Issue 119 (25 JuN 2019)

A PERFECT LONG-TERM HEDGED TRADE

Hello, and welcome back!

Sunset over Hong Kong Harbour from subscriber Michael.

An apt photo for this edition as you’ll see.

And this one from subscriber Rob, up the street from me. Waiheke Island, New Zealand.
 Capitalist Exploits Insider Weekly: Issue 119

THIS WEEK

• China pushes ahead: HK

• Rare earth metals: The real deal
• Hormuz risk
• A perfect long-term hedged trade
• Ship financing dead
• China & hydrogen
• China running out of REMs
• Norway ditches exposure to oil and gas
• Kubas Manganese Hydride
• Are we forgetting about LPG for autos?
• The Big Five:
1. Arafura
2. Alkane
3. Silex Systems
4. Gran Colombia Gold
5. Northern Minerals

HK PROTESTS

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What we’re looking at here is the clash between a society that wants freedom of political
expression and one which denies it.

This is a PR disaster for the Chinese Communist Party. Hong Kong is theirs, but it’s not at the
same time.

Unlike on the mainland they can’t control the narrative on this, nor can they block the sharing
of information via the internet as to what is happening.

It’s somewhat ironic that this has been taking place only weeks after the anniversary of the
Tiananmen Square massacre. Within China many citizens remain unaware of the events of

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1989 where student protests led to Chinese troops violently retaking the Square in Beijing,
where pro-democracy protesters had set up camp for weeks.

The Tiananmen Square massacre left an unknown number dead, with some estimates in the
thousands, and smothered a democratic movement that had been building in China.

How is it then that so many Chinese are unaware of it? Simple, the control of information
within the country is extensive. No website will ever be accessible to Chinese citizens with
such information.

And here we are 25 years later with Hong Kong having been returned to China under special
conditions, and China having attempted to implement an extradition bill into the HK legal
system that would allow for the CCP to effectively pick up people off the streets of HK and
take them to China to be tried under their courts.

We know that the CCP exerts extensive influence over the courts, and we have human rights
experts who’ve pointed out how authorities extract forced confessions, use physical torture,
and slap trumped up charges against CCP critics in order to silence them.

Implications?

There is zero chance capital ISN’T fleeing Hong Kong. Zeee-roh!

The smart money began leaving years ago and that trickle is turning into a flood no question
about it.

Our preferred way to play this has been and remains Bitcoin.

REMS: THIS IS THE REAL DEAL

Folks are now waking up to the stranglehold that China has on the rare earth metals market.
We find this rather amusing because few are talking about the long-term fundamentals of
REMs or “battery metals” in general. We came across an interesting study on metals required
for electrification just for the UK:

Omitted from the analysis is the extra electricity that will be required. And if that is going to
come from solar and wind, then one needs to ask the question, what will be the demands on
materials to build that infrastructure?

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And what about the other renewable, wood chips? How many trees will need to be grown to
feed the converted coal plants? Just a “minor” complication.

It doesn’t take a university degree to work out that, given current technologies, there just
isn’t enough key materials to achieve these grandiose “electrification” ambitions.

Here is another study from a global perspective if you’d like to dig further. The report is long
but very comprehensive.

HORMUZ RISK

Ever since we started the Insider publication we have been saying that there is precious little
geopolitical priced into oil.

We wouldn’t be buying oil service stocks based on a view that there is going to be a shootout
in the Straits of Hormuz, but it is nice to know that there is a free option on offer.

As the relatively benign geopolitical world we’ve enjoyed for the last few decades crumbles,
and a new world emerges with far greater uncertainty, markets will begin to wake up to this
new reality. And not only will political bodies move to ensure their own positioning, leading
to resource nationalism, amongst other things. The market participants will begin to price in
this new reality. Both will act in a feedback loop.

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A PERFECT LONG-TERM HEDGED TRADE

Here is a very bizarre situation. The way I see it, the crowd is implying that the world won’t
need the kind of transportation that we currently enjoy by 2030. That seems like a truly
silly bet to make, though that’s what the market is implying.

If the crowd was genuinely thinking that EVs will “take over the world” by 2030 (let’s say a
30% penetration rate), then we would see the likes of nickel, cobalt, REMs, and associated
miners constantly moving higher. And yet they are not.

And if the crowd genuinely thought that the EV thing was as funny as the Benny Hill Show,
then we would see oilers pouring money into big offshore oil projects in an all out effort to
beef up reserves.

Yet oil majors seem more intent on paying out dividends or buying back their own shares
rather than developing new reserves.

It is truly one of the most unique markets I’ve experienced in my career.

