The Big Long

Rodney  Forrest

Michael Burry ran Scion Capital Hedge Fund, with aggregate returns of 489% net of fees and expenses, over a decade. He made his name during the Global Financial Crisis betting against, or shorting, the housing bubble, with credit default swaps.

Burry’s contrarian bet on US Housing paid off so well that he was featured in The Big Short, a movie inspired by a Michael Lewis book. At the end of the movie, viewers got a hint of where Burry was turning his attention to next. The final line of the movie was emblazoned with his bold next investment:

“Michael Burry is focusing all of his trading on one commodity: Water”

In this wire we will focus not on Michael Burrys Big Short but his Big Long, Water, showing:

  • The crisis emerging in Global Water, affecting 3.6 billion people;
  • China's water scarcity - bigger in our opinion than emissions pollution; and
  • Clean TeQ Water, (the subsidiary of Clean TeQ (ASX: CLQ), as it recently presented at the Macquarie Conference.

The Crisis

Water is a commodity we cannot live without. A human can go for more than three weeks without food (Mahatma Gandhi survived 21 days of complete starvation), yet according to Professor Packer at George Washington University the maximum time an individual can go without water is about 4 days.

According to the United Nations, an estimated 3.6 billion people (nearly half the global population) live in areas that are potentially water-scarce at least one month per year, and this population could increase to some 4.8–5.7 billion by 2050. Most alarming is that globally over 80% of all wastewater is discharged without treatment, yet the benefits to society of managing human waste are considerable, for public health as well as for the environment. For every US$1 spent on sanitation, the estimated return to society is US$5.5. By 2020, the market for industrial water treatment technologies is predicted to grow by 50%.

While it’s always easy to think of the earth as having a plentiful supply of water – after all 71% of the earth is covered in water – the reality is fresh water makes up only 0.76% of all water.

China's water scarcity - bigger than emissions

China as a specific example has a severe water scarcity problem. At the end of China’s last Five-Year Plan Period, more than 85% of the surface water in Shanghai was deemed unsafe to drink, while in Tianjin – a port city home to 15 million people – that figure reached 95%. Over that period of time nearly half of China’s mainland provinces – 14 of 31 – failed to meet their water quality targets.

Back in 2014 it was called out according to China uncensored (see link), China was forecast to run out of Water by 2030. They also noted:

  • China had only 50% of the rivers left that were in existence in the 1950s;
  • 50% of lakes and reservoirs that were left were polluted beyond safe consumption; and
  • 90% of all groundwater was unsafe.

Since then pollution in The Yangtze river China (below), a river which covers almost 450m acres of land and is home to more than 400m people, has troubles that the Chinese Government is seeking to address. This river is important for life and the One Belt One Road Initiative. According to the Jiangsu Provincial Environmental Protection Office, over the first quarter of 2018, water quality of tributaries entering the Yangtze River deteriorated. Of the tributaries that enter the river, grade three water, classified as safe for direct human contact, accounted for only 53.3%.

Source New York Times - A pipe discharging wastewater into the Yangtze River from a paper mill in Anqing, Anhiu Province

Chinese President Xi Jinpinig has therefore acknowledged the challenge, at a symposium on April 26 2018, then called for all out efforts to protect the Yangtze River, and said:

"The Yangtze River is China's mother river, and we must protect it, while enterprises are the major force in protecting and building the ecological environment of the river… We must not allow the ecological environment of the Yangtze River to continue deteriorating in the hands of our generation, and we must leave our descendants a clean and beautiful Yangtze River."

Source Xinhua/Xie Huanchi - Chinese President Xi Jinping, speaks at a symposium on promoting the development of the Yangtze River economic belt in Wuhan, capital of central China's Hubei Province, April 26, 2018.

Knowing this pollution and water supply challenge, the Chinese Government in March 2018, at the National People’s Congress, in a historic moment, formed a new Ministry, the Ministry of Ecology and Environment. Chinese Premier Li Keqiang allocated a historic 1 trillion-yuan investment in water management, as well as calling for closing inefficient coal and steel plants, increasing China’s electric car fleet, banning waste imports, and hardening pollution standards and enforcement. While China is still building big supply infrastructure, there is a growing emphasis as well on demand management.

