July 3rd, 2008
Scarcity: An Investor’s Best Friend
Leave a CommentBaltimore, Maryland
- Investing in the “plastics of the 21st century,”
- Fat profits from fat bottoms – how to make a buck by losing weight,
- What is vanadium and how can I get me some? All that and more, below…
Joel Bowman, reporting from Dubai, UAE…
“Why don’t they charge extra for crying babies and taller people then?” argued a friend of ours over dinner the other night.
“We don’t particularly enjoy sitting next to a wailing infant either,” we responded, “and as for tall people…well….”
“It’s discrimination!” our friend raged. “That’s what it is…discrimination against fat people.”
While we harbor no special resentment against the more…er…well built members of our society, we can certainly see the airlines’ point. In the era of soaring energy costs, many carriers have become far more conscious about their weight…and that of their passengers.
“With fuel costs almost tripling since 2000, now accounting for as much as 40 percent of operating expenses at some carriers, according to the ATA, airlines are cutting costs and raising revenue in ways that once were unthinkable,” a recent Bloomberg article reveals. “U.S. Airways Group Inc. has eliminated snacks. Delta Air Lines Inc. is charging $25 for telephone reservations. AMR Corp.’s American Airlines last month became the first U.S. company to charge $15 for one checked bag.”
The article goes on to explain how high energy costs are weighing on carriers.
“If you look at the air-freight business, that’s the way they’ve always done it,” said Robert Mann, head of R.W. Mann & Co., an aviation consultant based in Port Washington, New York. “We’re getting treated like air freight when we travel by airlines, anyway.”
Whether the touchy issue shames overweight Americans to eat less or travel less, we’re not sure. But we do know that $140 per barrel oil is going to shake up the way business is done, both in the air and on the ground. With it’s notorious sensitivity to fuel costs, the airline industry will probably be among the first to tighten their belts. According to the International Air Transport Association, the airlines may suffer losses of up to $6.1 billion for the year as a result of higher fuel costs.
Some will wince and whine at the scales before boarding their plane. Others will cut back on the fried food. But a few, like Chris Mayer of Mayer’s Special Situations investment service, will find a way to profit off the whole thing. Details below…
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Scarcity: An Investor’s Best Friend
By Chris Mayer
Ultra high-strength and super-light steels are the plastics of the 21st century. There is high demand for these steels for use in everything from jet engines to rail components. In turn, there is a big push for the quirky metals so critical in making them. And in those quirky metals are good opportunities for investors. One of them is vanadium.
For some industries, such as airlines, finding a more fuel-efficient way to do business is a matter of survival. According to a recent Financial Times article, it’s “triggered a massive jump in the price of obscure and scarce metals that are used to improve the fuel economy of jet engines.”
The quest for fuel-efficiency goes beyond just the airlines, of course. It extends to rail cars and automobiles, to power plants and high-speed drilling. Vanadium’s primary use: to strengthen steel. Combine it with titanium and you get the best strength-to-weight ratio of any engineered material. That makes it practically irreplaceable in aerospace and other industries. Companies also use vanadium to produce sulfuric acid, and in nuclear power plants. Vanadium also promises new advances in battery technology. Giant vanadium batteries power wind farms and solar power plants.
In the great infrastructure boom, vanadium takes its place at the table of other rare and obscure metals that are growing much more important. The price of vanadium, as with many of these metals, is way up. For most of last year, vanadium cost $40 per kilogram. In February, it hit $90 per kilogram. It has since come back some, but it rallied to over $80 again recently.
The rocketing vanadium price is no mystery. Demand is strong, while supplies are constrained. A big part of the supply constraint lies in South Africa. That’s because a massive electricity shortage is preventing many mines from operating at full capacity. As the CEO of Windimurra Vanadium, an Australian mining company, put it: “The market is very sensitive to power supply issues. Large South African miners are facing up to 15% restrictions to their power supply…The supply of vanadium will remain tight, and that’s factoring in a best scenario for South African producers, which is no guarantee.” In March, Xstrata, which produces about 12% of the world’s vanadium, said it would cut its deliveries by 10-15% in the second quarter. And Highveld, the world’s biggest producer of vanadium, said in February that power outages posed a “considerable threat” to future output.
