Doug Goodwille from Kayne Anderson speaks to Drew Meredith from The Inside Network on market thinkers.
While a surging gold price is on hold as the world adjusts to a Trump presidency, all the factors that saw its price rise more than 50 per during his first term in office – trade disputes, fiscal deficits and geopolitical tensions – are almost certainly guaranteed the second time around.
Magnesium – is this the next commodity gold mine?
It was the magnesium boom that never happened, but Aussie investors are finally having a day in the sun after a shortage sends the magnesium price skyrocketing. In a similar fashion to the rare earths boom a few years ago, China has created, whether deliberately or accidentally, a magnesium crisis, which is sending investors piling onboard two stocks that have lain dormant for almost a decade.
But why magnesium?
Outside the bright white flame it produces when ignited, or the positive effects it has to prevent injury by loosening tight muscles when consumed, magnesium does have industrial uses. It is used in small amounts to add strength to aluminium alloys, which are then used in building supplies and packaging. A similar amount is used in automobiles, mostly in cars, in areas such as gearboxes and seat frames, and in aircraft, and expensive laptops.
Are you thinking of semi-conductors? Well, if you were, you’d be right. As the US did by recently banning China from using its semi-conductors, it seems China is attempting to play tic-for-tac by starving the world of its magnesium. In 2020, it exported 961,000 tonnes of magnesium, which accounts for roughly 85% of the world’s supply. The price of the metal, which in recent years has hovered around US$2,000 per tonne, peaked at more than US$11,000 in September.
In their usual fashion, Chinese officials told at least 40 producers to shut down or reduce output to cut emissions and meet energy-consumption targets. According to S&P Global Platts Analytics, China’s slowdown could mean around 120,000 tonnes of production is lost this year. Some magnesium miners have been told to operate at 40% of their normal capacity but the damage has been done. Producing magnesium isn’t easy. Owing to the material’s extremely high energy intensity required for production, it takes 35 to 40 megawatt hours of electricity to produce one tonne of magnesium.
German carmakers have been hit hard. Not only are they in short supply of semiconductors, but rapidly depleting supplies of magnesium have been revealed at Volkswagen, Daimler and BMW. Passenger car output at German plants has fallen by roughly 35%. Although Volkswagen has the European battery EV market, it’s going to be a lot harder to keep ahead of the game with Tesla hot in its heels.
Enter Latrobe Magnesium (ASX:LMG). Yes, Australia to the rescue once again. As we’ve done with rare earths and lithium, one Aussie producer has risen to the challenge. LMG’s share price, at 18 cents, has risen from under 3 cents in just over a month. That’s a 566% share price return, dwarfing Bitcoin’s 40% as the highest monthly gain recorded in recent times. There are currently three magnesium ASX listed producers:
- Latrobe Magnesium Ltd (ASX: LMG) up 566.67%
- Korab Resources Ltd (ASX: KOR) up 492%
- Magontec Ltd (ASX: MGL) up 88.24%
LMG appears to be creating the most interest in the sector. Having just raised $3 million via a placement, the company will use these funds to fast-track the construction of the initial magnesium demonstration production plant in Victoria’s Latrobe Valley. The plant will produce 3,000 tonnes a annum of magnesium metal from a waste by-product of the giant 1,480 megawatt Yallourn power station, which burns brown coal. Construction is expected to start in the new year, with first production targeted for 12 months later, and after being in operation for a year, it will expand capacity to 40,000 tonnes-a-year.
In the longer run, China could release its grip on restricting its magnesium production, as it has done with rare earths. Either way though, analysts say Europe has only enough supply to last a few weeks, which means the LMG run could only just have begun.
