Market Commentary - Metals Team, April 2021

17 May 2021

Posted by Mark Smith on 17 May 2021

The Amati Strategic Metals Fund ('ASMF') was up in April largely driven by a positive bounce in the precious metals and nickel stocks held in the fund.

The theme for the month was US President Biden’s 'Green Deal'. The President quickly signed off a $2tn climate executive order, once in office. The Green New Deal set out goals including achieving economy-wide net zero emissions by 2050, a carbon free electricity sector by 2035 and conserving 30% of land and water by 2030. This 'Green drive' will be front and centre for the demand of strategic metals going forward.

The electric vehicle market is slowly gathering international market share. Lithium-ion battery demand is expected to double by 2024, doubling again by 2029. This growth is projected to flow through to battery related metals markets, resulting in increased demand for nickel, copper, lithium, and cobalt. While non-nickel-based cathode battery technologies are in use, these generally fail to compete in EV applications due to trade-offs in cost and mass/volumetric energy density. Tesla is currently deploying cheaper LFP (Lithium-Iron-Phosphate) battery packs into the Chinese market. However, these vehicles have been troubled by slower charge times, restrictive operational range, and poor performance in cold weather. Assuming prices for nickel and other inputs remain palatable to OEMs, we expect nickel cathode batteries to remain the preferred electricity storage technology for most mobile applications over the medium to long term.

However, in March 2021, the nickel market was caught off guard by the announcement from the leading stainless-steel manufacturer Tsingshan who stated it would supply two Chinese battery producers with 100,000 tonnes (total) of purified nickel matte (>75% Ni) upgraded from nickel pig iron (NPI). This deal was specifically targeted at using nickel matte for production of battery cathode precursor nickel sulphate. The announcement spooked the market, as it was the first time an NPI producer has upgraded a product to a purity suitable for nickel cathode production. Nickel prices responded with a sharp sell-off from ~US$19,560 to US$15,907/t.

However, due to the scarcity of nickel sulphide projects we continued to add to our nickel positions during this time of weakness. With the nickel price above US$18,000/t again, we expect these investments to continue to perform well.

The EV metal market demand theme continues to play out as at the time of writing one of our lithium investments – Bacanora Lithium has been bid for by Ganfeng International Trading for 67.5p, representing a 53% potential gain on our investment. Indeed, all our speciality metal (graphite, cobalt, lithium) investments are in positive territory.

We believe that the current macro-economic environment continues to justify an overweight positioning in precious metals. The economic recovery in the US has been largely driven by fiscal stimulus, which may need to be continuously repeated to achieve the desired employment rate and maintain the buoyancy of the stock market. Rising yields and a firmer US dollar have proved to be headwinds for the gold price since mid-2020, which in turn has encouraged traders to increase their short positioning in the metal (Exhibit 2). Despite rising bond yields, real yields remain firmly negative – this is usually a very good environment for gold. The pullback in yields in April coincided with a recovery in the gold price as traders moved to cover short positions.

The lack of momentum in gold and silver prices has completely discouraged investors from buying gold and silver shares despite record levels of profitability reported by the companies. This has left many gold company valuations at levels which suggest fair value at gold prices 20-30% below the current spot price. In our opinion, this is usually the best time to accumulate these stocks and we are actively taking this opportunity to accumulate a number of oversold companies for the Fund.