23rd September 2020 JANUS ANALYSIS

New J. Hutton – Thematics, Gold, Aus. IO (23/08/20)

• Market in a period of transition, timing (not fundamentals) critical

• S&P mkt cap now more expensive than the height of Dot.com
• Berkshire Hathaway holding $147Bn in cash & equivalents
• Eschewing bullion cost Buffett $144Bn in potential gains
• Gold’s value retention against any fiat currency indisputable
• Australian-Chinese relations decline at unprecedented rate
• Inevitability of import tariffs on Australian iron ore
• Implementation of duties possible before years end
• Forecast Australian seaborne volumes to remain unchanged
• Impact on Australian GDP estimated ~ -0.9%

The oft most asked question is when will this Disrupter Bubble burst? With Yogi
Berra’s tautology “I never make predictions, especially about the future” ringing in
our ears, we recommended a Short on TSLA in April on a fundamental basis, in
hind-sight, it was an exercise approaching recklessness, because all of us in the
business know that financial Bubbles go for far longer and higher than anyone
expects. Hence the term Bubbles!
Looking at four historical financial bubbles, we determined that the final seven
percent of the event typically accounts for around 50% of the capital gains. At this
juncture, we have several Buys and a number of Shorts we want to implement, in
and around the expected mean-reversion event. But with no clear understanding
when that event may occur. As we write, excess market liquidity measures,
indicate further short-term market appreciation; but S&P market capitalisation
divided by corporate profitability suggests that overall valuation levels now exceed
that of the Dot.com Bubble. Implying a 50% correction is imminent.
One of our favourite sectors, Gold, is also susceptible to a temporary price
correction as a result of its recent close correlation with the overall market. We
took the opportunity to update our Berkshire Hathaway liquid asset holdings versus
transference into gold. The decision to eschew bullion has resulted in Berkshire
forgoing US$144Bn in lost purchasing power over the past 12 years; which
incidentally, is approximately the sum equal to its entire net earnings over the past
six years. Concluding that gold’s importance as a store of value will continue to
increase as in time, as central banks around the globe continue to chase inflation
targets via fiat money printing.
We also discuss the unprecedented and rapid deterioration in the
Australian/Chinese relationship, looking at the factors leading to the recent
cascade of events and the spate of recent tariff impositions. Although a number
of missteps can be identified, the cognitive dissonance between the two
Gaius L.L. King governments makes this type of conflict almost inevitable. We examine the level
and possible timing of import duties and the impact on seaborne supply, incomes
and its effect on Australian GDP.
 New J Hutton Mining/Exploration Note

Table of Contents

Commodity/Market Update Page

Market Update 3

Reflections on our Thematic Investment Methodology 4

New Recommendations 6

Gold Performance vs Buffett’s Cash Holdings [Update] 8

Confluence of Politics & Commodities: Are Chinese Tariffs Imminent?

Political Summary 10

Tariff Implementation Schedule & Scale 12

Iron Ore– it’s all about China 13

PGM Update 14

Lithium Update 15

Tesla Update 16

UK Nuclear Energy Comment 16

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 New J Hutton Mining/Exploration Note

Market Update

Table 1: Current recommendations and performance.

Source: Janus Analysis. * USD/Yuan 6.83

Table 2: Past Performance.

Source: Janus Analysis

* Returns include dividends, BHP $A1.92, RIO $A9.97; FMG $A0.84 ps.

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 New J Hutton Mining/Exploration Note

Reflections on our Thematic Investment Methodology

What makes a good short-seller? Jim Chanos suggested it was critical that the
analyst was willing to go against the crowd. Unsurprisingly, his firm “Kynikos”, is
Greek word for “cynic”; targeting those companies affected by technological
obsolescence, fads, growth by acquisition, arbitrage, and debt finance binges!
Shorting in this type of market is a However, in a decade-long bull market with seemingly no limit, one can only
thankless task. imagine the financial pain that the Kynikos fund must be suffering. Not dissimilar
to a number of value investors who suggested that the market was too expensive
on fundamentals several years ago, many of whom exited, or started shorting
have missed out on substantial capital gains since. Value investors for a number
of years, have experienced meagre single digit gains, compared with Growth and
“Disrupter” stocks gaining two to three-digit returns over the same period.

There is a wide appreciation that we are entering a new paradigm on how to

conduct business, social interaction, mega trends that have been evident for a
while, but have been accelerated by the Coronavirus pandemic. They include
the obsolescence of bricks and mortar retail, increase in virtual offices,
democratisation of information, thought, ideas and ideals; the superfluidity of
urban centres, AI, carsharing Apps, among many others. The closest analogy to
current market conditions, would be the Dot.com Bubble, its initial founding
based on fundamentals, that eventually morphed into a speculative hysteria,
when investors ignored cashflows and analysts started using peer-analysis
focussing on business models that had extreme and naïve transformative
outcomes.

