The global economy may not have fully recovered, but there are definitely potentially lucrative spaces for investors to look at. At this week’s Canadian Investor conference, Chris Berry, founder of House Mountain Partners, spoke about the importance of disruptive technologies in the current economic climate and noted which strategic metals he thinks are worthy of attention.
Berry first commented on the global economy, stating that the world has not recovered to pre-2008 levels. He identified low interest rates, the confluence of globalization and the ubiquity of technology as “abundances or excesses” in the current economy that, combined with an excess of labor due to a growing middle class worldwide, have created stiff competition for jobs and a “ceiling on wage growth in the west.” Berry suggested that this wage ceiling is part of the reason the commodities sector hasn’t recovered, pointing out that a lower standard of living usually means less intensive commodity use.
“I’m comfortable now saying that I think we are at the bottom of the cycle with respect to metals,” the analyst said. However, he also clarified that he is not ready to say that the market has started to turn up, noting that interest rates across the world are still going down, which “has direct correlations … with respect to commodities and commodity demand.”
So what’s a resource investor to do? Berry suggests taking a look at “disruptive technologies,” or ideas and approaches that can survive the current environment.
To explain the concept, he talked about how Blockbuster went bankrupt while Netflix (NASDAQ:NFLX) boomed to four times the brick-and-mortar store’s market cap with a paltry 3 percent of its employees. Berry suggests that the theme of “doing less with more” will carry into the junior mining sector, forcing companies to become smaller, leaner and meaner while making it somewhat easier for investors to make good picks.
Metals of interest
In that light, Berry is looking to critical metals. He pegged sustainability as a key factor when looking at metals or companies to invest in, and encouraged those interested to look at each critical metal on its own merits rather than placing them all under the same umbrella.
“My favorite metal amongst all the critical metals right now is scandium,” Berry said. He stated that currently just 15 tonnes of the metal are produced per year, mostly from co-product mining, and noted that there is demand from the airline and solid oxide fuel cell industry. Further explaining his bullish sentiment on scandium, Berry said he believes that the fuel cell market will not take off without the metal. Another critical metal he’s interested in is graphene. “There’s so much money going into materials science right now all over the world,” said the analyst. He suggested it is not a question of if graphene will become commercially viable, but a question of when.
Berry also suggested that governments can be disruptive, but in more of a geopolitical sense, noting that changes to export rules in Indonesia have “caused prices to go through the roof” for cobalt and tin.
In terms of companies, the analyst picked two favorites operating in the disruptive technologies space. Aurora Control Technologies (TSXV:ACU), based in Vancouver, has a patented process for the optimization of solar cell manufacturing. Most solar cell manufacturers are currently unable to tell if their products are geared to optimal efficiency until they are “off the racks,” Berry said, but Aurora has created a process to test optimization at each stage of production.
Argex Titanium (FWB:ASV) has what Berry calls an extremely powerful disruptive technology whereby it produces high-grade titanium dioxide from a relatively low-grade feedstock. There are no drill holes or feasibility studies, so the story may be different from what junior resource investors are used to. However, with its low-cost production process and “perfect size,” Berry believes Argex will fit nicely into the industry, generating cash flow without crushing the market. Argex also has validation from an end user in the form of a technology services sharing agreement with PPG Industries (NYSE:PPG), the largest paint manufacturer in the world. Titanium dioxide is an important additive in paint.
Overall, the analyst stressed the importance of looking for offtake agreements when investing in companies. “The offtake and the strategic agreement is absolutely critical, for lack of a better phrase,” he said. “That gives validation that an end user believes in the product and believes in the process for one of the critical metals producers.”
“Throughout history, people who have underestimated or doubted the power of human ingenuity to solve problems and also democratic capitalism have been proven very very wrong over time,” Berry said to finish his presentation, “that’s another reason why I think the critical metals space longer term is a very interesting and potentially lucrative place to be.”
Securities Disclosure: I, Teresa Matich, hold no direct investment interest in any company mentioned in this article.