Thursday, 18 April 2024

By James Cooper Editor, Mining: Phase One and Diggers and Drillers

Twitter (X): @JCooperGeo

[9 min read]

Dear Reader,

James Cooper is off this week.

So we thought we’d share a snippet of a recent report he sent to members of he’s resource advisory service, Diggers & Drillers.

Enjoy!

*****

In this month’s edition of Diggers and Drillers, we’ll be looking to take a slice of the booming AI market.

Mining and tech might not seem like a likely partnership. But this is an emerging segment of the market full of unique opportunities. 

Just take our mining service stock, RPMGlobal Holdings [ASX:RUL].

The company has developed a suite of software packages tailored specifically for mining operators.

It’s business model makes sense. The resource sector is bleeding cash in this high-cost environment and RUL’s AI backed technology improves efficiency across operations, saving the miners cash.

So far, the strategy has worked out well.

RUL is up around 43% since we recommended it last November. You’ll recall we took some profits in February.

Yet, the company stands to benefit over the long term too.

Given tech is set to play a much larger role in mining’s future, I’ve continued searching for more opportunities in this niche field.

But this time, we’ll be focusing on the supply side…

Raw material for the Semiconductor Industry

As you know, interest in semiconductors has exploded in recent months. That’s thanks to a boom in artificial intelligence.

If you’re unfamiliar with the link, semiconductors have been likened to the ‘picks and shovels’ of the AI boom.

In other words, the vital tools needed to expand AI’s reach throughout the global economy.

No doubt, this is a sector offering massive growth opportunities.

For better or worse, corporations are rapidly adopting AI into their workplace. This is an unstoppable trend.

The AI revolution promises major disruption, especially within the white-collar sectors like law, accounting, and finance.

That could devastate the many professionals who could lose their jobs in this new AI era.

Still, it is set to become a boon for major corporations benefitting from higher productivity.

From the graduate to the experienced practitioner, no one’s immune from the threat of AI.

But as they say… ‘If you can’t beat them, join them!’

The resource sector may not seem like an obvious choice to do that.

But recall the blowup in gallium and germanium supplies last year. Two minerals critical for semiconductor manufacturing.

China holds a firm grip on global supply and used its dominance to hit back on Western pressure.

Given the country supplies almost 80% of the global market, the announcement of China’s germanium and gallium restrictions last year created a major stir in the market.

A small handful of Australian explorers surged on the back of these geopolitical rumblings.

And all it took was a sniff of germanium or gallium in some old drill core.

Yet, beyond a couple of tiny explorers, few ASX-listed players exist in this China-dominated market.

That’s why we’re not focusing on germanium or gallium this month.

I’ve uncovered another critical material used in the manufacturing of semiconductors.

It’s known as High Purity Alumina, or HPA for short.

And this company is set to become one of the world’s largest suppliers.

So, strap yourself in. This month’s opportunity is looking to deliver something very unique.

But to truly understand the opportunity, we must first get a picture of why HPA will be critically important in the years to come.

High Purity Alumina: A Metal for the Future

Demand for HPA is diverse and driven by two MAJOR growth drivers: renewables and artificial intelligence.

This month’s recommendation will be looking to tap into both these mega themes.

This is truly a metal for the future.

Yet so few understand or know about the important role of high purity alumina.

According to Grand View Research, the global HPA market was valued at around US$3.2 billion in 2022. But that’s expected to see a compound annual growth rate (CAGR) of around 22% from 2023 to 2030.

But what exactly is high purity alumina?

HPA is an ultra-refined form of aluminium oxide with a purity exceeding 99.99%!

You see, unrefined aluminium tends to hold small amounts of trace elements like silica and iron. This gives it vastly different properties to HPA.

But once these ‘impurities’ are removed, the magic of HPA begins to emerge.

High transparency, chemical inertness, high thermal conductivity, and resistance to thermal shock…these are some of the properties that make HPA ideal for semiconductor manufacturing.

The material is used to build the tiny wafers and insulating layers that surround the chips.

Yet, this is not the only market for this unique commodity.

It is transparent like glass but has far superior strength. This means it’s used for optical lenses, medical equipment, and specialised windows.