Figures 1 & 2: Selection of currencies priced in gold per ounce from Q110 to Q220. Being the global Reserve currency, the USD has
appreciated the least (54%), whilst, as a result of unorthodox economic policies, the Turkish Lira has depreciated the most (Left); on a long
enough time-scale, currency depreciation resulting from inflation affects every currency, for example, the GBP only has ~7% of its
purchasing power (in real terms). By comparison, the CPI adjusted gold price over that same period, although relatively volatile, has
retained its purchasing power without peer (right).
602% 100%
600%
90%
USD Euro Rs TL
500% 80%

70%
55%
400% 60%
50% 49%
300%
40%
31%
30%
200% USD UK Ger. China Swiss
155% 13.3%
20%
93%
100% 10%
7.2%
0%
54%
0%
1968
1970
1972
1974
1976
1978
1980
1982
1984
1986
1988
1990
1992
1994
1996
1998
2000
2002
2004
2006
2008
2010
2012
2014
2016
2018
2020

Q1'10 Q1'11 Q1'12 Q1'13 Q1'14 Q1'15 Q1'16 Q1'17 Q1'18 Q1'19 Q1'20

Source: WGC (2020), Inflationdata.com (2020), Janus Analysis

Created as social beings, there is an inherent difficulty for any individual to

eschew the collective. At market extremes, however, successful investing is
Investing is often an exercise in self- more often an exercise in self-control, not allowing emotions to dictate one’s
control. actions (fight or flight), from which none of us are immune. Stanley
Druckenmiller, one of the worlds most respected financial commentators, in his
“Lost Tree Club” speech, recounted several times his Dot-com experience –

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 New J Hutton Mining/Exploration Note

“January of 2000 I go into Soros’s office and I say I’m selling all the tech
stocks, selling everything… This is crazy at 104 times earnings…”

Druckenmiller continues –

No one gets it right all the time.
“…around March… I had to play. I couldn’t help myself… three times the same
week… don’t do it. Don’t do it. Anyway, I pick up the phone finally. I think I
missed the top by an hour. I bought $6Bn worth of tech stocks, and in six
weeks… I had lost $3Bn. You asked me what I learned; I didn’t learn
anything… I was just an emotional basket case… maybe I learned not to do it
again, but I already knew that.”

Examining a variety of financial Bubbles and investor-type behaviour for over a

decade, in our experience, we have yet to meet anyone that sells anywhere the
near top. The fundamentalist sells years before a bubble, recognising extended
valuations; lacking the imagination of the true believer who typically holds all the
way up, then all the way back down, all the time, expecting a recovery.

Why did Druckenmiller fail? Answer - the fear of missing out. We have
previously noted a plethora of commentators/fund managers that publicly
eviscerated Robinhood investors in late May/early June so soon after the height
of the pandemic, but then falling into line a month later by allocating enormous
sums of institutional funds to pursue the market ever higher. The “Herd”
collective is alive and well, even if many professional fund managers are ignoring
their own feelings in the process.

Figures 3 & 4: Notional volume ($Bn) traded in listed US equity positions (10-rolling average). Clearly the differentiating feature over the
past six months is the rapid rise in single stock call option volume (pink line). The disproportionate rise in reading calls meant that market
Importance of macro-investing, is
makers had to purchase relevant stocks, reducing volatility, further pushing up equity prices, raising expectations of investors to purchase
determining where you reside in the
businessmore
and calls, creating
financial cycle.a feed-back loop. We believe that this mechanism has been particularly responsible for the large upward movements
in US equities (Left); with the market being driven by small traders, typically with orders <10-lots, collectively spending US$34Bn in call
premiums (Right). An unsustainable position, which requires continual call purchases. If the number of purchased call options falls,
market-makers will start to off-load the underlying securities given the options value becomes increasingly worthless; creating a negative
feed-back loop, increasing volatility. At that point, we would expect a dramatic mean-reversion event.

All stocks will go in and out with the

tide, fundamentals aside.

Source: FT (2020), GS (2020) SpotGamma (2020), SentimenTrader (2020), Janus Analysis

As a thematic investor in the commodities sector, with a fundamental overlay,

historically, we have outperformed the market significantly over substantial
periods of time. Although our general recommendations remain positive, they
are becoming eclipsed by the market, with specific Shorts in South African PGM
stocks and Tesla moving strongly against us, and continued strength in the price
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 New J Hutton Mining/Exploration Note

of iron ore price being completely out of sync with key global growth measures.
Which makes us reflect that no one method works all the time. The key
determinant, therefore, is to recognise when a strategy will work, but more
importantly, when it doesn’t.

