Specialty Metals ETFs – Time to Turn Up the Heat
The Exchange Traded Fund phenomenon has been much derided by miners who feel (particularly in the precious metals space) that the physical metal ETFs have stolen a lot (most!) of their thunder. This is largely a self-inflicted wound as many gold miners could have paid dividends, and yet didn’t, as the payment of dividends would have skewed the playing field in favour of the producers as they would have been an income stream for yield hungry investors (in the low interest rate environment of the last 15 years). Instead the miners preferred to grouch that people were buying the GLD and SLV and eschewing the majors. Despite everything that has happened to the gold and silver price investors who played the physical ETFs they have still come out of it better than those who took bets on haplessly managed companies like Kinross and Barrick.
Frankly physical ETFs were a clever idea and we have long favoured the Palladium ETF (NYSE:PALL) and the Uranium Participation Corp (TSX:UPC) as the best ways to play those two spaces. Now I cannot help wondering whether an auspicious moment may not have arrived to revive the whole idea of specialty metals ETFs. For governments they would represent a de facto onshore stockpile of strategic metals that they did not need to fund, while for investors they would represent exposure to metals that are otherwise not available through listed vehicles. A good example is tin where there is scarcely a listed tin PRODUCER in any of the Western markets and certainly not any pure plays.
Strategic Stockpiles by Any Other Names Would Smell as Sweet
As we have long argued, a healthy array of strategic metal ETFs would/could act as de facto strategic stockpiles (provided of course that they are not permitted to leave their metals in Chinese warehouses). The US strategic stockpiles had their origin in the bitter experience of the Second World War and the prolonged Cold War. The WW2 experience was that the US suddenly realized that while it may be the land of abundance there were some things it did not have easily to hand, a good example being tin. In fact when the Second World War started the US had no tin production and the only deposits it had in Alaska were inadequate for its needs, so it was dependent on Bolivia. I might note that relations with Bolivia these days are not as rosy as they were in 1942 and that the South American nation is barely a shadow now of what it was in the tin production stakes back then.
The US once had great mountains of commodities stored away for a rainy day. The stocking of these caches had the added benefit that it justified mining of some of these minerals in the US thus creating a symbiotic relationship between the government and the miners. Is it any coincidence that the decline of the US as a great mining nation (and the brutal shrinkage in the number of top miners based in the US) has coincided with the abandonment on the stockpiling strategies in the 1970s and 1980s? The most notable stockpile still extant is the Strategic Petroleum Reserve. Though as I have noted several times, here in Investorintel, Beryllium is something the US also still squirrels away. Ironically in the latter metal, it is the only metal I can think of where the US dominates global mine production and processing.
Rare Earths – Been There Done That (Poorly)
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The subject of the potential for a Rare Earth ETF brings back bad memories for many of the veterans in the space because a previous attempt at this, by well-intentioned parties, was eventually hijacked by cynical operators and exploited for promotional purposes ultimately adding nothing to the Rare Earth space and arguably damaging the credibility of other attempts to genuinely address this issue.
Dacha Strategic Metals (TSXV:DSM) was a creation of its time (though it had existed before the REE boom). Its real surge to prominence took place at the height of the boom when it was, in some eyes, the only “real” REE story (besides Neo Materials) because Dacha was actually a stockpile of Rare Earths. Unlike the miners (or wannabe miners) Dacha could pick and choose what it held and could focus on those REEs for its portfolio that were such scarce and sought after items. It could eschew the whole Lanthanum/Cerium problem by accumulating only what it thought “hot”. In many respects it could still have done that even when the number of “real” REE miners was expanded by Lynas and Molycorp getting across the line into production.
In the phase when we were first taken by the idea it was the brainchild of a Rare Earth whizzkid, however it eventually became part of the Forbes & Manhattan stable which dulled our interest in the story. It ultimately fizzled out when the Rare Earth boom faded, which of course should not have been the case because true traders should be able to make money at the top AND the bottom of the markets.
The prolonged bottom in the REE markets makes me think that now is actually the best time to be launching a REE ETF. Dacha has gone the way of all things. The Rare Earth space only offers two stricken majors where investing is more like Russian Roulette than anything else and a couple of handfuls of wannabes which are still so far from production as to not offer leverage into a resurgence in REE prices. Indeed if there is NOT an REE ETF we could have a massive rally in REE prices and NOBODY will get to benefit. Of course the old adage goes that nothing succeeds like success and a newly launched ETF full of bargain-basement REEs would be able to point to a more promising future rather than fizzling into insignificance after a dire past performance as Dacha did. Such an ETF would give a real flow of management fees to the REE company that launched it which would be more than virtually any other REE wannabe could point to.
Metals that Need ETFs
Running through my mind the specialty metals that could clearly do with some ETF-love the most obvious candidates are Tin, Tungsten, Cobalt, Vanadium, Lithium Tantalum, Graphite, Antimony and Rare Earths. All of these have sufficiently large annual volumes to allow an ETF to pick up, say 20% of annual production, without ending up with an illiquid holding.
The chief caveat with specialty metals ETFs is that there is always the danger of illiquidity and jerky price moves in the lumpy and non-transparent world of, for example, REE trading where odd-lots are almost the rule rather than the exception.
The Western governments have largely abandoned stockpiling of strategic metals as a defence strategy. However with rising tensions with Russia and China the “peace dividend” that we were supposed to be paid at the end of the Cold War has turned out to just be a series of proxy wars now compounded with tense relations with major suppliers of strategic metals. The difference between now and 1989 is that back then Western economies were NOT dependent upon the parties they were lined up against militarily. Now the same cannot be said.
A resurgence of specialty metals ETFs would kill two birds with one stone in offering governments a de facto strategic stockpile while offering investors exposure to metals that are otherwise only within the grasp of the “big boys” of the major trading houses like Trafigura, Glencore, Traxys and Noble. Wannabes in the mining space are by their very nature “not there yet” and thus make very imperfect proxies for the underlying metals they seek. The shocking thing in recent times is just how many wannabes in specialty metals are out there and yet how few are real production stories. This is a perfect scenario for driving investors in the short term into the arms of special purpose ETFs aimed at picking up this frustrated demand. And for those wannabes that want a means to establish their credibility in the short term, it also represents a potentially profitable stop-gap source of management fee income from establishing and managing a captive vehicle in their dedicated metal.
Christopher Ecclestone is a Principal and mining strategist at Hallgarten & Company in London. Prior to founding Hallgarten & Company in New York in 2003 ... <Read more about Christopher Ecclestone>