mine what would normally be considered waste rock. There are also very few investment options. The large producers trade on local exchanges in places like Shenzhen, Jakarta, Kuala Lumpur and Lima. Companies that do trade on Western exchanges may have assets in challenging jurisdictions or low share liquidity making it difficult for large institutions to invest.
These types of situations are often ripe with opportunity, and we have identified a few bright spots for further research. At current prices there are producers trading at 3-4x EBITDA and development projects trading at a fraction of net asset value. This is in stark contrast to other areas of the market which we view to be wildly overvalued with much less fundamental support. We have not been this intrigued by an idea since we started researching the uranium industry several years ago.
(b) Massif Capital: Q1 2021 Letter [April 15, 2021] [REQUIRES EMAIL]
Tin: We added a position in niche metal miner Alphamin this quarter. Alphamin operates the world’s highest-grade tin mine in the Democratic Republic of Congo. With ample brown field expansion opportunity, the firm’s high-grade tin mine is currently trading at a discount to a stable state cash flow at tin prices well below the current spot price and tin recovery levels below what the firm recently reported achieving as a steady ore recovery rate.
Furthermore, the global supply of tin is deteriorating against a backdrop of rising demand. Indonesian state-owned tin miner PT Timah (the world’s largest producer of refined tin in 2019) is showing signs of fiscal prudence and supply discipline under new management. Additionally, production out of Myanmar is rotating away from cheap alluvial deposits to more expensive underground operations. We may see new alluvial output from Nigeria, but not soon. Underinvestment in tin exploration has consequences. We anticipate that prices need to stabilize above $30,000 for a few years before banks will lend against a new price floor for development projects. Solder, tinplate, glass making, and lead-acid battery consumption are all highly inelastic. We expect new support levels for the tin price and would not be surprised if we continue to see price appreciation. Alphamin supply is a critical feedstock to refiners increasingly starved of material, and the company can bring this supply to the market with one of the lowest sustaining cash costs of production.
Our investment in Alphamin is somewhat instructive of our evolving perspective on portfolio construction. Value investing, which we define as the allocation of capital to opportunities in which you are buying a dollar for fifty cents with a credible and defensible thesis, often produces portfolios that are concentrated in what appears to be less than constructive ways. Value can be found in a wide range of risk/return profiles (which defines absolute returns) and may or more not have a catalyst contextualizing the thesis (which informs time-to-realization and ultimately annualized returns). Diversity among these factors is vital so one does not end up with a portfolio overly weighted towards large asymmetric bets or deeply value opportunities with no catalysts. Either could be a portfolio of value investments, but not necessarily one you want to hold even if each stock pick makes sense on a standalone basis; after all, we as investors collect the portfolio returns, not just the returns of individual positions.
We provide this color to point out that Alphamin does not have a clear catalyst, in our opinion. The firm is small and operating in a niche metal market. Despite the record low levels of inventory at various metal warehouses worldwide and the firm increasing production by 30% from debottlenecking their processing plant, it is not entirely evident when/if the market will recognize the business’s embedded value. We are happy to own it, but only if it is sized correctly (as just plain cheap companies with no catalysts come with an opportunity cost) and, importantly, in a portfolio with a multitude of ideas with diverse return drivers.
(c) Deep Value Speculator: Going Over the Thesis: The Tin Market [18. July 2021]
The supply and demand picture going forward looks similar to what we expect in a lot of other commodities. Low demand has led to low prices that have not incentivized new production. This has led to a gap between demand and production with tin inventories scraping the bottom of the barrel. In addition to primary uses (in solder, tin plating, chemicals, and copper alloys), tin is also becoming important for the “green” economy. With the electrification planned over the next decade tin is likely to be found in lithium-ion and other batteries, solar PV, thermoelectric materials among others. In solar panels alone, we can expect between 2-3x increased demand for tin from what we have today.
Alphamin Resources is the owner and operator of the Bisie tin mine located in the Democratic Republic of Congo (DRC). At a tin grade of roughly 4.5%, Alphamin has the world’s highest-grade tin resource, about four times higher than most other operating tin mines. In addition they belong to the lowest quartile cost producer. The biggest concern most investors have to the company is the jurisdiction. If you think the company specific pros outweigh jurisdictional cons, the company is a buy. Alphamin has a drill program to increase their resource,and they are also increasing their production from 11,00 tonnes to 13,000 tonnes. This is great timing in a rising price environment.
Metals X Limited is the other alternative who has a producing asset. They are the largest tin producer in Australia, and they hold 50% stake in the Renison Mine in Tasmania. They are working on increasing the output from the mine to 10,000 tpa from 8,500 tpa by full year 2025. With jurisdiction it is not as challenging, and at a higher tin price they are a good option for people who want exposure to the sector.
There are other companies like Afritin Mining, Elementos Limited, Stellar Resources and Cornish Metals. Many of these probably have higher potential than the two producing ones, but you have to have some more in depth knowledge to assess them.
(d) VIC Alphamin Write-Up [January 10, 2021]
Alphamin is one of the few pure play Tin producers listed on a major stock exchange. At the current Tin price of $21,300 per ton the stock is trading on a forward dividend yield of more than 20%. The company will be debt free by June this year. The Mpama mine provides a base from which the geologists can explore the region’s exceptional potential, with vast scope for production expansion from a series of low-cost, hub and spoke open pits near the plant. Ongoing remediation of the poor metallurgical recoveries will provide a continuous tail wind to results.
Additional Sources
Relevant Tweets
