OK, OK, so the problem here is that I’m kind of a sucker for royalty companies… so when I see a new one teased, that often percolates up to the top of the coffee pot that morning.
And it’s really just my inner laziness that drives that fascination, of course — I love the idea of buying something once, or building it once, and earning some share of the cash flow from the business forever, without ever having to invest another dollar or do any more work. Royalties are the perfect investment for the patient investor with low initiative.
What they usually aren’t is super exciting, or super-growthy in any particular business — whether it’s song royalties or mining royalties or book royalties or pharmaceutical royalties, it’s pretty rare for there to be huge growth years. The tendency is for those businesses to grow slowly, and to be winners over the very long term in large part because their down years are not as bad as the down years of high-cost operators in those businesses… but a royalty stock will rarely be the funnest stock in your portfolio or the one you daydream about, or even the one you brag to your brother-in-law about after a few beers in the back yard.
But the pitchmen do sure love to sell us on the excitement of royalties, which they do mostly by using the long-term price charts of some of the massive winners, like Royal Gold (RGLD) and Franco-Nevada (FNV), and every once in a while there’s also a pitch for a royalty company that’s got a connection to something more lustworthy and topical… and whaddya know, that’s what we have today — Bill Shaw at Stansberry is selling his Commodity Supercycles entry-level newsletter ($49/yr) with a pitch about a special report, and he manages to work Tesla into the story… the title of that report is: Super-Charged Battery Royalties: How to 10x Your Money Investing in the Critical Resources Tesla Needs for Electric Vehicle Batteries
So might this be the one? The super-exciting electric vehicle story that’s also a lazy man’s royalty story? Has my dream come true?
Well, let’s see how he sells it, check out those clues to find you a name, and think about it for ourselves, shall we? I’m sure there’s a catch somewhere…
Here’s how the ad starts:
“Elon Musk’s BIG PROBLEM
“Each Tesla Model 3 requires 121 lbs. of one rare resource, and supply is drying up. One analyst found a $4 stock
he believes will be the biggest winner of a $30 TRILLION market opportunity…”
That “rare resource,” it turns out, is nickel, which is not all that rare, but which is currently in pretty short supply, with that deficit expected to get worse — at least for the higher-purity nickel that’s seeing growing demand for battery cathodes in lithium-ion batteries.
It’s a little tricky to have any certainty about the nickel market, at least when it comes to batteries, because there’s more than one kind of nickel — about 2/3 of nickel production is used to make alloys, mostly stainless steel, and that’s a very industrial and consumer-goods driven business, dominated by China, and it uses a lot of lower-grade nickel, typically called ferronickel or Nickel Pig Iron, not the higher-grade nickel, typically nickel sulfate, that is used in batteries and other high-end uses (and can also be used for stainless steel).
And producers, especially in Brazil, Indonesia and China, see those rising prices for battery-grade nickel, and that has led to some projects to refine Nickel Pig Iron into nickel sulfate for the battery markets… which could shift the pricing around further in the future, even if it takes some imagination to get to that point (after all, right now batteries consume only about 2% of the nickel supply… so even if they’re mostly taking the higher quality nickel, and even if demand doubles and triples, the overall impact on the nickel market might not be so dramatic).
When we’re talking about royalties what usually matters the most is the commodity price five and ten years into the future, which is usually very unpredictable, though we do, at least, know that yes, battery demand for nickel is probably going to keep growing… and might grow dramatically enough to impact pricing.
So with that backdrop, what clues do we get about this nickel royalty company? Shaw says it’s a young firm, but has quickly built up a portfolio…
“This company with first mover advantage owns the rights to 18 nickel and copper mines around the world, resources which will explode in demand in the coming years, thanks to the worldwide shift to electric vehicles and renewable energy.
“Currently trading around $4 per share, this stock has as much upside as any stock I’ve seen in my 20 years in the resource business….
“I’ve found a way for you to set yourself up to potentially profit on the major nickel production ramp up we’re about to see.
“Like always, where Elon looks, money follows.”
And Elon is looking for nickel, which has been rising in price over the past year or so, getting close to $20,000 a tonne again, but which still remains well below the China-driven price spikes of 2006-2012 (it maxed out over $50,000/tonne in 2007), when stainless steel demand was dramatic and when most of the industrial metals peaked in price. Lots of people sat up and paid attention when he shared a “Please mine more nickel” plea on a Tesla conference call last year, and the pricing has recovered a bit since then.
More from Shaw:
“This year alone several mines in Indonesia, Siberia, and Canada have ramped up nickel production.
“As more automakers get serious about developing electric cars, nickel production will continue soaring.Are you getting our free Daily Update
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“And for just $4 you can invest in a little-known company that is exclusively focused on ‘dominating the nickel market’ in a unique way…
“By using a little-known, but incredibly powerful, wealth building tool called ‘royalties.'”
That’s when your friendly neighborhood Gumshoe perked up his ears, of course. He explains mining royalties, in case the concept is new to you:
“… in the mining industry, there are a couple of ways you can obtain a royalty…
“Most royalty companies obtain them by simply providing upfront cash to the miner for development costs.
“Prospectors, on the other hand, will keep a royalty on their discovery after sel