Importance of macro-investing is
determining where you reside in the
business and financial cycle.
Our strategy remains (assuming we can pick the market turning) to dump all our
Buy recommendations. Not because there is anything inherently wrong with
them, in fact, we intend to repurchase many of them later. But, in recognition that
all boats float with the tide. Namely, a market correction will be indiscriminate as
to the underlying quality of stocks, or not.

New Recommendations

Although we have come across some companies we would normally recommend

The market is approaching a threshold.
We await direction confirmation before
we change our recommendations.
as Buys, we are unsure as to macro conditions, which we feel are more important
than thematics or even fundamentals presently. In addition, we have compiled a
list of mid-tier technology stocks that we intend to recommend as shorts. Given
our disastrous foray into shorting Tesla earlier, reminds us that timing, not
fundamentals, is the most critical component. Unfortunately, that is not our
primary strength.

Figure 5: US corporate profits (US$Bn) on a semi-annual basis (March/Sept.) (left); versus S&P
Market (US$Tn) (right). Corporate profits peaked ~2015, long before the recent pandemic, have
largely plateaued for a decade. The Bubble of Everything asks whether (i) US company profits are
about to double? alternatively: (ii) the S&P market capitalisation is about to halve? or (iii) a
combination of both?

35
3,700
The Bubble of Everything

3,200 30
US Corporate Profit ($Bn) S&P Mkt Cap ($Tn)
2,700 25
We believe that a mean-reversion event
is now inevitable.
2,200 20

1,700 15

1,200 10

700 5

200 0
1990 1994 1998 2002 2006 2010 2014 2018

Source: Bloomberg (2020), BEA (2020), Piper Sandler (2020), Steve Blumenthal (2020), Janus Analysis
NB: S&P Mkt Cap. correct as of 29th August 2020

As the old saying reminds us, Bubbles can go for far longer and higher, than
anyone expects. The irony being, Druckenmiller is describing current market
conditions as:
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 New J Hutton Mining/Exploration Note

“…an absolute raging mania… Companies then go up 50%, 30%, 40% on stock
splits. That brings no value, but the stocks go up.”

It is also worth noting that in contrast to his 2008 narrative and actions, Buffett
has gone silent, quietly accumulating cash.

Figure 6: S&P Market (US$Tn) (left) divided by US Corporate profits (US$Bn) (right). The highest
observed ratio (16.8) exceeds the peak of 2000 Dot-Com boom. This should be viewed in
conjunction with Figures 3 & 4 and the associated discussion.

18 16.8
15.7
16

14

12

10

The market is now more expensive than 8

5.2
the height of the Dot.com Bubble. Begs
the question, if we are not in another 6
2.5
irrational moment, why these
4
valuations?
2

0
1990 1994 1998 2002 2006 2010 2014 2018

Source: Bloomberg (2020), BEA (2020), Piper Sandler (2020), Steve Blumenthal (2020), Janus Analysis
NB: S&P Mkt Cap. correct as of 29th August 2020

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 New J Hutton Mining/Exploration Note

Gold Performance vs Buffett’s Cash Holdings [Update]

Bearish on gold from 2013 onwards, we became secular bulls 18-months ago.
Believing that gold on a long-term basis will increasingly become a medium
against which all other forms of monetary value will be measured. The two
economic scenarios (inflation/deflation) are, in fact, two sides of the same coin, in
part, addressing the concerns of the investor wanting to preserve purchasing
power. Clearly gold is not portable or easily fractioned, however, its role is slowly
evolving into a medium as a store of intrinsic value. This becomes increasingly
obvious when you compare a number of currencies using a set quantum of gold
over time (see Figures 1 & 2).

Figures 7 & 8: Buffett’s cash holdings and equivalents have been building for more than a decade (annualised amounts using Q4
holdings), Q220 ~US$147bn (Left); using CPI data, we calculated loss of PPS over time. The result being that over the past 12½ years,
Buffett has lost ~US$15.7Bn in net value, just from the collective effects of inflation (Right). We are not criticising Buffett’s investment
strategy, recognising that substantial cash holdings in the midst of a deflationary event offers incredible leverage and exceptional long-term
returns. But equally, so does gold, but without the loss of purchasing power in the interim.

160
147
140 Lost purchasing power from
Buffetts Q4 cash-holding (US$Bn)

inflation over the past 12½

120
years (~US$15.7Bn)
100

80

60

40
25
Buffett's Cash & Equivalents
20
(Q220) US$147Bn
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Q220

Source: ChartR (2020), Janus Analysis

Probably the most talked about event regarding gold over the past quarter was
Hubris is an all too common failing for
the fact that Warren Buffett Q220 bought a US$564m stake in Barrick Gold. The
all of us. reason why this is so significant (apart from the fact that Barrick jumped 12% on
the announcement) is Buffett’s history of condescension and apathy toward the
medium and all its sector participants, despite the fact he didn’t have any gold
holdings in any form. Having previously written on Berkshire Hathaway’s cash
equivalents versus a theoretical gold holding, we decided to update our
comparison over the past twelve and half years.