China also appears to be managing demand through linked water infrastructure. As well as expansions to the South-North Water Transfer Project (a multi decade project; the most expensive engineering project in the world), top tier research by nine collaborators from the University of Melbourne (see link) has identified hundreds of smaller water infrastructure projects (reservoirs and canals) that are under construction with the purpose of increasing supply, but also connecting water systems so that water can be moved to where it is needed and where it can be most productively used.

This all makes sense as a top priority, as the priority of water was noted, many years ago, by Chinese President Xi Jinping when he said:

“Clear waters and lush mountains are as valuable as Gold and Silver”

As any value investor worth his or her salt they understand where demand is high and supply is limited, prices rise. In this case, the demand comes from an ever-growing population of humans on earth who demand more of the earth’s limited freshwater resources. With water as an investment arguably off the radar (our research suggests China's water scarcity is not covered in mainstream media) and non conventional, this quote from Howard Marks (+19.9%p.a for two decades) is worth considering:

“If your behaviour is conventional, you’re likely to get conventional results – either good or bad. Only if your behaviour is unconventional is your performance likely to be unconventional and only if your judgements are superior is your performance likely to be above average"

Clean TeQ Water

We have previously written (see link) about the Derisking of Clean TeQ (ASX: CLQ) after it presented at the Macquarie Conference, focusing only on its Cobalt Nickel mine, which has the lowest cost, highest grade Cobalt Nickel in Australia (showed Bloomberg Broker consensus 12 month target $1.96). Institutions then asked well what about the water business, so below we aim to highlight some points.

Clean TeQ Water, which in the presentation to the ASX (see link) at the Macquarie Conference showed it has:

  • Four water projects currently under construction/development;
  • Applications in municipal, mine and industrial waste water;
  • Strong leverage to growing global demand for water purification technologies;
  • Key partnerships and joint ventures with China based research and design institutes and universities;
  • Technology Distribution Agreement for Africa in place; and
  • A team assessing multiple new opportunities in this rapidly expanding market.

With Clean TeQ Water, contaminants in water can be effectively removed using a combination of physical and ionic filtration, though technology it has spent 20 years refining. The feed water is passed upwards through the ionic bed and exits the top of the filter as cleaned water. At the same time, the resin is removed from the bottom, cleaned, regenerated and returned to the top. Below is an example of the technology:

According to company documents, the proprietary technology it offers, provides the following benefits:

  • Operates on Dirty Feed Waters;
  • Operates on Variable Quality Feed Waters;
  • No Scaling & Fouling Issues;
  • Potential Value in By-Product Recovery;
  • Low Capital Cost;
  • Low Operating Cost; and
  • Fully Automatic.

Clean TeQ Water also operates three other technology processes

  • NeX™ – Natural Evaporation and Crystallisation: where high salinity water can be treated to create high purity distilled water and a solid residue by-product.
  • CleanBio® Lenses - using natural bacteria immobilized in a PVA gel, it ensures waste water treatment processes are accelerated with as a result a lower footprint, low power and less sludge production. This process is particularly applicable nitrification and denitrification, and
  • Advanced Membrane Systems - Clean TeQ provides the full range of membrane systems. Clean TeQ is also developing a novel membrane-based on graphene oxide with Ionic, a firm in partnership with Australia's leading water research Institution Monash. The graphene technologies being developed include a graphene oxide nano-filtration membrane and graphene oxide coated sand that aims to supersede activated carbon as an absorbent material. A formalisation of the use of the technology at scale, has not been announced to the ASX, so this could be an area to watch if the previously announced partnership to the ASX develops.

Clean TeQ Water also has a MOU with Shanghai Investigation Design Research Institute (SIDRI), for the marketing and sales of water services in China. SIDRI is majority-owned by China Three Gorges Corporation, the state-owned Chinese company responsible for construction of the Three Gorges Dam Project (the world largest hydroelectric power plant and one of the world's largest energy companies).

