June 22nd, 2022 | 11:22 CEST
New opportunities in the supercycle - Glencore, Defense Metals, NIO
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"[...] Nickel, therefore, benefits twice: firstly from its growing importance within batteries and secondly from the generally growing demand for such storage. [...]" Terry Lynch, CEO, Power Nickel
Surge in profits and a flood of recommendations
Many companies are groaning under the high energy and commodity prices. For Glencore, the world's largest commodity trading group, however, the price explosion is leading to a significant jump in profits. The Swiss company is already expecting an adjusted operating profit of more than USD 3.2 million in the first six months of the year, which would mean that it has already more than recouped its planned annual profit in the first half of the year. Originally, the full-year 2022 EBIT guidance was between USD 2.2 billion and USD 3.2 billion for the trading business.
The strong forecasts prompted several analyst firms to shower the Company with buy recommendations. For example, US investment bank Goldman Sachs raised its target price from GBp 710 to GBp 745 on the back of the solid interim report and reiterated its buy rating, as did major Swiss bank UBS. They continue to see a target of GBp 560. US bank JPMorgan even raised its price target for the Zug-based company from GBp 630 to GBp 650 and maintained its "overweight" rating. The commodities group presented a solid interim report, wrote analyst Dominic O'Kane and sees Glencore as his "top pick" in the mining sector.
Even though the Company itself expects the situation to calm down in a report from the summer, the stock should remain in demand after a brief consolidation. The inclusion in the STOXX Europe 50 should also provide a tailwind. There Glencore replaces the recently weakening sporting goods manufacturer Adidas.
Defense Metals - Concerns about dependence on China
Since Russia invaded Ukraine, Western politicians have been trying to reduce dependence on Russian oil and natural gas. It is to be achieved by accelerating the development of renewable energies. Here, however, the danger of dependence, this time on China, is already lurking. China has a virtual monopoly on the mining and processing of critical raw materials such as rare earth metals. These are needed, for example, for the production of wind turbines, solar panels, batteries and electric cars. With a new law, the EU Commission wants to secure Europe's supply of raw materials needed for the energy transition and the digital transformation. In initial key points, EU Internal Market Commissioner Thierry Breton warns against "Europe's excessive dependence on critical materials, which often come from only one country," the "Handelsblatt" reported.
However, alternatives are scarce in the Western world. As outlined in a report, besides Australian mines in the US, there has been only one rare earth mine worth mentioning in the recent past. The mine in Mountain Pass, California, owned by publicly traded MP Materials, produced 15% of global production in 2020, according to the US Geological Survey.
The Wicheeda project, acquired outright by publicly-traded Defense Metals since the beginning of the year, has strong metallurgical similarities to the only profitable mine in the Western Hemisphere to date, the Mountain Pass mine. It has the potential to become one of the most significant global deposits of rare earth metals, according to the Preliminary Economic Assessment (PEA).
After Defense Metals staked additional claims, the deposit totals 4,244 hectares and is equipped with world-class infrastructure. For 2021, a PEA indicated an after-tax net present value (discounted at 8%) of USD 517 million at an internal rate of return of 18%.
Recently, an update on ongoing diamond drilling was released. The campaign began in the northern resource area, with the first two resource delineation holes nearing completion, totalling approximately 615m. According to the Company's management, Defense Metals plans to drill diamond holes up to 5,000m in length. After a stock price correction of over 40% since last year, positive drilling results could lead to a rebound. With the supply shortage of rare earth metals in the Western world, the Wicheeda project offers a prime opportunity for long-term share price gains.
NIO - With relative strength
After the sharp price losses of recent months, the worst of the suffering seems to be over for shareholders of electric car maker NIO. After the stock corrected from its high at USD 66.99 to USD 11.67 in mid-May, where it formed a possible double bottom, the share has since rallied to USD 20.77. In addition to buy signals in MACD and RSI, there was also a tailwind from the fundamental side.
The new ES7 off-road vehicle was recently presented. The sporty SUV is expected to put the competitor Tesla and its Model X and Model Y under pressure. Depending on the battery size, the ES7 manages a total of 485km, 620km or 930km and is expected to cost just under USD 70,000 for the basic variant. NIO's obstacle detection software is also said to detect objects as close as 687m, while Tesla can only detect obstacles from 229m.
In addition, Deutsche Bank is optimistic and continues to see NIO as a buy candidate with a price target of USD 45. Analyst Edison Yu remains confident that NIO will embark on the most important product cycle in the Company's history. In addition, volumes have been under pressure in recent quarters due to operational bottlenecks and COVID lockouts. However, the Company's shipments are on track to increase from 7,000 per month in May to 25,000 by the end of the year. That should shift the focus away from supply bottlenecks and toward a robust product supercycle.
After solid gains in recent months, various commodities needed for renewables are correcting, in addition to oil and natural gas. Thus, companies such as Glencore and Defense Metals present anticyclical entry opportunities after corrections. NIO has already turned and sent the first buy signals.
Conflict of interest
Pursuant to §85 of the German Securities Trading Act (WpHG), we point out that Apaton Finance GmbH as well as partners, authors or employees of Apaton Finance GmbH (hereinafter referred to as "Relevant Persons") may hold shares or other financial instruments of the aforementioned companies in the future or may bet on rising or falling prices and thus a conflict of interest may arise in the future. The Relevant Persons reserve the right to buy or sell shares or other financial instruments of the Company at any time (hereinafter each a "Transaction"). Transactions may, under certain circumstances, influence the respective price of the shares or other financial instruments of the Company.
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