Opportunities in tech & energy!

The global economy is in transition, and there have been a number of events taking place that have highlighted the importance of several commodities. At the same time, countries are also expanding exploration projects, influenced by the sanctions play that is adding sand to the engine of trying to get the global economy back in order.

The volatility within the stock market over the past few months has been underpinned by a number of factors, including inflation, interest rates, and geopolitical events.

Tech and Critical metals

The tech and defence developments in the US and China are expected to require a significant amount of rare earth elements, along with gallium and germanium (two elements used in semiconductor chips). However, this could face uncertainties as a result of trade restrictions. The Chinese government announced an "Export Control Law" (as of August 1, 2023) on items related to gallium and germanium, stating that it is "to safeguard national security and interests." A Chinese trade advisor said that this was just the start.

For some stocks, it signalled an opportunity. Golden Deeps Ltd, an Australian-listed explorer with exploration projects in Australia, Namibia, and Canada, announced that it found a significant amount of gallium and germanium at its Namibian deposit. This news caused the stock share price to rally. Golden Deeps Ltd CEO Jon Dugdale said the new restrictions by China "will likely result in a shortage of supply of germanium and gallium for countries outside the country."

The export control law was announced a few days before the four-day meeting between Chinese officials and US Treasury Secretary Janet Yellen. At the end of the meeting (Sunday), Yellen told journalists at the US embassy in Beijing that these were "direct" and "productive." She also said the two countries have significant disagreements, and America believes that the world is big enough for both countries to thrive.

Currently, there is no formal relationship between the US and China, but officials within the two countries have been meeting to talk about their trade relations. This announcement by the Chinese officials sparked concerns that export control could spread to other critical metals required for America's tech ambitions. A US Department of Commerce spokesperson commented:

"China's actions underscore the need to diversify supply chains. The United States will engage with our allies and partners to address this and to build resilience in critical supply chains." 

America and China

America has been working on diversifying and securing rare earth elements and other critical minerals, and this is also through the Minerals Security Partnership (MSP), led by the US collaboration of 14 member states, which include Australia, the United Kingdom, Germany, and European Union. The partnership is for the countries to provide each other with support on critical mineral supply chains.

Last year, two Australian-listed rare earth companies struck deals with these two jurisdictions. Lynas Rare Earths signed a deal with the US Department of Defense to construct a rare earths' separation facility in Texas, which is expected to be operational by 2025. Its subsidiary, Lynas Malaysia, also extended its operating license for three more years in Malaysia.

In China, Shenghe Holdings, a Chinese-based company that engages in the mining, smelting, and processing of REEs, agreed to buy a 19% stake in Peak Rare Earths Ltd (an explorer) from Appian. The deal comes with a non-binding agreement to buy Peak's Tanzanian mining output once it's operational. Before this, the explorer signed a 250-year lease at Wilton International (located in the UK), where it intends to build a rare earth refinery plant.

South Africa

Copper, Manganese, and Liquified Natural Gas (LNG) are important resources for energy production and distribution due to their crucial roles in various aspects of the energy sector; South Africa is one of the countries also rich in mineral resources, but its stock market has been shrinking, and there aren't many miners and juniors. The country has several junior miners and explorers focusing on Copper, Manganese, and LNG.

Copper360 Limited (JSE) is a mineral discovery company with three subsidiaries focused on copper in the Northern Cape. Two are explorers, while one is a copper-producing plant.

Orion Minerals(ASX/JSE) has three exploration projects, and it intends to build a battery refinery plant in the province. The explorer has had a number of private placements, with the latest being supported by private investors such as Clover Alloys (a South African private company), Tembo Capital (a private equity investment advisor based in the UK), and Delphi Group (a group of German investors).

Renergen Limited, a natural gas explorer in the Free State, recently commenced phase one LNG production. Last month, it secured funding from the United States International Development Finance Corporation (DFC) and Standard Bank to construct its phase 2 Virginia gas project. It is listed on the JSE and ASX, and plans extend to Nasdaq.