Interestingly as well Clean TeQ Water, in April 2018 signed a Cooperation Framework Agreement with Meili in China. Meili is a design and research institute supported by Shanshui Environment Technology Inc. and CITIC Construction Co. Ltd. (a subsidiary of Chinese SOC CITIC Group Corporation Ltd.) and is expected to assist CITIC Construction Co. Ltd in the execution of environmental construction projects in China and abroad as part of China’s “One Belt One Road” initiative. We are yet to hear any revenue streams from the Cooperation agreement (given the early stages and only the new Chinese Water Ministry has been established), yet it would be one to watch closely.

Then there is the second largest shareholder of Clean Teq (ASX: CLQ), being Pengxin Group, whom has major skin in the game in China. Pengxin is a Chinese conglomerate based in Shanghai with interests in mining, real estate, construction, water-treatment, technology and dairy farms. According to ASX announcements, Pengxin is the largest shareholder in Shanghai-listed Heilongjiang Interchina Water Treatment Co Ltd, one of China’s largest publicly-traded water treatment companies and is working with Clean Teq to support rapid development of their business (as CLQ has the water technology). Chairman of Pengxin Group, Jiang Zhaobai, with net worth of $1.2b according to Forbes (see link), is also the Co-Chairman of Clean Teq. This would be another area to watch closely. Consider legendary investor, Ed Wachenheim comment:

"Managements of companies possess more information about their companies than you ever will be able to possess. Pay more attention to what managements do than to what they say. Remember, managements, like most other people, tend to act in their self-interest. Favor managements who are highly incentivised to achieve higher prices for their shares. "

The other Co-Chairman of CLQ, is billionaire Robert Friedland, whom in a recent Livewire interview with Rick Rule (President of Sprott US Holdings), was referenced by Rick Rule (see link), as the worlds single best mining financier ever. In a prior wire we wrote on the Top 5 Commodities (see link) that Robert was focusing on (one being water). He has made the following comment regarding Water:

“Just like butter is the new kale, water is the new oil. We think water is going to become one of the most valuable commodities in the world.”

We should also add, the CEO of Clean TeQ, Sam Riggall, whom is a highly respected ex Rio Tinto (ASX:RIO) executive, led RIO's negotiations with Mongolia over the giant Oyu Tolgoi copper mine. In April, he signed a partnership agreement for CLQ Continuous Ion Exchange processing technology with global mining heavyweight Multotec, for the African continent. Sam in the statement to the ASX, made reference to it being only the beginning for CLQ saying (see link):

“Clean TeQ is making excellent progress in commercializing our suite of mineral processing and water purification technologies. We are delighted to have been selected to provide this solution, which we expect will offer another valuable reference for the efficacy and cost effectiveness of our processes. The potential market for our technology is enormous – this is only the beginning.”

Clean TeQ Water has offices across the globe in Melbourne, Beijing, Hong Kong and partner offices in Africa and South America.

Conclusion

Lets not forget that an estimated 3.6 billion people (nearly half the global population) live in areas that are potentially water-scarce according to the United Nations, so the challenge to water scarcity is not China's alone.

Taking the time to research infrastructure plays in water (there is also ASX listed Fluence (ASX: FLC) and Phoslock Water (ASX: PHK)), could well be worth the effort, given water is finite and is the key commodity to the survial of the world.

As Michael Burry (who successfully returned 489% net of fees and expenses), said:

“Fresh, clean water cannot be taken for granted”

Thank you for reading.

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Quotes are from Investment Masters Class, a free amazing 25 year collection of insights from the Worlds Greatest Investors.

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Co-authored with Dr Jon Hall. Previous Associate Research Director Sydney University, with expertise in asset analysis and demand supply dynamics research. Also a co-investment analysis of Forrest Equities.

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Disclaimer - Forrest Equities Pty Ltd owns shares in Clean Teq (CLQ). The information contained is general information only. Any research should not be interpreted as one that provides personal financial or investment advice. Any examples presented are for illustration purposes only. No person, persons or organization should invest monies or take action on the reliance of the material contained in this report, but instead should satisfy themselves independently (whether by expert advice or others) of the appropriateness of any such action.


Rodney  Forrest

Rodney has 15 yrs Finance experience with postgraduate degrees in Economics/Econometrics, Finance, and Taxation Law. Forrest Equities research, conducts work for Investment Banks, Superannuation and Wholesale clients.

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