The probabilities are decent that crude moves significantly higher over the coming years,
which will make alternative transportation competitive (BEV and HEVs).

However, I don’t think one needs to try and be a genius or get to cute attempting to forecast
the future.

The only call that one has to make is based on answering this simple question: Will there still
be a need for transportation (cars, trucks, planes, ships, busses) in much the same manner
as it currently exists? Yip, that is the only call you have to make.

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If your view is that goods and people will still need to get from A-B, then just buy a basket of
offshore oil service and “electrification” stocks (REM, cobalt, nickel, copper, etc.).

It doesn’t matter if EVs fail to take-off because your investment in a basket of offshore oil
service stocks will register 10x returns.

And if EVs do achieve a 30% adoption rate by 2030, then “electrification” sensitive stocks will
rise in a manner that will at the very least rival the 2002-2007 uranium bull market.

Really folks, it is that simple. A wonderfully hedged trade, and no shorts are required.

Getting a little more micro...

PETROLEUM

If the crowd did believe that petroleum would pay a substantial part in transportation, then
investors would be bidding up offshore oil service companies.

Remember, 30% of the world’s oil and gas still comes from offshore sources.

Currently, the world is only replacing 1 barrel of oil for every 3-4 that it consumes, and it
doesn’t seem too determined to do much about reversing this lack of appetite for discovering
oil. I’m using Helix as a proxy for offshore oil service stocks:

Then, looking at the alternative side, which we’ll broadly call “electrification”...

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RARE EARTH METALS

So much for REMs being rare or the world needing strong magnets for EVs (and that includes
the hydrogen variants).

NICKEL

One of the most important base metals for the manufacture of batteries for EVs. Hmm,
maybe there is a huge amount of nickel production about to come online that we don’t know
about?

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COBALT

OK, let’s assume that the big upside in late 2017/early 2018 didn’t happen and COB went
sideways ever since it listed. The market suggests that very little cobalt will be required for
EVs. Either that or there is about to be another cobalt ore body discovery of DRC
proportions.

COPPER

So much for the “idea” that all the big copper mines are aging, ore grades are falling, expenses
are rising, etc., and that there aren’t any big mines in the pipeline to replace the old maturing
mega mines.

Or perhaps there is a technological breakthrough that I don’t know about (and the market
does) that will make copper redundant?

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It’s as if the markets believe we’ll have some massive electrification going forward, but are
clueless as to how that’s to actually happen.

And if we look at the other side of the coin (the non-electrification side), then clearly the
markets believe we’re going to have an absolute collapse in oil demand. Neither of these
scenarios present us with a probable outcome. This is crazier than a dog in a hubcap factory.

So, at the very best, 10 years from now, the world’s demand for oil, nickel, copper, cobalt, rare
earth metals, and uranium will not have grown from current levels. Hmmm… that is a very
strange proposition.

ARE WE FORGETTING LPG?

All this talk of EVs, etc., but what about good old fashioned LPG for autos?

Yes, one tends to forget there is a huge supply of natural gas out there and an infrastructure/
systems already in place for its use primarily in autos globally.

We hear of various cities (and some countries) banning or wanting to ban diesel and petrol
driven cars by 20XX, but there is no mention of banning natural gas powered vehicles.

It just so happens that stocks focused on delivery of LPG/CNG and the manufacturers of
natural gas engine systems aren’t on the average investor’s “must have” list.

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In short, we’ve a market which believes we’re still to have all the fun stuff: transport, air
conditioning, heating, cooling, you name it. And, we’re not going to have to do anything for it.
It’ll just come out of fresh air.

SHIP FINANCING: DEAD!

More evidence that finance for shippers is drying up.

Our interpretation of this is that less financing availability leads to less shipbuilding, which
means ships are not being replaced. A long-term bullish setup.

CHINA & HYDROGEN

We have mentioned China’s drive into hydrogen before.

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As per usual, the question we ask ourselves is how to position to take advantage of this?

From a second order effect we’re leaning towards rare earth metals. More electric engines
means there will be more need for REMs (remember, hydrogen EVs still use the same electric
motor as battery electric vehicles).

Right now, there are no compelling companies directly within this space that we’ve found.

CHINA: IMPORTING REMS?

You probably were not expecting to hear that China is now importing REMs.

This is rather interesting and indicates that China’s supply of REMs isn’t so endless after all.

If you’re interested, the table below is a list of REM stocks. Take out Lynas and you are talking
about micro cap, or should I say, penny stocks. One wonders how high these will go when a
few funds go hunting for REM exposure.

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NORWAY’S SWF DITCHING ENERGY STOCKS

So the famous Norway Sovereign Wealth Fund ditches its exposure to fossil fuels (at least a
good chunk of it).