Gold is not a dividend paying asset (ignoring the ability of large holders of bullion
to lend out against the gold curve), that does not preclude, however, the fact that,
at certain times, large fund managers such as Buffett need to hold large sums of
money to take advantage when markets mean revert. We believe that gold is a
medium that has attributes sate that need.
The theoretical financial loss accrued
as a result of apathy toward gold is Collating Buffett’s annualised cash holdings over a 12½-year period, converting
truly staggering – effectively equivalent additional funds accumulated to ounces of gold using the average gold price in
to Buffett’s entire current cash that year, theoretically he would have collected 149.4Moz Au. Using a
holdings, or six years gross earnings. US$1,550/oz Au, that would translate into ~$291Bn in-situ value, some
~$144Bn more than his current official holdings!
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 New J Hutton Mining/Exploration Note

Figures 9 & 10: Using Buffett’s cash holdings and equivalents, from 2008 we converted every annual Q4 cash reserves into ounces using
that year’s average gold price. Adding every year up collectively, including annual reserves that were negative over the pcp, resulted in a
theoretical holding of ~149.3Moz au by the end of Q220 (Left). Assuming US$1,950/oz Au this implies an NPV ~$291Bn. Gold value
exceeds current cash holdings of ~$144Bn using (approximate) current prices (Right). It is also salient to note that Gold holdings over the
evaluated timeline outperform USD, even in 2013 where the average price fell >$365/oz.

300
291
280
Cash vs like-for-like Au holdings (US$Bn)

260
240
220
Buffett's cash holdings Au in-situ value converted
200 Lost purchasing
180 power over past
160 147 12½ years by not Buffett's Cash
140 turning USD & Equivalents
120
holdings into gold US$147Bn
100
80
(~US$144Bn)
60
40 25 25
20
0
2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 Q220

Source: S&P IQ (2020), ChartR (2020), BH (2020), Janus Analysis

To put that into some kind of perspective, it is equal to the entire net earnings
attributable to Berkshire Hathaway1 for the past six-year period (2014-2019
inclusive)2, or approximately double of its current cash holdings and equivalents.

The counter-argument to our above analysis, is threefold:

• Firstly, because of the strong correlation between the gold price and
overall market strength, it is reasonable to assume that when equity
prices mean-revert, the gold price would fall as well (as observed in
2008, and earlier this year).
• Buffett’s liquid assets are a form of optionality, held primarily to acquire
assets during periods of financial distress. Allowing him to out-perform
the market in the long-term.
• As observed during the 2008 financial crisis when many asset classes
Berkshire Hathaway could be the
were totally illiquid, gold wasn’t. However, the quantum Berkshire
world’s second largest gold holder. Hathaway’s theoretical gold holdings, (~4,236t), would make it the
second largest holder after the US (8,134t), and well ahead of Germany
at 3,364t. Sales on that scale, within a relatively short period of time,
would decimate total global demand and prices. To put it into
perspective, 2020 world primary production (pandemic affected) is
estimated ~3,250t Au.

In theory, the practicalities of such enormous cash holdings preclude large funds
such as Berkshire Hathaway or Banks from transferring it into bullion, despite

1
Includes after-tax investment and derivative gains/losses.
2
Totalling US$194.4Bn. 2019: $81.4Bn; 2018: $4.02Bn; 2017: $44.94Bn; 2016:
$20.07Bn; 2015: $24.08Bn; 2014: $19.87Bn.
9

