Rare earth elements update

Hue Frame

Frame Funds Management

In January 2020, we published an article titled “2020 Investment Themes & Opportunities”. The fifth theme we identified in this article was “Battery metal turnaround” and how it seemed the markets view of this sector was pivoting.

The following will provide an update on this theme and how it is currently unfolding 6 months after identification.

Summary

In the January 2020 article, we noted elevated investor exuberance towards Tesla Inc. (rising from $299.68 to $537.92 after their earnings report release on 24/10/19) had flowed through to the supply chain of battery metal producers and developers, namely Galaxy Resources Limited (GXY), Orocobre Limited (ORE), Pilbara Minerals Limited (PLS) and Syrah Resources Limited (SYR) (up 52%, 63%, 39% and 80% respectively from 24/10/19 to 14/01/20).

Year to date, Tesla Inc. has risen from $418.50 to $944.50 (as at 08/06/20). Several factors can be attributed to this price rise - their expansion into China, a short covering rally and a continued pivot towards electric vehicles, among others. The continued increase in the Tesla Inc. share price has once again flowed through to the supply chain battery metal producers and developers. GXY, ORE and PLS have all risen 17%, 6% and 32% respectively, with SYR declining 12.77%, during the same period.

New developments

The recent price action seems to have different characteristics than the rally we witnessed between 24/10/19 and 14/01/20. During this period, we saw aggressive buying over a relatively short period of time without a significant change in the level of short interest. We also failed to see a fundamental shift in the way these businesses were attempting to solve the issue of over supply within the battery metals market.

Now we have seen consistent buying in the market, with the largest short sellers of these companies gradually reducing their short positions (see below). Most importantly however, we have seen two fundamental changes within their businesses. Firstly, they have reduced their production to match the drop off in demand caused by COVID-19 and secondly, they have implemented new cost-savings programmes to maintain profitability while the market over-supply exists.

From a macro-economic perspective, the most recent vehicle sales data released from China showed positive signs of a rebound. China Passenger Car Association (CPCA) reported that Tesla delivered a record 11,095 made-in China Model 3 vehicles in May. They also reported that vehicle sales in China rose 12% in May to 2.14m units.

From a geopolitical perspective, United States Senator Ted Cruz of Texas and Senator Lisa Murkowski of Alaska recently passed legislation to offer compelling tax breaks for new projects and large tax incentives for domestic rare earth suppliers, in an attempt to wean themselves off Chinese material dependency. This follows on from President Trump’s 2017 executive order seeking to ensure supply of critical minerals occurs. The combination of these factors should work in favour of GXY, ORE, PLS, SYR. Syrah Resources for instance has a Battery Anode Material Project in Louisiana, USA.

Conclusion

We believe that we have started to see signs that the medium-term trend of this theme is turning. While short interest in these companies is still elevated, we are beginning to see it reduce as investors start to cover their positions. We expect this trend to continue as prices of these businesses increase, meaning a short squeeze is one anticipated scenario. 

Technically, we see these businesses have recaptured their long term down trends, where their price is now greater than their 200 period daily moving average. 

Finally, we note the fundamental adjustments and cost cutting programmes these businesses have made as market demand decreased due to COVID-19. All of these factors seem to be pointing to this theme starting to play out as we move into the second half of 2020.

Get investment ideas from industry insiders

Liked this wire? Hit the follow button below to get notified every time I post a wire. Not a Livewire Member? Sign up for free today to get inside access to investment ideas and strategies from Australia’s leading investors.

........
This information is prepared by Frame Funds Management Pty Ltd (ACN 608 862 442) (Frame Funds, we or us) is a Corporate Authorised Representative (CAR No. 123 9068) of Primary Securities Limited (ACN 089 812 812 635) and is intended only for "wholesale clients" within the meaning of sections 761G and 761GA of the Corporations Act 2001 (Cth). This material is not intended to constitute advertising or advice (including legal, tax or investment advice) of any kind. These materials are not to be distributed to any person who does not qualify as a wholesale client and must not be copied, reproduced, published, disclosed or passed to any other person at any time without the prior written consent of Frame Funds. Primary Securities Ltd (ACN 089 812 635 635, AFSL 224 107) is the Trustee of, and issuer of units in, the Frame Futures Fund (Fund). In deciding whether to acquire, or to continue to hold, units in the Fund please read the current Information Memorandum available from Frame Funds. Past performance of the Fund is not a reliable indicator of future performance. The value of an investment in the Fund may rise or fall. Returns are not guaranteed by any person. Total returns are calculated before tax and after ongoing management costs. In preparing this information, we have not considered your investment objectives, financial situation or personal circumstances and therefore the Fund may not be suitable for you. Neither Frame Funds, Primary Securities Ltd, nor any of their respective related parties, directors or employees, make any representation or warranty as to the accuracy, completeness, reasonableness or reliability of the information contained in this publication or accept liability or responsibility for any losses, whether direct, indirect or consequential, relating to, or arising from, the use or reliance on any part of this material. Any rates of return, forecasts or estimates contained in this publication are not guaranteed. The content of this publication is current as at the date of its publication and is subject to change at any time. It does not reflect any events or changes in circumstances occurring after the date of publication.

Founder & Portfolio Manager
Frame Funds Management

Hue Frame is the founder of Frame Funds Management and Portfolio Manager for the Frame Futures Fund and Co-Portfolio of the Frame Long Short Australian Equity Fund.

I would like to

Only to be used for sending genuine email enquiries to the Contributor. Livewire Markets Pty Ltd reserves its right to take any legal or other appropriate action in relation to misuse of this service.

Personal Information Collection Statement
Your personal information will be passed to the Contributor and/or its authorised service provider to assist the Contributor to contact you about your investment enquiry. They are required not to use your information for any other purpose. Our privacy policy explains how we store personal information and how you may access, correct or complain about the handling of personal information.