12. April 2021 | 07:50 CET
NIO, Varta, Nevada Copper: Where the best opportunities lurk in the value chain
The theory around value creation is simple: the more a raw material is refined or processed, the greater the margin a company can ultimately achieve. While a kilo of Kobe beef fillet costs around EUR 400, a savvy chef will conjure up ten dishes from it and take in four-figure sums. There are many reasons to invest at the end of the value chain, but the risk also increases. If the chef cannot cook, he will not make sustainable sales even with the best ingredients. The situation is similar in the value chain around electromobility.
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ISIN: US62914V1061 , DE000A0TGJ55 , CA64128F1099
"[...] We knew the world was rapidly electrifying and urbanising and needing significant amounts of copper to do so. [...]" Nick Mather, CEO, SolGold PLC
NIO: Milestones and obstacles
The Chinese Company NIO builds e-cars and has been doing a lot right in recent years. The Company's sedan broke the soft-riding sound barrier of 1,000 km, and most recently, saw its 100,000th production vehicle come off the assembly line. Even if established manufacturers, such as VW, can only laugh at such production figures, the round mark proves that NIO is poised to become an established player in the field of electromobility. The growth figures also speak for this: In the first quarter of 2021, NIO delivered 7,257 cars, 373% more than in the same quarter of the previous year.
Such growth figures have always been well received on the stock market. On a one-year horizon, the share gained around 1,170%. However, in the last three months, the value has weakened somewhat and lost more than 30%.
Comparable to the chef example, the stock market assumed NIO had the best possible products and a booming business last year - and now there are doubts whether everything will really turn out that way. The theory says that the most money can be made with complex products that incorporate engineering and development work, but this area is also particularly competitive. The electric offensive by German manufacturers, such as VW, could quickly put newcomers like NIO in a bind. Volkswagen is also very popular as a brand in China. In contrast, NIO is unknown in Germany. NIO's future success is not set in stone. The stock is relatively expensive after its brilliant rally.
Varta: What is the catch?
Varta wants to act one step ahead of NIO in the value chain. The Company has always been known for good quality batteries and rechargeable batteries. In hearing aids and headphones, customers appreciate the longevity and high quality. It has been clear for some months that Varta also wants to get involved in rechargeable batteries for electric vehicles. The opportunity seems favorable given the German e-car offensive. If batteries are manufactured not far from Germany's major car production facilities, it would eliminate some of the risks associated with long supply chains. Plus, "Made in Germany" looks good on one of the most important components of premium vehicles. Is there a catch, though?
Varta's stock has already risen about 80% in the last year. There is not yet a production facility for batteries for electric cars. Also, the Chinese have done a lot of research on the technology in recent years and are currently the leaders in batteries for electric vehicles. Chinese batteries are also likely to be very competitive in terms of cost. Once before, competition from the Far East caused German companies in a sustainable sector to slide into bankruptcy: in the case of solar cells, companies such as Q-Cells and SolarWorld simply could not keep up a little more than ten years ago and suffered from falling margins. It is still uncertain whether Varta's plans will bear fruit. While there are good arguments for battery manufacturing in Germany, there are also reasons not to.
Nevada Copper: Clear conditions and 4.4 billion pounds of copper
The situation is different at Nevada Copper. The copper producer is in the process of bringing its underground mine in the US state of Nevada fully into production. It expects to reach this goal before the end of the first half of the year. Copper plays a crucial role in electromobility: every electric car contains around three times more copper than conventional combustion engines. Nevada Copper's reserves currently comprise about 4.4 billion pounds of copper. The price of copper has already risen significantly in recent months - the start of full production could come at the right time.
While it is very important to convince end customers of the benefits of complex products such as batteries or finished e-cars, the situation is different for raw materials. Copper is needed in many areas and finds customers outside of electromobility, such as in large construction and infrastructure projects. Also, in contrast to automotive brands, there are, to put it simply, fewer differences in quality - copper is and remains copper. If it can be mined cost-effectively within an intact infrastructure, the chances of good business are good. Unlike companies that are currently dreaming of the electrified future, Nevada Copper, where KfW, among others, is on board as a capital investor, will soon really get going. Also, the stock does not have a rally behind it, like NIO or Varta. Investments at the beginning of the value chain have their appeal and sometimes even offer better chances of an attractive risk-reward ratio.