In fact, purified alumina is so strong it’s used as ‘transparent armour’ for the military.

Meanwhile, it’s perfect for making scratch-resistant camera lenses and smartphone screens.

But the applications are broader, still.

HPA plays a critical role in lithium-ion batteries.

Here, it acts as something known as a ‘separator’.

A thin, porous membrane that divides the positive and negative electrodes (anodes and cathodes) in a battery cell.

While separating the electrodes it also allows free flow of ions during charging and discharging battery cycles.

This is critical for preventing short circuits in EV batteries thereby eliminating the problem of spontaneous explosions that have plagued electric vehicles.

Yet, the biggest demand driver for high purity alumina comes from the LED sector. According to a report by Grand View Research, it accounts for 49% of overall demand.

You can see the full breakdown, below:

Two things to note here, ‘phosphor’ relates to the light emitting sector while ‘sapphire’ refers to the specialised glass derived from HPA.

We’ll get into the ‘sapphire’ component in a moment as this forms an important part of our company’s future downstream ambitions.    

But a key thing to point out here is that the landscape is shifting in the resource sector.

There are enormous opportunities among niche commodity markets, especially those tied to minerals with unique properties and wide technological applications.

That’s a big change from the last commodity boom of the early 2000s.

Here the focus was on bulk tonnage iron ore and base metal operations feeding a hungry Chinese infrastructure boom.  

But I believe investors will need to be much more targeted with their investment choices in the years ahead.

The coming resource boom may not be a tide that floats all boats, like it did during the last cycle.

Specific commodities will feature prominently, just like lithium has over the last few years.

And it is those companies that can value add and find a niche in the market that could benefit the most.

That’s what I have found for you this month.

A stock already producing a small volume of ultra-high purity alumina for specialised clients yet destined to become one of the world’s largest HPA suppliers.

And this is an ASX-listed home grown, downstream producer that’s ideally positioned to serve major tech firms and EV markets throughout Asia and beyond.

So, let’s jump in and uncover this month’s emerging success story!

*****

To access the full report plus all of James’ research and stock recommendations, you can do so here!

Regards,

James Cooper,
Editor, Mining: Phase One and Diggers and Drillers

James Cooper has been a working geologist in mines across Australia, Canada, and Africa since the early 2000s. He’s led the operations of tiny explorers through to huge producer outfits. He’s seen booms and busts firsthand and he also understands the cyclical nature of individual commodities. For example, James was right there when Barrick Gold launched an enormous $7.5 billion takeover bid for Equinox. That was the peak of the last cycle.

With his background as a geo and finance professional, he brings a unique insight and experience to Fat Tail Investment Research. He writes the broader resource-focused investing letter Diggers and Drillers and the ultra-speculative explorer-focused trading service Mining: Phase One.

By Bill Bonner Editor, Fat Tail Daily

[3 min read]

Gloomy. Defeatist. So negative... even our computer got depressed and stopped working. 

Over the past week or so, we’ve seen...  

... that the main two things that bring down a great nation are war and debt 

... that the US is not backing away from either of them 

... that US debt is approaching the Doomsday Trigger of 130% of GDP 

... that we all use the same credit card for public expenses... and kick the debt can down the road to someone else, some other time, to be paid off somehow  

... and that in a modern democracy, the decider compete for power and money; none has an incentive to stop kicking. 

Primary Trend Reversed

Let’s put these insights in context. The bond market topped out (with record low yields) in July 2020. The stock market topped out at the end of 2021. These looked to us like reversals in the Primary Trend; nothing has happened since to suggest otherwise.  Most likely, we’ll see generally lower real stock and bond prices (with higher interest rates) for many years to come.   

We’ve seen the Tops.  Now, we await the Bottoms.  As Tom points out, we’re in ‘Maximum Safety Mode.’  We’ll move back into ‘growth mode’ and sell gold when stock prices go down so low that you can buy the entire thirty Dow stocks for five one-ounce gold coins.   

Most likely, the US government will have to hit some kind of bottom too. It will have to get into the middle of a genuine debt crisis before it can come out on the other side. Then, it can return to sustainable financial policies.  Alas, that turnaround is nowhere in sight. 