There is no real argument for not
holding bullion. The fact that central
bank holdings have been slowly
climbing over the past decade is the
realisation that fiat currencies have a
very finite life span.
Why did Australia call for an
independent enquiry? Was it un-
necessarily provocative?
Australia’s economic miracle has, in
large part, been driven by China.
New J Hutton Mining/Exploration Note
obvious advantages; simply because there is not enough gold liquidity to make a
fully functioning monetary medium.
That liquidity argument is disingenuous, lacking creativity. The inconvenient truth
is, there are a host of financial instruments that could be established, not
dissimilar to gold hedging, or even lending to a counterparty for instant liquidity in
USD as a call option; associated with an agreement to re-purchase the bullion at
an agreed price, at a future date. Akin to a withdrawal facility with asset backing,
land or businesses. Even ignoring recent price rises, Gold holdings over the
evaluated timeline outperform USD, even in 2013 where the average price fell
>$365/oz.
Confluence of Politics & Commodities: Are Chinese Tariffs
Imminent?
POLITICAL SUMMARY: We have written numerous times over the past several
years on the increasing fractious relationship between Australia and China. The
recent escalation, now appears to be outside any attempts by the Australian
Government to re-establish rapport. It was recently disclosed that various
Federal Government ministers have been unable to contact their Chinese
counterparts for the best part of a year.
After Huawei was excluded from participating in building Australia's new 5G
network, Chinese coal quotas were first implemented (first thermal, later including
metallurgical products) in early 2019, on the basis of excessive radioactivity.
Surprisingly, the Australian government and political parties then came under
sustained “state-based” cyber-attacks (which continue to the present day).
Subsequently, import restrictions have included (in varying measures) Australian
wheat, barley and beef.
Tensions rose further when Australia asked for an independent inquiry into the
source of the Wuhan virus; things escalated dramatically when Australia (along
with the UK) offered political asylum to Hong Kong citizens after the imposition of
political and judicial control by the CCP over the territory. A certain level of
inevitability followed; China then implemented a 202.7% anti-dumping tariff on
Australia wine accusing it of being sold at less than the cost of production3.
Several weeks ago, an extraordinary speech by a senior Chinese diplomat,
Wang Xining (http://au.china-embassy.org/eng/sghdxwfb_1/t1809360.htm),
articulated two key tenets defining the future relationship between Australia and
China; with unmistakable consequences.
Firstly, it reminded it’s southern neighbour that its future economic well-being is
highly reliant on China’s continued benevolence:
• Trade volumes have grown from <A$10Bn to $235Bn (2019) over the
past 20-years;
3
In 2019, ~40% (~A$1.1Bn) of Australian wine exports headed to China.
10

Unsure how Australia, a common-law
democracy, can culturally assuage
Chinas displeasure without
compromising its own independence?
Figures 11 & 12: Weekly iron ore shipments from Australian, Brazil and South Africa (Mt) (Left); and Northern China bulker volumes in
anchorage (Mt) – that although steel inventories at mills are normal, inventories at Traders are abnormally high, as they speculate on future
pricing (Right).
Source: UBS (2020), Janus Analysis
China is re-establishing itself as a
great-power, all countries, even
Western nations, are increasingly
forced to make a choice…
New J Hutton Mining/Exploration Note
• Over the same period, the number of Chinese students has increased
from <15k to ~229k (2019);
• 1.43m Chinese tourists visited in 2019; and
• China has been Australia's biggest trade partner for 11 years in a row.
However, it was the second half of the speech that illuminated China’s real
concern; namely that Australia should refrain from interfering in China’s
sovereignty, territorial integrity and each other's internal affairs. That each should
respect each other's social and political systems, mode of development, and not
to impose one's own ideas onto the other. The speech referring several times to
problems between married couples, by implication, portraying itself as the
aggrieved spouse. It is in this action that it appears Australia has unwittingly,
“crossed the Rubicon”.
Australia’s offer to re-settle large numbers of Hong Kong citizens, in time, could
establish an alternate form of Chinese community implacably resistant, if not
actively aggressive, toward any form of Chinese socialism. Annulling attempts by
China to use its diaspora to influence national policy in its favour. But more
importantly, fearing that at some point in the future these groups could sow social
discord within China against the State.
We have always maintained it is well within China’s right to bestow privilege on
whom it chooses. Although many market participants would disagree, we believe
that the future of Australian iron ore is now very much in the realm of politics. In
the past week, all Australian news agencies have withdrawn their journalists from
China, for the first time since the mid 1970s, now without a single credentialed
correspondent within the entire country; unprecedented in the modern era
between two major trading partners. Moreover, the Government has advised all
Australians not to travel to China, warning of arbitrary detention.
The modus operandi being applied to Australia is not dissimilar to bans on
Canadian canola oil, pork, including hostage diplomacy over the arrest of a
Huawei executive; the closure of Lotte’s entire China operation as a result of a
South Korean decision to purchase an American missile system; withdrawal of
investment and downgrade of the English Premier League after the banning of
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 New J Hutton Mining/Exploration Note

Huawei by the UK; and hundreds of millions of lost revenue incurred by the NBA
because of players’ criticism over Hong Kong; as more recent examples.

Figures 13 & 14: China port stocks by origin (Mt) (Left); and Iron ore prices, CFR China (US$/dmt) (Right).

Source: FMG (2020), Janus Analysis

TARIFF IMPLEMENTATION SCHEDULE & SCALE: The prevalent argument

against China’s imposition of iron-ore tariffs is the necessity for the seaborne
trade to supply rebar product to sustain its domestic infrastructure and housing
programmes. Considered critical for future planned economic growth. We think
the logic nebulous at best.

