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Tech is the new Coal in 2023

2023 has started well. China growth of +10% by the end of 2023 a shallow US recession and a peak in interest rates following inflation lower set against a background of expensive equity markets and rallying bond markets are important.

Commodities were the best performing asset class for 2021 (+46%) and 2022 (+27%) as inflation kicked on massive stimulus. 2023 looks mixed for commodities as inflation eases, war in Europe becomes 'normal' while a weak USD and China reopening are bullish commodities. Selecting the right commodity will be more important in 2023.

US stocks crushed global equities for the past 15 years - $100 invested in March 2008 would now be worth $288 versus $100 invested in Global (ex US) stocks would now be worth $94. A new era has begun with Europe outperforming the US by 15% in the past two months on lower oil, natural gas, China reopening and growth/inflation differential.

Last year our best trade was old world coal producer Thungela (TGA £1.87 billion mkt cap) which started 2022 at £3.96, peaked at £19.32 after paying out £3.00 in dividends. If you had owned Thungela when Anglo American spun it out in June 2021 at $253 million or £1.50 per share then you would have made 15 times your money trough to peak....

What about 2023?

We have chosen five stocks with three themes:

  1. China reopening - a rare earth and a tin play

  2. US recession - two precious metals ideas as the USD rolls over

Quick Read

Neo Performance Materials (NEO C$10, C$450 million mkt cap) trading 50-70% below peer valuations will rally with the neodymium rare earth price and more visibility on NEO's European magnet manufacturing expansion.

First Tin (1SN, GBP 14 pence, £38 million) will rally with tin price, drilling results from its Australian and German projects, progress on permitting, potential resource growth and a more 'seasoned' share register.

Discovery Metals (DSV C$1.40, C$500 million mkt cap) there is no better silver proxy cheered on by the worlds biggest silver bull and 27% shareholder, Eric Sprott. Discovery's Cordero project in Mexico is the largest primary silver development project in the world with serious management and manageable capex.

Ausgold (A$ 6 cents, A$115 million mkt cap) can show growth with exploration success to a high grade 5 million gold ounce resource and a lithium exploration wildcard, the stars are aligned for Ausgold in 2023 - 14 years after its 2009 IPO!

China Re-opening

In 2022 the worlds largest commodity consumer and primary engine of global growth - China - locked down until Xi Jinping's political future was assured in November 22. Even an autocracy has to listen to its people who noticed the rest of the world had moved on from Covid during the football World Cup at the end of last year. Beijing surprised most by opening up in January 2023.

Two commodities where China dominates half or more of the processing capacity - neodymium for high performance batteries and tin for solder - both fell by over 50% in 2022 as capacity was closed and metal destocked.

Hence in 2023 as China reopens we propose a reversal of 2022's price action for neodymium and tin.

Neo Performance Materials (NEO C$10, C$450 million mkt cap) is the only independent processor of rare earths into battery materials at scale.

NEO trades on 4X 2022 Enterprise Value to EBITDA with approximately US$100 million on its balance sheet that will be deployed at NEO's Sillamae processing facility in Estonia. NEO plans to make 2000 tpa of Neodymium Ferrous Boron (NdFeB) magnet blocks by 2025 then expand to 5000 tpa NdFeB.

Its hard to overstate the importance of Sillamae's future importance to the European auto industry. There is no other European supplier of NdFeB magnets and the European car industry has an imperative to diversify its supply chain ex China.

Hong Kong Listed market leader JL Mag Rare-Earth Co (US$4 billion Mkt Cap) which is forecast to make 25,000 tpa of Neodymium Ferrous Boron (NdFeB) magnet blocks in 2023 forecasts total industry magnet production capacity to double by 2025 to 150,000 tonnes from current 87,000 tpa.

JL Mag Rare-Earth trades on 17X 2022 EBITDA and is double the enterprise value per 2025 unit of NdFeB production capacity as NEO.

As China controls +90% of the rare earth processing capacity a significant neodymium price rally in 2023 is part of our China reopening theme. NEO's margins will expand both cyclically with the neodymium price and structurally as it expands its fully funded European magnet making business.

First Tin (1SN GBP 14 pence on the LSE £38 million Mkt Cap) fell 60% along with the tin price last year after its IPO at 30 pence in March 2022.

Tin prices collapsed in 2022 with solder demand for electronics despite strong growth from solar capacity installations. Tin is painted on the copper ribbons that move electrons around solar panels for rust proofing.

2022's Chinese tin smelter closures and inventory destocking are reversed in 2023 with China reopening while largest tin producer Indonesia has signalled export restrictions. Political instability in Latin America adds supply risk with low exchange inventories suggesting a bullish outlook for 2023.

The combined NPV of First Tin's Tellerhauser project in Germany and Taronga project in Australia increase from a combined $263 million at $25,000/tonne to $433/tonne at $30,000/tonne versus the current LME tin price of $29,000/tonne.

That is 6 times to 10X the current £37M/US$45 million market capitalsiation of First Tin which has £15 million of cash, more than enough to fund current studies and drilling.

Discovery Silver (DSV C$1.40, C$500 million Mkt Cap) are the only future +30 million ounce per year primary silver mine of which we know. Eric Sprott at +27% of the share register ensures that silver bulls will pay attention to DSV.

We walked across Discovery Silver's giant Cordero Project in November 2021 and believe this will be a future mine. Mexico is a mining country, Chihuahua is a Mining State with excellent local infrastructure. Cordero's strip ratio is less than 2X and excellent metallurgy infers low operating costs.

Cordero's resource contains over 393 million ounces of silver and over 7 billion pounds of contained zinc. We expect an imminent Pre Feasibility Study (PFS) to confirm Discovery Silver has the largest silver reserves of any undeveloped silver project globally.

Discovery Silver's two Tony's (T2) Tony Makuch (CEO) and Tony Esplin (COO) impress us. They will figure out water, permitting and attract the capital to fund the construction of Cordero starting in 2025.

If you are a silver bull and want to own one share, Discovery Silver is it.

Ausgold (AUC AUD 6 cents A$115 million mkt cap) share capital of +2 billion shares speaks to a long inglorious history that dates back to its IPO in December 2009 at AUD$ 20 cents. Ausgold's world changed when serious geologist Matt Greentree joined Ausgold as Managing Director in April 2017.

We think 2023 will be Ausgold's year; the Katanning Gold Project is high grade with a 1.25gpt reserve, we see the company demonstrating resource growth to 5 million ounces in 2023.

There are potentially three companies within Ausgold:

  1. Katanning can grow to 5 million ounces at 1.25gpt at which point it is a logical takeover target for a West Australian gold miner. A 5 million ounce resource at $100/ounce implies a 300-400% return.

  2. Ausgold has a serious 5500km2 regional land package with for example the Stanley Gold Project, Ausgold earning 85%, west of Katanning has intersections like 8.5 metres at 33gpt and 8.6 metres at 19gpt to follow up.

  3. A battery metals greenfields nickel/PGE and lithium potential with pegmatites within 40km of the worlds largest lithium mine - Greenbushes.

Canadian mining investor Dundee Corporation is a 13% shareholder in Ausgold and recently backed winners like Reunion Gold and Magna Mining. CEO of Dundee, Jonathan Goodman says this about Ausgold:

“We think Katanning will keep growing and see future expansions as exploration success sustains the 1.5gpt head grade beyond the first five years of Katanning’s life.” "It’s unusual to see quality ounces and exploration potential as good as Ausgold’s portfolio in a first class jurisdiction.”

Good luck.

PS Arlington and its principals own the companies mentioned above and may earn fees advising those companies.

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