Hello Voornaam,
Welcome to another Ingham Analytics Weekly Letter on Sunday in which we aim, inter alia, to take a step back to see wood for trees, in South Africa, and around the world. A bit of tongue in cheek never goes amiss either, especially in these absurd times.
In "Gold a must?" this week we point out that whilst oil may not seem related to gold in fact the COVID-19 induced turmoil in the oil market back in April was a precursor of what we've witnessed in the gold market.
Due to Covid-19 travel and transport restrictions in March and April, the New York price of gold was trading as much as $70 above the price in London at the same time. Investors count on the commodity exchanges to always deliver gold safely against futures and options contracts. CME stocks of gold, insufficient at the time, have quadrupled. Retail investors and central banks have taken a shine.
Since March gold has again been in the spotlight and a topic we regularly analyse. COVID-19 has been a catalyst for a sharp upward move in gold but there were factors at play preceding the pandemic that had gold regaining its glitter. From mid-2019 gold started to take off and it's around 60% higher today, closing on Friday above $1,900/oz which is 20% higher than in January.
Gold is a long-term store of value and protection from political instability. It is also protection from both inflation or deflation depending on how you view the cocktail of monetary and fiscal measures around the world playing out. Further detail and several interesting graphs are in our note.
In our note "Nickel for Elon?" we reference Elon Musk who has promised a "giant contract for a long period of time" to any company able to extract nickel in an efficient and environmentally sustainable manner. This isn't nickel-and-dime stuff, we're talking big money and bigger stakes.
Nickel consumption in electric vehicle batteries is expected to grow by over 60% up to 2025, according to UK energy consultancy Wood Mackenzie. The catch though is supply, as not much capacity has been added in the past few years; one big-listed mining company intends to change that.
Nickel is more important than lithium at this stage and a Tesla Model 3 contains 30kg of it. Elon Musk has pointed out that lithium-ion battery isn't quite correct as the quantum of lithium is small, 2% in a lithium-ion cell. Tesla prefers the term nickel-graphite as the main constituent in the cell is nickel. Primarily the cathode is nickel and the anode is graphite with silicon oxide. As Mr. Musk says, there is "a little bit of lithium in there, but it's like the salt on the salad."
Most nickel production is destined for stainless steel. Maraging steel for example is super strong whilst remaining ductile and with an 18% nickel content has the impact-fatigue strength required for aircraft landing gear. Batteries use around 3% of the world's nickel supply, but this is rising rapidly. Nobody has yet developed a technology that matches nickel for its density - the power to weight ratio - that is critical in cost-effectively moving EVs.
Formula E racing is pushing the boundaries of battery power and may even displace traditional Formula 1 in the future. English company Williams was commissioned to build the first batteries but now another English technology firm McLaren Applied
Technologies are contracted to supply them. The chemical composition inside McLaren's Formula E batteries is a technical secret but the supposition is that McLaren is using a nickel-heavy design for enhanced energy density, with 8-1-1 chemistry, using eight parts nickel for every one-part cobalt and manganese.
This "future-facing" commodity will be in accelerating demand, with pricing likely to stimulate further exploration and production. What is interesting too is that mining and smelting is possible in an environmentally clean manner, an aspect we look at in the note. And with Mr. Musk leading the clean charge, pun intended, miners, will be incentivised to follow.
If you are looking for a no-nonsense take on the COVID-19 world this Sunday download the annual results of English pub operator J D Wetherspoon plc. And some of the annual reports if you've got the time, it'll be well worth the read, maybe over a pint or two.
J D Wetherspoon helpfully provides a pro forma P&L and balance sheet that is pre-IFRS 16 Leases, a daft and needlessly complicated accounting standard that's even more inexplicable than straight-lining of leases, that only served to deflate earnings per share in the earlier lease period and inflate it after whilst having no cash flow implication.
The inimitable Englishman Tim Martin, the enterprising founder of this successful and popular chain of 780 pubs, is known for his common-sense view on the world and the absurdities of it, and that's not just including a pandemic either. He has no time for corporate-speak, MBA-style phraseology (bottom-line oriented, and such like) never features.
Mr. Martin takes modern corporate governance to task, seeing it as "deeply flawed." He says, "common-sense, management skills and business savvy are more important to commercial success than board structures." And then cites instances of businesses that "have suffered colossal business and financial problems, in spite of, or perhaps because of, their adherence to inadvisable governance guidelines." Here, here!
He also believes that "customers and employees are far more important, in practice, to the future well-being of any company" but get short shrift in governance codes. By way of example, he says that "in the UK Corporate Governance Code there are 64 references to shareholders, but only three to employees and none to customers - this emphasis is clearly mistaken."
We agree. And especially so when, as Mr. Martin points out, the average institutional shareholder turns over a portfolio twice annually. Short-termism means the shareholder tail wags the larger dog (well-being) of an enterprise.
He's also known for his cogently argued, and often witty, views on why Britain needed to get out of the European Union.
Mr. Martin qualified as a Barrister though chose business rather than The Inns of Court to ply his trade.
The annual result release on Friday typically includes some hilarious quotes by Mr. Martin. Such as "some journalists apply more spin than a Shane Warne googly and more venom than a Waqar Younis Yorker", whilst in reference to the utterances of two members of parliament he calls it "complete cobblers" and reckons they're "bonkers."
Mr. Martin is excoriating about the way this pandemic has been handled around the world, causing deep economic damage with little, if anything, to show for it.
In this context, Warren Buffet even gets honourable mention in support of his contention of the lemming-like behaviour of groupthink. Mr. Martin references Mr. Buffet who commented in 1989: "I thought then (in business school) that decent, intelligent, and experienced managers would automatically make rational business decisions. But I learned over time that isn't so." He may as well have added in governments, politicians, and investors for that matter.
The future of motor racing - Formula E, powered by nickel
Thank you all for visiting us.