China has effectively publicly declared
they will impose some kind of tariff
regime – we now wait for the official
reason.
Expect Australian iron ore miners to
take significant earnings cut, with FMG
the greatest, BHP the least and Rio
somewhere in between.
• An Australian commentator with normally impeccable official Chinese
links (quoting un-named sources) that “…Chinese President Xi Jinping
believes that Australia has ruthlessly exploited the COVID-19 pandemic to
force China to pay exorbitant prices for iron ore. Xi is determined to teach us
a lesson as early as next year…”
• The logic behind that statement defies any acknowledgement of market
forces of demand and supply; nonetheless, we are in the realms of
politics where perception is key. Critically, the CCP does not differentiate
between politics and business, with most pig iron producers SOEs;
• In June, China’s steel association and a number of major steelmakers
(the vast majority are SOEs and are, therefore, an extension of the state
apparatus) publicly asked the Communist leadership (at the Chinese
People’s Political Consultative Conference) to increase domestic iron ore
production (~20% of total demand). Including investment overseas (in
particular Africa) to ensure security of supply. The importance of self-
reliance on the pretext of national security is the perfect excuse for the
imposition of tariffs, which have US and EU analogies to follow (e.g. US
tariffs on Chinese steel and aluminium imports, or EU tariffs on butter).
• Any disagreement could be referred to the WTO, taking years to reach a
decision, which at the end of the day, would be unenforceable.
• FMG, RIO and BHP have iron ore C1 costs ~ US$11-$14wmt.
• Australian exports are expected to be >850Mt this year, potentially rising
>910Mt by 2021; the majority sent to China.
• Tianjin Spot (Rio Spec) is currently ~US$127dmt;
• Australian IO CFR costs to China by the three majors (including royalties
and ocean freight) is ~ <US$36dmt;
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 New J Hutton Mining/Exploration Note

• Ignoring long-term ROI thresholds, at current prices, arguably, China

could impose import duties of ~US$65-$68dmt on Australian products
without materially impacting seaborne volumes; and
• In the short-term, operational decisions do not consider capital costs
given they are already expended, the major Mining Houses will still
attempt to maximise output and realise economies of scale.

We suspect that there is a certain level of inevitability regarding the imposition of

tariffs on Australian iron ore, given the political dissonance and China’s narrative,
we predict duties could be implemented as early as before year’s end. Australian
2020 GDP is estimated to be ~US$1,320Bn, with national earnings from iron ore
recently revised upward ~A$71Bn4, approximately half of Australia’s foreign
earnings. Under a scenario whereby net warnings shrink by a third, the nominal
impact would be ~1.3% GDP (AUD/USD 0.7). The actual effect would be
substantially less (<0.9% GDP), as a falling AUD would lower domestic input
costs and raise income in AUD terms. Its impact overall would be relatively
modest nationally, given that GDP figures from the ABS show that the economy
shrank by 7% in the past three months due to the on-going pandemic. Tariff
imposition would impact FMG the hardest.

Iron Ore– it’s all about China

Property is the primary source of wealth and savings within China. According to
PBoC, 96% of China’s urban households own at least one home, compared with
65% in the U.S.; the WSJ (quoting Goldman Sachs) indicating that current
Chinese home and developer inventory hit US$52Tn in 2019, by comparison US
inventory stands at ~$26Tn. Demand from the investment cadre owning several
properties is rising, with yields typically <2%, national house prices rose 4.9%
over the pcp. It is estimated that 65m (~21%) of homes in China are vacant.
Among investors who own two properties, the vacancy rate is ~39.4%, rising to
48.2% who own three or more. Rebar accounts for approximately 25-27% of
Chinese iron ore demand (and thereby 13-15% of global) and is primarily utilised
in residential housing. Unsurprisingly, Rebar blast furnace utilisation rates are
>80%, with hot-rolled sheet ~76%.

Chinese vehicle sales were up 16% over the pcp (making it four months in a
row). Sales of heavy-duty trucks are +24% y-o-y, demand stimulated by
increased infrastructure spending and a switch to lower emission vehicles. The
CCP have selected the domestic vehicle industry as a mechanism to encourage
economic growth, it alone accounts for ~40% (~25m units) of global vehicle
sales, consuming ~5% of global steel (HRC).

4
DISER, June, 2020
(https://publications.industry.gov.au/publications/resourcesandenergyquarterlyjune2020/d
ocuments/Resources-and-Energy-Quarterly-June-2020.pdf)
13
 New J Hutton Mining/Exploration Note

Figures 13 & 14: China’s crude steel production (Mtpa) (Left); and seaborne Iron Ore supply run rate (Mtpa) (Right). China consumes
57% of global iron ore (EU accounts for 6%); in the seaborne trade, China accounts for 68% of all iron ore imports (Germany at ~2%).

