Greetings and welcome to this edition of the Insider Weekly.

Subscriber Steve sent this sunset shot through. 4th/5th July, midnite, Hamningberg up on the Varanger peninsula, 70.5 deg N!!!

The perceptive among you will realise that this is Norway’s summer...when the sun never sets.

- ISSUE #161, July 2020 -

CIVIL WAR INCOMING…...Having lived in over half a dozen countries and having travelled to dozens more it is hard not to experience countries in some state of unrest, general pha-cup, and or post war. Certainly having grown up in Africa and witnessing how damn quickly countries can descend into the abyss provides some context which I find an alarming few in the developed world seem wildly oblivious to.

Now I sit here and everyday wake to see more of the western world marching steadily down the path towards civil war, social unrest and authoritarianism.

This picture below seems like something out of a lawless African state…...no racial connotations intended! From zerohedge:

THIS WEEK• Civil War Coming?• Watch Chinese Equities• Commodities are moving• The curious case of Rhodium• Banks pull credit from shalers• A Corona observation• Mike Alkin speaks• Japan to close coal power stations• A boom in small cap miners• The Big Five!

1. Turquoise Hill Resources2. Rex Minerals3. Leju Holdings4. Cameco5. Duxton Broadacre Farms

WATCH CHINESE EQUITIES! Something bullish is brewing here, real bullish! We like to look at the Shenzhen Comp because it is a little less noisy than the Shanghai Comp…….we know there is more to investing than the angle of a chart but nonetheless it does seem like the Shenzhen Comp wants to go higher!

But what is even more bizarre is how this insanity is condoned by folks as John Bankhead’s comments demonstrate! Either these people are complete morons with zero understanding of human nature or history or they are actively part of this new religion. Violence and calls to violent action are no longer violence. Instead defending one’s home and property, and refusing to bow to the new religions doctrine are “violence”. Even remaining silent on providing an opinion is “violence”. You can’t make this shit up. This is the nature of the beast. It is a cancer and it is spreading like wildfire.

Investment implications - buying gun stocks. We think this still has a long way to run.

In any event buying gun stocks isn’t really our remit. While we anticipated and wrote about civil unrest coming our preferred avenue of tackling the fallout has been to invest in inflationary asset classes as the correlations between civil war and civil unrest and inflation are high.

Gun stocks however we believe will continue to outperform, especially heading into the US elections. We are preparing a special report on this for you...stay tuned.

We found the chart below really interesting - Chinese small caps overlaid with the base metals ETF - DBB…...remarkably similar! Now the correlations are due to the fact that China’s economy is still largely tied to international export of goods which itself is tied to the importation of raw materials. Hence the correlation.

There are as we’ve argued in these pages, some aspects which we believe are relevant and not well understood. Namely that the greatest bubble of all lurks in the sovereign bond markets. Outside of the equity markets there really aren’t any other options to place capital when that tsunami breaks. Nothing of sufficient depth of market. Within that space of “somewhere else” to place capital certainly the deepest value and most asymmetric of all sectors happens to lie in the commodity markets at present.

COMMODITIES ARE MOVING!If you haven’t already noticed……..commodities are climbing. Is this because demand is falling less than supply? Or is it because demand is picking up quicker than supply? We suspect it is the latter! Although we must not forget the impact of monetary debasement that has occurred over the last few months (and will no doubt continue over the coming months).

In a strange way perhaps the CoronaV is a huge blessing for us…...at the start of the year it was evident to us that supply deficits across many commodities were opening up. Then along comes the Corona, not only was production restricted across many facilities (which could be treated as a short term 6+ month thing) but capex and development was significantly curtailed (not just in the O&G sector)........this is going to have a long lasting effect leading to even more supply imbalances than we were staring at some 6 months ago.

Take a look at some of the commonly looked at commodity prices, in many cases the comeback has been remarkable, it is almost as if nothing has happened!

Now here are some of the lesser known commodities.

Dry Bulk shipping rates at a high for the year……...

Oats, something that not many folks think about, yet it is a vitally important ingredient in many foods.

Milk, and Cheese all at multi-year highs! Take milk out of supermarkets (and all its derivatives) and you will clean out a significant part of the supermarket!