But wait. There’s always more to the story. Isn’t Javier Milei turning Argentina around? Isn’t RFK, Jr. suggesting that he will do likewise in the USA? Didn’t Jamaica successfully pull out of a debt crisis... and Greece too? 

Yes, yes, yes, and maybe. 

Full Sh*thole

Only a few years ago, Jamaica was on the edge of a financial breakdown. It had spent too much and borrowed too much. Lenders refused to provide more credit. Inflation was running riot. The currency was losing value.  

But rather than go Full Sh*thole, Jamaica pulled up its socks and got to work. A couple of academic studies, reported in the Financial Times, tell us what happened: 

‘Jamaica halved its government debt-to-GDP ratio from 144% between 2012 and 2023…[It] did it through sustained primary surpluses (excess of revenues over spending, excluding interest payments) exceeding seven per cent of GDP for seven straight years.’ 

For reference, the US is currently operating with a budget deficit of about six per cent of GDP. 

The authors of the academic work, professors from Stanford and Berkeley along with Serkan Arslanalp of the IMF, concluded that it was a ‘hard-won tradition of consensus building’ that did the job for Jamaica. Somehow, the government was able to get nearly everyone to go along as it cinched the budget belt tighter and tighter. 

Greece is another case. We took a trip to Athens in 2015 just to see it; we wanted to see a financial collapse up close.  

Greece’s public finances were absurdly mismanaged and notoriously corrupt. The government had been in ‘almost continual default’ for the entire 19th century and much of the 20th century. It spent money it didn’t have... and then lied about its numbers so you couldn’t tell what was actually going on. In 2008, for example, its military spending was twice the EU average.  

Germans vs. Greeks

But in 2009, it hit the Doomsday Trigger — with debt greater than 130% of GDP. Under normal circumstances, people might not have extended it so much credit. But Goldman Sachs had helped it disguise its real financial situation so as to gain membership in the European Union. As a member of the EU, it was able to borrow in a stable currency — the euro — and appeared to have the backing of Germany and France.  

Then, when the trouble began, the Germans protested: they didn’t want to bail out the lazy, profligate Greeks. So, the Greeks did what they always did: they became the first developed nation to ever default on an IMF loan. There were riots... bank closures... chaos and turmoil.

Outlays were cut. Bailouts were negotiated. More crises. More negotiations. At one point in 2012, a 20-year Greek bond was almost worthless, with a yield spiking to nearly 140%.  

Greece was a ‘basket case.’ But life went on. The ATMs didn’t work. But restaurants were open. Tourists had disappeared... so there was no trouble getting a table. Unemployment increased, but many Greeks were used to not working anyway. 

In 2011, Greece was in a depression, with GDP declining at a 7% rate. More than 100,000 companies went broke, and the unemployment rate hit 23%. The debt-to-GDP ratio hit 177% in 2014. And by 2016, Greece seemed to be hitting bottom, with one out of three Greeks said to live in poverty. 

Tanks in the Streets

But it can get worse. Economic crises often become political crises, too. If you are lucky, people lose money... they lose their jobs... businesses and investors go broke... and that’s the end of it. If you’re unlucky, you hear the sounds of gunfire and see tanks in the streets, 

So far, Greece has been lucky. It could have bolted from Europe and told the ‘Troika’ — the IMF, the World Bank, and the EU — to get lost. It could have gone back to its own currency, the drachma, as Paul Krugman advised, and gone on a bacchanalia of money-printing and hyperinflation. Instead, it buckled down... cut spending, raised taxes, fired deadbeat ‘public servants’ and actually managed a budget surplus of about four per cent of GDP. 

Its debt-to-GDP ratio has come down from as much as 180% to 160%. But with the help of the Troika, it seems to be holding things together as it reduces its debt. 

What can we learn from these examples? Probably not very much. They are small countries, where democracy seems to work better.  And, unlike the US, they were never able to borrow large amounts in a currency whose value they controlled. So, they couldn’t ‘inflate away’ their debts. 

More to come...  

Regards,

Bill Bonner,
For Fat Tail Daily