Source: Rio (2020), WoodMac (2020), Janus Analysis

PGM Update

Using latest vehicle sales numbers, we have updated our fundamental PGM
demand and supply model. Initially, we estimated (early April) that global car
sales would drop ~50% for the year 2020, but in hindsight, it appears that this will
be closer to 25%. A number of PGM companies are touting investments or JVs
with various hydrogen participants, which is experiencing unprecedented political
and economic support. Share-prices of electrolyser, hydrogen and fuel-cell
companies are all climbing substantially.

Figures 15 & 16: Despite falling demand, S.A. production losses have roughly kept pace H1, but should overwhelm in H2. As far as we
can determine, secondary Platinum production remains relatively unaffected. Forecasting a modest surplus ~272koz, not dissimilar to
previous years surpluses, it is reasonable to assume that prices will plateau in the short to medium-term (Left); originally forecasting a
significant surplus in Palladium, we expected Russian primary supplies to be “managed”. Despite a forecast of 521koz primary surplus, we
expect prices to remain robust (Right).

2011 2012 2013 2014 2015 2016 2017 2018 2019 2020F 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020F
1.5 0.8

0.6

0.4
1.0
0.2

0.0
0.5
(0.2)

(0.4)
0.0 (0.6)

(0.8)

(0.5) (1.0)

(1.2)

(1.4)
(1.0)

Source: Johnson Matthey (2020), USGS (2019), Janus Analysis

14

Despite a recovery in the Chinese car
market, lithium prices continue to fall.
New J Hutton Mining/Exploration Note
To summarise our particular view toward the potential adoption of a Hydrogen
economy, include:
• Conceptualise mobile hydrogen applications as akin to electric vehicles
(EVs). Mechanically, an EV uses a battery to drive an electric motor,
whereas a hydrogen vehicle utilises fuel cells to drive an electric motor;
• Hydrogen does have some particular strengths over normal EVs. In
particular, density; the energy in 1kg (40k Wh/kg) of hydrogen is
equivalent to 2.8kg of petrol. Compared with a Lithium-ion battery which
typically has 278 Wh/kg, meaning that hydrogen has 236x more energy
per kg. Despite the energy differential between the two, we believe that
this advantage alone is not sufficient to ensure widespread adoption;
• 96% of current global hydrogen production is reliant on natural gas as its
source via steam reformation. Cheap and plentiful, especially in the US,
this method is entirely irrelevant to the future of hydrogen processing,
given limited supplies of gas;
• To establish a hydrogen economy among Developed Nations, would
require the utilisation of electrolysis, a process whereby one gets
significantly less energy out than it requires to create (typically <70%
using PEM);
• The current thesis for its establishment relies on an almost exponential
growth in the renewables sector; with hydrogen providing storage for
intermittent-based systems;
• The real question, therefore, is not whether a hydrogen economy is
technically possible, but whether it is financially feasible? and
• Ultimately, whether a hydrogen economy becomes an economic reality,
is entirely a political discussion.
Lithium Update
The lithium price is still continuing to fall despite China extending existing EV
subsidies and establishing a campaign to promote Chinese BEV purchases. In it,
the CCP endorsed more than a dozen domestic models, the programme
encouraged local governments and car makers to target smaller cities and towns;
whilst the CCP allocated significant governmental expenditure toward
establishing a network of charging facilities in rural areas. Figures suggesting it
was a tremendous sales success.
Historically, it has been very difficult to accurately model future lithium
consumption, not only accounting for the variance of different BEV battery types
and capacities, but to also incorporate the rapid growth in hybrids. A Honda Fit
has a 20kWh battery, whilst Tesla S can now be specified to have a capacity of
up to 90kWh; with the energy cost per kilometre for both models ranging from 5.8
to 7.6c, respectively. Looking at 11 different BEV models, the average capacity
was 39kWh. The recent arrival of numerous cheaper models with typically
smaller capacities have driven sales volumes (on a weighted-average basis).
15
 New J Hutton Mining/Exploration Note

Figure 19: European car registration by fuel-type, updated to March 2020. Most recent numbers will be
revised, BEV sales bolstered by significant deliveries of pre-ordered Tesla’s Model 3 which has been a
world-wide phenomenon.

100
Diesel Petrol E.V. AFV/Hybri d
90

80

70

60 52
50
%

40
30
30

20 11.3
10 5.7

0
1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

2018

2020F
Source: Assoc. Auxiliarie de L’Automobile (2020), European Automobile Manufactures Assoc. (2019), JATO (2020), Cargreencongress
(2020), Janus Analysis
NB: Separated BEV and plug-in-hybrid numbers, attributing the latter to overall hybrid sales believing it’s a closer definition fit. Rounding
error ~1%.