Neodymium (a REM used to make magnets). Without Neodymium there is no miniaturization of electronics, no magnets for EVs, wind turbines and the like - you get the point! Prices at a high for the year.

Bitumen - Most refined bitumen is used in the construction industry. 85% of all bitumen is used as a binder in asphalt for roads, runways, parking lots, and footpaths. It has pulled back all its Corona Crisis losses.

Naphtha - a petrochemical derived from oil refining. Commonly used as a solvent. It is used in hydrocarbon cracking, laundry soaps, and cleaning fluids. Naphtha is also used to make varnishes, and sometimes is used as a fuel for camp stoves and as a solvent (diluent) for paint.

Uranium, one of the big winners this year. You could say that this is due to unique factors surrounding Uranium, but we believe the same macro factors surrounding Uranium (prices too low to justify production) are affecting the broad commodity group.

The prices of these vitally important commodities are rising on no uncertain terms. We wouldn’t take too much notice if it was just “one or two” commodities rising but it appears broad based.

And last but not least. Natty

We made the case for natty in our recent investment report and it’s as if Warren has been reading our work. We continue to believe natty is going to outperform over the coming years.

THE CURIOUS CASE OF RHODIUM!

The world’s most precious metal! It is mainly produced in South Africa and is a byproduct of platinum mining. Click here if you want a good description of Rhodium.

I certainly would have loved to have got my hands on a few Rhodium bars 5yrs ago!

Here is a longer term chart - not the best presentation but nonetheless it gives you a good idea of the magnitude to which this metal can move!

Granted there isn’t too much Rhodium out there so it doesn’t take much to move it. However, think about this - the amount of money created over just the last 6 months relative to the entire precious metals complex (and commodities in general) is of the “holy shit” variety. Even the gold bulls are going to be surprised by how much gold moves over the next 5yrs or so!

For us there were a couple of takeaways from this discussion.

Firstly, Mike has left no stone unturned - his thoughts on the uranium sector are all backed up by hours of meticulous proprietary research.

Secondly, taking profit in this sector (or when to get out) is likely to be the biggest problem that we face because the upside is likely to be of greater magnitude and duration than the previous bull market from 2002-2008!

We can’t see ourselves taking profit inside 5yrs from now…….we just gotta make sure that we have enough exposure now to not look back in a few years and say to ourselves “damn should have bought more uranium stocks when it was so fundamentally obvious to buy them but no one wanted give them the time of day”

Speaking of Uranium. Anyone seen this?

MIKE ALKIN - THE KING OF URANIUM!

If you are unfamiliar with our viewpoints on Uranium our good friend and colleague Mike Alkin does a spectacular job of getting down to the nitty gritty of this opaque and deeply undervalued sector. This is a 2hr tour de force with Mike which will put you in the 1% of investors understanding this market. Highly recommended.

Previous lockdowns all over the world have repeatedly been extended beyond the original timeframes and this one is quite likely to be similar. That means more supply constraints. Meanwhile nuclear reactors keep chugging away operating at a near full capacity (because they have to) burning up all that fuel.

To us the uranium market is like one big spectator sport where you all sit in a stadium and watch a car go around the track and bet on when the car will run out of fuel.

The more laps go by the higher the odds.

Paying attention to details like the Kazakhs deciding to buy on the spot market is like hearing the driver put his foot down.

You know fuel consumption has gone up and mileage has gone, and your odds just keep getting better.

Don’t agree? Then take Paladin and short the hell out of it and hold that short position for the next 5yrs………

We’ll take the other side thanks.

Just one last thing to consider. I recently talked with a friend of mine who has been involved with the gold mining sector in Aussie and Africa for all of his working career. He has worked at many mines at the coal face and as a mine manager. He said to me - don’t underestimate how long these mines in C&M (like Cameco’s) will take to bring back online.

From his experience bringing a mine that was in C&M (particularly underground) takes a hell of a lot longer than what people think - and that includes senior management! Then there is the aspect of raising what is typically debt financing to get the operation back up to speed. All of this takes time.

Well it seems we were a little early, since the start of the year hydrogen stocks have doubled once again!

Granted we are never (rarely) going to call a top in a sector/market but one gets a little miffed when stocks rocket higher after bailing on the sector.