The vanadium market also has some interesting quirks. For example, 98% of the world’s vanadium comes from only three countries — China, Russia and South Africa. South Africa, we know, has power issues. China’s Sichuan province, devastated by earthquake, was also a rich vanadium producer. Moreover, China is becoming as much a consumer of vanadium as a producer. So vanadium exports from China are dropping. Last year, China ended its export credits for vanadium because it needed the metal more at home. This year, China went further and put an export tariff in place.
China’s vanadium use per quantity of steel is still well behind the curve compared with the U.S.’ If China were to use as much vanadium as U.S. steel producers, the vanadium market would face a one-third increase in demand. That’s a pretty nice long-term tail wind for vanadium.
Russia’s Evraz Group is the world’s largest producer of vanadium, with about 27% of supply. I think it’s safe to say that Russia has been an uneven producer of certain commodities. And as the Russians like to change the rules of the game as it suits them, I would not rely too heavily on Russian supply. And finally, there are no stockpiles of vanadium or substitutes of equal quality.
So where are the opportunities?
It’s tough to find a good pure play that is easy to buy. Most of the producers are in China or South Africa or Australia. And these producers make lots of other metals. You wouldn’t buy Xstrata just because you like vanadium. You’d also have to understand a host of other metals that contribute much more to Xstrata’s bottom line than vanadium.One interesting company is Denison Mines. Vanadium could represent up to a third of Denison Mines’ revenues in 2008. The problem with Denison is that it is mainly a uranium play. To invest in Denison, you have to like uranium; you get the vanadium exposure as a bonus. Denison is probably cheap, although I haven’t looked at it in great detail.
Some of the best ideas are just in the prospecting stage or emerging as producers. There are a few in Australia, including Windimurra Vanadium and Reed Resources. Both have big vanadium resources and could each eventually represent 6-8% of global production.
One of my favorite vanadium ideas I’m keeping an eye on is Largo Resources — LGO.V on Yahoo. Largo has the world’s highest-grade vanadium mine, in Brazil. It’s close to infrastructure and located in a mining-friendly state. The company should have a completed feasibility study in July. Production should start in 2010. It’s highly speculative, but promising.
The company also has a molybdenum and tungsten project in the Yukon, called Northern Dance. These metals are also important in infrastructure.
Scarcity is a great thing when you are an investor. Finding companies that own something scarce — with good long-term demand behind it — is a winning formula for finding good ideas.
[Joel's Note: Another good idea, and one Chris has mastered over the years, is to scout around oft-overlooked sectors for investment opportunities. As we all know well, being first on the block can mean the difference between mediocre and meteoric returns…provided you choose your play carefully, of course. It is amazing what the mob will pass up in favor of fancy credit derivatives or whatever else is en vogue at the time. While the rest were busy piling cash into financial securities and the like, Chris was researching hard to mine (and harder to pronounce) metals with high demand and limited supply.
We’ve been running Chris’ essays here in Rude for quite a while now and rarely will you see him recommend an idea that you’ll see on the evening news. (Although, admittedly, many will turn up a few months later, when Chris’ readers are ready to sell for a fat profit.)
One theme Chris got in on very early is the potential in water investing. His original report on the matter went gangbusters, returning triple-digit gains for early bird investors. Now that much of the hype has died down, Chris has updated the report. If you want in on the next wave of profit taking, be sure to check out his research right here.
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[Rude Endnote: Thanks to all the readers who wrote in with “boots-on-ground” reports about the cost of living situation in their neck of the woods. Forgive us for lacking trust in government figures, but we thought a reader poll might shed some light on the real situation Americans are facing in their own neighborhoods. We are compiling a special mailbag edition of your Rude Awakening that ought to give you some insight into everything from the price of milk in Hawaii to the effect of the oil run up in Louisiana.
Keep an eye out for this Rude Reader report over the next few days and remember, if you wish to contribute anecdotes from your own area, feel free to write to us with the details. The address is below.
Until tomorrow…
Cheers,
Joel Bowman
Rude Awakening