We estimate that hybrid vehicles on
average only consume 1/8th of the
capacity in a normal BEV.
Hybrid vehicle ranges vary dramatically (13 to 50km), with battery capacities
ranging from 4-15kWh. The average appears to be ~4 to 6kWh. Meaning, if we
take a snap-shot in time, currently it takes approximately eight hybrid vehicles to
equal an equivalence of a single in-situ BEV battery capacity. The implication
being, despite hybrids making up 11.3% of EU market sales (see Figure 19), in
BEV-terms, they only add ~25%% of additional overall battery demand.

Tesla Update

Our timing on TSLA is atrocious. We
own the mistake, but think the overall
narrative correct.
Sometimes you just get the story wrong! Using traditional valuation metrics in the
midst of a financial bubble (in hindsight) was foolish. Although we knew Shorting,
when we did, was speculative, we never foresaw the intensity of the buying about
to emerge. Despite this, TSLA is an increasingly attractive short, now more so
than ever.

We re-iterate, it is a premium product, and although arguably the best of its breed
technically with inherent practical short-comings, it is unlikely to ever be adopted
in large numbers by the proletariat. We maintain that the current share price has
no basis in financial reality, either in current or future manufacturing growth, or
operating margins. Critically, there are approximately 100 electrified models
slated to arrive up until 2022. It soon will be a very crowded market place.

16

Increasingly likely that much of the
nuclear power capacity in the UK will
not be replaced.
Quoted power costs in the main-stream
media are often distorted and belie the
importance of baseload power.
New J Hutton Mining/Exploration Note
UK Nuclear Energy Comment
In the past week, Hitachi officially announced it was exiting the £20bn nuclear
power project in Wylfa, Wales. Several years earlier, Toshiba abandoned the
Moorside project in Cumbria. These failures add to existential problems
maintaining the UK nuclear industry that include age-related cracking of the two
Advanced Gas-cooled Reactors at Hunterston leading to extended closure;
closure of the Thermal Oxide Reprocessing Plant at Sellafield; protracted
difficulties with EDF replacing existing nuclear facilities. Critically, the economic
liberalisation and disintermediation of the UK electricity market, has made major
capital investments by private investors problematic. Especially in an
environment whereby the Nuclear industry is increasingly at the behest of
political considerations/ machinations of growing anti-nuclear ambitions within the
Labour Party, LibDems, SNP and Greens.
Table 3: Capex, opex, lifespan, utilisation factors, decommissioning costs associated with the UK
Dogger Banks and Hinkley Nuclear projects. Electricity turbine tariffs were settled last autumn at
auction with a strike price ~ £41.61 MWh (adjusted annually for inflation) for 15 years which then
revert to the prevailing market price. To put that in perspective, current UK energy spot prices (Apollo
Energy) are £30.5MWh, with Q420 at ~£45.6 MWh. European Commission estimated that external
costs for nuclear as €18-22 MWh, including health impacts, accidents and ‘resource depletion.
Source: EDF (2020), Equinor (2019), IJEEE (2019), Gov.UK (2018), WWA (2020), Wang (2018), InsideEnergy (2016), EnergyVoice
(2019), Apollo Energy (2020), WNA (2014), Janus Analysis
Not surprisingly nuclear power gets a disproportionate amount of bad press on
how precarious and expensive it is compared with other forms of energy, which
we believe is patently incorrect. Moreover, when published costs are compared,
they are typically not like for like. In Table 3, we made direct comparisons
between two projects encompassing all capex costs. Unsurprisingly, nuclear
17

A distracted UK is allowing its only
baseload power source to shutter.
Heralding a new era of energy
insecurity, with inevitable economic
consequences
New J Hutton Mining/Exploration Note
power competes more than favourably. Three reported wind turbine projects on
the Dogger Bank (large sandbank in a shallow area of the North Sea about
100km off the east coast of England) with 3.6GW of capacity (e.g. equivalent of
three mid-sized nuclear power plants) are scheduled to commence production
from 2023 onwards.
Half of the UK nuclear capacity is due to be retired by 2025, in our global
demand/supply model, we have previously forecast UK nuclear power-generation
to settle at ~31.2TWh, which we think is now hopelessly optimistic. The new PM,
Boris Johnston, remains focussed on reallocating long overdue infrastructure
spending to the North of the UK and supporting economic growth during the
current Covid pandemic. Britain’s economy contracted by 20.4% during Q2,
making it the world’s worst-hit major economy, with only Spain contracting more
over H1. The political perception is that there is little or no public appetite to
replace existing nuclear infrastructure, which is strategically dangerous, because
it makes the UK increasingly reliant on future unknown gas imports.
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 New J Hutton Mining/Exploration Note

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 New J Hutton Mining/Exploration Note

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