Does this not echo of what Calpers did back in 2000?

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Not to mention many other endowment funds in the late 1990s.

And what happened since then?

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Lessons? The more hated an investment is, the higher future returns are likely to be. The
same is true vice versa. This is one of the most difficult investing concepts to come to terms
with, but probably the most powerful.

How do you know when an investment is really hated? When big pension funds and
endowments ditch their holdings and vow never to return.

Perhaps we could also conclude that it takes way longer for a society to get off an addiction.
Modern society was essentially built on fossil fuels. It will take more than just a couple of
decades to kick the habit.

KUBAS MANGANESE HYDRIDE-1

And don’t ask me to explain the physics of that compound.

Here is the problem with investing in a developing technology: it keeps on evolving.

Goodness knows where it will take us in 5 to 10 years.

The thing that scares us the most about investing in the “hydrogen economy” is missing out.

We’re thinking second order effects here. If hydrogen really takes off, what takes off in
“symphony” with it?

Trying to have picked Google way back when the Internet was still being formed was bloody
difficult. Trying to pick THE player in the hydrogen space will likely be equally as difficult. It

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won’t stop us trying but does require us to check our ego at the door and be intelligent about
things.

THE BIG FIVE

From Our Trading Desk

Five stocks that few would know about — let alone be invested in — putting their hand up
begging for someone to take a closer look. These aren’t official trade alerts or even ideas but
rather invitations to take a closer look.

1. Arafura
2. Alkane
3. Silex Systems
4. Gran Colombia Gold
5. Northern Minerals

ARAFURA

One of our trades for the rare earth Alert.

We would have preferred Arafura to have gone up for fundamental reasons, not political. But
we firmly believe that fundamentals would have eventually pulled it higher. Arafura’s Nolans
Project in the Northern Territory is forecast to produce the bulk of its revenue (85%, to be
precise) from sales of neodymium-praseodymium (NdPr) oxide, a rare earth product used to
make ultra-strong permanent magnets for micro-motors and the drivetrains of electric
vehicles, both battery and hydrogen powered.

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ALKANE

This is really interesting. A gold miner, no debt, 30% of its market cap is cash, 12% ROE, P/E
10x, P/book 1x.

They are operating a gold mine in New South Wales, Australia and making a healthy ROE,
which is remarkable given that most other gold miners are not making a profit.

But they have a REM development. It’s not in operation and ground hasn’t been broken yet.
However, it is development ready. So the way I look at it, buy ALK for its gold assets and you
essentially get the REM development for free.

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GRAN COLOMBIA GOLD

Gran Colombia Gold has made it into the Big Five on more than a few occasions. Columbia’s
largest producer of gold, a turnaround situation, and one of those absolute textbook
bottoming patterns.

SILEX SYSTEMS

This is interesting. Silex developed a laser technology to enrich uranium which was licensed
to GE-Hitachi.

We don’t pretend to be experts in this field, but we “romance” with the idea of what happens
to the demand for this technology when the price of uranium sky rockets and there isn’t
enough capacity available to enrich uranium?

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Also seems to us that, while there is “elementary” interest in uranium miners/developers,

there is absolutely no interest in uranium enrichment capacity. We don’t want to get into a
narrative here, but rather highlight that something is happening here, and it probably
warrants further investigation particularly if you are bullish on the prospects of the nuclear
energy sector.

NORTHERN MINERALS

One of the few companies actually now producing rare earth metals — the two others are
Lynas (ASX) and Rainbow Rare Earths (LSE). Northern Minerals produces heavy rare earths
as opposed to Lynas, which produces light rare earths.

REFER A FRIEND

Much of our subscriber base love our work and refer their friends. For this we’re extremely
grateful as we’re isht at marketing, dislike it, and prefer to spend our time on things that
make us happy. Markets basically.

I’d hate for any of you to refer friends and not get something out of it, which is why we have a
30% discount both for your friends, colleagues, and even your enemies if you send them this
way. And you’ll score yourself a bonus 4-month subscription, which amounts to the same
thing.

Nobody wants to feel like they’re selling their mates something only so they can get
something in return. That’s not how friends work.

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In any event, when you’re singing the praises to your friends, please use this link to ensure
they get a better deal… and you do, too.

INSIDER COMMUNITY

As per usual, a gentle reminder to join us on the Slack community. Just go here.

As always, thanks for reading and being part of Insider.

Sincerely,

Chris MacIntosh

Founder & Editor In Chief, Capitalist Exploits Independent Investment Research

Founder & Managing Partner, Glenorchy Capital

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