If there is any consolation it is the observation that “the longer a market remains in a trading range the the tighter that trading range the greater will be the breakout” just grew another feather in its cap!

Moral of the story - don’t be too quick to close out trades when they break out of long term trading ranges no matter how expensive the stocks look!

REMEMBER THE HYDROGEN TRADE?

The biggest problem we face? Getting out too early! This is demonstrated by the Hydrogen trade. In May last year we put out our hydrogen alert, over the next 6 months or so the stocks we bought had doubled as a group (Nel, Ceres, Hydrogenics, PCell Sweden). We sold out because we felt the whole ESG thing had gone too far and prices of hydrogen stocks had gotten a “little” ahead of themselves

All the more reason to believe that the glory days of shale are over. The lockdowns accelerated the industry’s woes but it was always going to happen anyway.

Don’t underestimate the significance of shale. Here are a few numbers to impress folks at dinner parties and down at the clubhouse!

Solve the outcome for US shale and you solve the outcome for oil (and a whole lot of secondary industries).

Although we hardly found the Corona crisis amusing (being long offshore oil service stocks before the crisis hit) perhaps it is the best thing that could have happened to us! This world is full of strange ironies!

Saipem (oil services), one of our long term investments - the asymmetry offered here is huge. The company will pull through this crisis, as it’s well funded and one of the premier names in oil services, particularly offshore.

BANKS PULL CREDIT FROM SHALERS!

Not that this comes as a surprise to us at all……..

In the last 10yrs Global oil production rose from an annual average of 81.58 million bpd in 2009 to an average of 95.19 million bpd in 2019, according to BP’s Statistical Review of World Energy 2020 report.

• Saudi’s production increased from 9.7m bpd to 11.8m bpd • Russia - 10.2m bpd to 11.5m bpd • United States - 7.3m bpd to 17.04m bpd in 2019, from approximately 7.27 million bpd

So some “90%” of the increase in oil production over the last 10yrs came from the US and “90%” of that came from shale!

Oil at $100 again? Don’t write this off as a silly idea. We encourage you to approach the $100 scenario from two perspectives - price is the intersection of demand and supply.

I guess what we are hinting at here is that demand is way more elastic than supply…..supply will not be able to be bought on quick enough to keep up with demand.

• Demand - how quick will it come back up? We suspect quicker than what everyone thinks. Believe it or not the world is coming to terms with the Corona, it has already lost its shock and awe and now people are dealing with it, face masks and all! Soon there will be other dramas to take people’s minds off the Corona.

• Supply will not be rushing back in after the glut on the market due to the Saudi, Ruskie, Yanky standoff. The impact of shut-ins, shut downs, and the crash in capex spending, exploration, drilling etc are not currently being priced at all. Shale will emerge from this crisis as a shadow of its former self!

A THOUGHT ON THE CORONA LOCKDOWNS!

While the narrative is strongly led by a media which earns its keep by clicks and keeping folks panicked and hysterical it is worth ignoring the screeching and looking at some facts.

locked down states have an overall 13.2% unemployment rate, while open states have a 7.8% unemployment rate.

But what about all the health consequences of not locking down?

Glad you asked.

In terms of health, locked down states have nearly four times the death rate from COVID-19.

Now to be sure there are many contributing factors in any given state. Density of population, percentage of elderly, state of medical facilities and so on but what would be truly tragic is to ignore actual real data and continue along a path which has very real and damaging consequences.

While this will never make it to the mainstream media what is absolutely true is that people are fed up with it and will begin to revolt against it. Guns remember!

Another blow to coal, well in this respect yes but how will Japan replace the power generated from those power plants? What isn’t discussed are the build out of 22 larger and more efficient new coal fired power stations. Realistically Japan is doing two things. One is to ensure their energy independence and doing so by diversifying. Coal will remain a major component as will natty gas and nuclear.

Additionally what isn’t reported by the press is the demand for coal in Asia ex-Japan. Check out this article - reported by an obscure shipping publication:

JAPAN TO CLOSE COAL POWER STATIONS!

