Paying the freight: How dense are you?

POSTED ON September 16, 2015 BY Benjamin Cox
CATEGORY Shipping,

Freight does not matter for everything. Of course, it will be extremely important to the likes of the clothing and food industry. This is why the services of Forager Logistics are very much sought after.

A concept that I think most mining investors miss is: what is economically affected by logistics and freight vs. what is not.

Freight does not matter for precious stones and metals. But when you have a business and need to transport heavy and fragile items to a location, the use of Freight Forwarder services could come in handy. It also seems very convenient too, as other aspects of your business need to be managed too. By a wide margin, the most densely traded items on a regular basis are diamonds, which has a cut value per kg of $25 million. Gold is in second place with $36,000 per kg. If you want to move money, these are your two choices.

Diamonds are clearly the better choice if you are worried about hiding it, but they have much higher transaction costs. Gold is cheaper to buy and sell (less slippage on the transaction), but to get $25m of gold you need almost a tonne of it, which is not easily put into a carry-on. Since diamonds and gold are so valuable, freight will never have an effect on their overall prices.

Currently, lithium bulls are talking about how Tesla is going to want to save freight by producing lithium in Nevada. My belief is that lithium is in the part of the curve where freight might be $0.20/kg vs. a value of $7.00/kg. Where you get the lithium from depends far more on the overall cost of the operation.

Copper, zinc, aluminum, and nickel also fall in that camp where freight also does not impact the cost of the final landed price. To be fair, none of these commodities can support complex logistics where mule equivalents (airplanes) are being used to move bulk supplies and product in and out of mines.

On the other end of the spectrum are the bulks. To put iron ore in perspective, a small Cape-sized ship at 160,000 tonnes total cargo capacity can carry roughly all the gold ever mined. Iron ore, salt, and coal all have freight costs that are 20%+ of the landed cost. For instance, iron ore costs 5.5 cents per kg, and freight is 1-2.5 cents of that cost.

Vale is building ships that can hold 380,000 tonnes; when you think about the size of those ships, consider how your asset (the company you own) is dealing with freight and thinking about these issues. Personally, I look for assets that are close to tidewater and have logistics that take the back of a napkin vs. a spreadsheet to figure and therefore logistics are not the core cost.

So, if anyone thinks Tesla is going to buy lithium from Nevada to save on freight, I have an iron ore mine in Bolivia to sell them. It's worth trillions, but logistically, El Mutan is so land-locked that it will probably not be an exporting iron ore mine in my lifetime, and not for a lack of trying by world-class operators.

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Benjamin Cox

Prior to founding Oreninc, Mr. Cox served as a senior analyst at the D.E. Shaw Group and as a consultant with the GLG Group, where he worked directly with 15 Wall Street teams in the mining deal space. Mr. Cox is the Chief Executive Officer and a Director of Aston Bay Holdings Ltd. (TSX-V:BAY), a copper and zinc company with properties in Nunavut, Canada. Mr. Cox has researched and developed business, financial, and shipping models for every major global iron ore project. He is also an expert on mining industry market dynamics and metals, with a focus on raw materials including base metals, iron ore, platinum group metals, and industrial materials such as potash and lithium. Mr. Cox holds a B.S. from Brandeis University and an M.B.A. in Finance from Portland State University. More →

bjc@oreninc.com

Benjamin Cox

bjc@oreninc.com

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