It's worth noting that explorers could still face a period of burning cash before they possibly become part of the global value chain.

In the manganese space, the South African state-owned logistics company Transnet Freight Rail (TFR) completed the construction of the Northern loop located in the Northern Cape. This will unlock railing capacity for manganese exports, and 11 is one of the miners that could potentially benefit from this move because of its Tshipi é Ntle Manganese Mining (Tshipi) flagship mine in the province, where its shareholders include Ntsimbintle Holdings.

Given the cost-effectiveness of Tshipi's flagship mine, it has been paying what Jupiter calls a "strong dividend" and has "more than 100 years remaining at current production rates."

Ntsimbintle Holdings, one of the project's shareholders, is currently not listed. Jupiter Mines Limited is also not listed on the JSE but rather on the ASX. It has been paying dividends quarterly and, as of writing, had an 11% dividend yield.

When we look at South Africa's market, the country only has a handful of large asset managers managing the nation's savings and investments (e.g. pension funds, individual and institutional investment portfolios). Listing in the local markets could be an option, given its benefits, such as accessing local investors (including institutional). In the case of South Africa, large asset managers are heavily invested in the biggest listed companies on the JSE.

In a Financial Mail article, Giulietta Talevi revealed that since 2013, the Australian Stock Exchange (ASX) has gained more companies while the South African Stock Exchange (JSE) has shrunk. Busisa Jiya, CEO of the Association for Savings and Investment SA (ASISA), said, "Asisa and its members agree that a vibrant and active market is in everyone's interest. There are several reasons companies have been delisting and why others are reluctant to [list]."

What have some of the big players been doing?

Coal is the biggest source of energy. In 2021, one of the biggest coal miners, Exxaro Resources Limited, indicated that it would reduce its dependence on coal, diversifying into other clean energy essentials, including manganese and copper. Thungela Resources announced plans to branch out to Australia, where it will acquire the Ensham coal mine. It was listed in 2021 after unbundling from Anglo American. Sasol makes its oil mainly from coal, and it's been selling off its stake in the Mozambique oil and gas exploration block while BHP Group Ltd bought OZ Minerals, an Australian copper producer.

The demand for renewable energy may raise concerns about the supply side of metals used in these projects. As a result, several large miners have consistently sought ways to demerge and diversify into different commodities, which may increase mergers and acquisitions (M&A) activity. The Financial Mail article further showed that Asisa had billions invested in private equity, mainly in renewable energy projects. Giulietta explained in the article, "In other words, these renewable projects alone dwarf the money going into private equity."

In another article, Orion Minerals CEO Errol Smart told FM, "South Africa has an advantage over other mining jurisdictions due to its good infrastructure. But without dependable regulations, exploration will stop."

Round-up 

The transition of the global economy may result in a volatile environment, especially for junior miners, while large miners also look for ways to diversify their portfolios. Trade relations may benefit investors in the commodities space, leading to greater returns for junior miners, depending on various factors, including operational margins.

Commodity prices and liquidity are important aspects to consider, as well as delisting. In such cases, investors could receive a premium or discount for their shares, depending on the reason for delisting.

The prices of commodities are influenced by several events that contribute to supply and demand. This can include trade relations between countries and consumer appetite. Taking into account the different regulations in the various jurisdictions for technology could potentially help investors navigate different environments. On the JSE, exchange-traded funds like Satrix Nasdaq 100 Feeder Portfolio, 1nvest S&P500 Info Tech Index Feeder ETF, and Sygnia Itrix New China Sectors ETF expose local investors to the top US and Chinese tech players in rand value – these are also available in the tax-free savings account(TFSA).

Sources – EasyResearch, Orion Minerals Limited, BHP Group, Jupiter Mines Limited, Renergen Limited, CXopper360, Lynas Corp, BHP Group, Peak Rare Earths Ltd 

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