A Near Untouched Resources Sector In North America
Since the beginning of 2022, investing in public markets has proven to be extremely unpredictable, and many financial luminaries are predicting a recession and a continuation of the current bear market. This market state is being primarily driven by a poorly functioning monetary system and forty-year high inflation rates. Regardless of the reasons for this market condition, smart investors are searching for investment opportunities where market demand will grow despite global economic conditions, which is what we’ll be highlighting here.
The same macro-economic trends that are hammering technology, banking, manufacturing and other sectors are driving demand and price increases for raw commodities like oil, metals and wheat. This follows historical trends where commodities have fared well during times of inflation. Commodities have outperformed all major asset classes during the last 9 Fed rate hikes since 1972. In the current market, driven by a slow supply chain and the conflict in Ukraine, 19 out of 28 raw materials are trading in backwardation (the current price of a commodity is higher than its price in the futures market), a market condition not seen since 1997. This indicates a high demand and low supply for base commodities.
In particular, rare earth metals are in extremely high demand for two reasons. First, rare earth metals are an extremely important component for electric vehicles. They’re used in the magnets of 93% of all new electric vehicles so the demand will increase significantly as consumers switch to EVs. In the next seven years, the North American electric car market is expected to increase by 35%. This condition, coupled with the recent inflation of gas prices will escalate the consumer need for electric cars.
Secondly, one of the primary buyers of rare earth metals is the military. Specifically, rare earth metals contribute greatly to technology dependant military equipment such as communication and GPS devices, as well as batteries and other defense electronics. This is important to note, as military spending is likely to increase over the next 5 years in response to Russia’s aggression in Ukraine.
This demand is evidenced by Biden’s recent efforts to secure a North American supply chain for rare earth metals as stated in the White House’s fact sheet, Securing a Made in America Supply Chain for Critical Minerals.
“As the world transitions to a clean energy economy, global demand for these critical minerals is set to skyrocket by 400-600 percent over the next several decades, and, for minerals such as lithium and graphite used in electric vehicle (EV) batteries, demand will increase by even more—as much as 4,000 percent. The U.S. is increasingly dependent on foreign sources for many of the processed versions of these minerals. Globally, China controls most of the market for processing and refining for cobalt, lithium, rare earths and other critical minerals.” – Joe Biden
A secure supply chain, by its very nature, requires multiple suppliers but there is currently only a single dominant producer.
That single producer within North America goes by the name of MP materials. This rare earth mining and refinery company was only created five years ago, and since its creation, MP materials has seen a tremendous profit. In the last two years alone, the stock has increased fourfold.
This quick return shows us that with a strong demand tailwind and a high-quality rare earth metal asset, investors will flock as they search for more ways to become involved with rare earth metals. Which brings us to a rare earth metal company that’s story is still yet to be told.
Defense Metals (CVE: DEFN) is essentially a junior version of MP materials. Defense’s Wicheeda property is extremely similar to the Mountain Pass mine. This is because the Wicheeda property is located in the untapped area of northern BC, and it is also strategically located next to a major highway, a national railway, a hydroelectric powerline and a major gas pipeline, very similar to the Mountain Pass Mine. Defense Metals secured 100% of the Wicheeda project in 2021.
In the last year, Defense Metals completed a preliminary economic assessment which valued their project after tax at $517 million which is only $100 million dollars less then what MP was valued at two years ago.
Defense Metals is currently undergoing the drilling process at the Wicheeda property. On April 27th, they drilled their longest high-grade intercept to date at 3.09% total rare earth oxide over 251 metres; including 3.92% over 80 metres. The company is fully financed, drilling and if Defense Metals is able to develop quickly, they could end up seeing similar economic success to MP. Defense Metals is definitely a stock to look out for, and the future for this rare earth mining company looks extremely bright.