You may have seen this article suggesting that Japan will close many power stations over the next 10yrs……

So the essence of the article goes something like this:

Contrary to popular belief the demand for coal is set to remain stable over the next 10yrs. This doesn’t mean that the price of coal will remain stable. Given the lack of finance available for thermal coal we’re likely to see supply contracting (and prices move higher). The essence of what we are trying to get across is that coal isn’t dead……...and when looking at coal equities this is NOT how coal producers are being priced in the market!

A BOOM IN SMALL CAP MINERS

We have been noticing small cap mining stocks on the ASX and TSX have been rallying hard over the last few months. Clearly something is going on. The best Index we could come up with to demonstrate this behavior is the TSX Venture Capital Index……

• Total coal fired power generation capacity that is planned, approved or under construction is about 25% of the current operating capacity on a global basis. Vietnam, Bangladesh and Philippines alone are building coal plants with total capacity 40% larger than Japan’s current installed capacity

• While there has been a lot of project cancellations in India the Asian giant still has 66 GW of new plants to be commissioned over the next six years. That compares to Japan’s current operating capacity of 46.7 GW.

• India, Vietnam, Bangladesh and the Philippines combined are set to add almost three Japans in terms of coal demand in this decade

• these projections did not include China, which, while culling many coal projects of late, is still building 100GW of coal power plants with another 106GW in the pipeline

From a longer term perspective we note that the “average small cap miner” has been in a bear market at least from 2011 (or was that 2007) with the stock price of that “average miner” down some 80%. This is the sort of behavior we are looking for as deep value contrarians.

The bull market in commodities and in precious metals in particular is here. And this one is going to be a massive one.

TSE Venture Capital Index and vs Russel 2000 (blue line)

Getting micro again…….we note that the Venture Index is outperforming the Russell 2000 Growth Index. Early days to be sure but if we’re right about our commodity call then I think we’ll be right about this one too. There is good evidence to suggest that change is in the wind.

TSX Venture Capital Index vs Russell 2000 Growth Index

It’s easy after the fact but Value vs Growth has been a 13yr bear market proposition! Why do we get the feeling that when value comes into vogue it will be a trend that lasts longer than everyone can imagine?

THE BIG FIVEFive interesting long term setups……..take a closer look!t

From Our Trading Desk

1. Turquoise Hill Resources 2. Rex Minerals 3. Leju Holdings 4. Cameco 5. Duxton Broadacre Farms

Turquoise Hill Resources

For all of TRQ’s troubles (additional capital required for the underground mine expansion) it is making a quiet comeback! It is a mere 15% away from the level from where it got poleaxed when it was revealed that significant additional capital would be required to develop its underground copper mine.

We are seeing a number of copper miners make a comeback as of late. Another little obscure miner….RXM

Rex Minerals

Copper in South Australia and Gold in Nevada. The dramatic bear market of Rex is so typical of what has happened to many smaller miners. Rex has been a ferocious bear market but it presents such huge asymmetry for capitalists like ourselves!

Leju Holdings

We have discussed Leju on a few occasions before - just a reminder it is China’s version of realestate.com. If for nothing else just watch how Leju behaves after it breaks out of its trading range. If our “trading range breakout” heuristic holds the upside will be dramatic.

Cameco

Just for fun I overlaid Cameco with Uranium Part Corp (the next best thing to a physical Uranium ETF and by default the spot price of uranium).......they look remarkably similar! Who says that the spot price isn’t important.

We first started buying uranium miners way back in late 2016 and ever since we have been buying although there is a responsible limit to how high your exposure can be! Over the last 4 years we have been saying - hmmm something is up with the uranium sector it looks like the next move is big and to the upside. The charts above confirm that thinking. The fundamentals confirm our thinking and now we just await the market to wake up from its slumber.

Duxton Broadacre Farms

An Australian listed entity providing investors with exposure to a diversified portfolio of Australian farms - Wheat, Cotton, Lucerne, Livestock, Barley, and Canola. A great play on rising agricultural product prices not to mention real estate prices. Not the most romantic looking of charts but we are talking farmland here, real estate, and the stock is trading 40% below book value!

That is all for this week.

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Chris MacIntosh

Founder & Editor In Chief, Capitalist Exploits Independent Investment ResearchFounder & Managing Partner, Glenorchy Capital

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