The Federal Reserve resumed lifting interest rates last Wednesday, with a quarter-percentage-point increase that brings interest rates to a 22-year high. But stock gains seem to be broadening with the equal weight S&P 500 index recently outperforming the market value-weighted S&P 500 index. This is a good sign. I recommend you buy Umicore SA (UMICY), notes Carl Delfeld, editor of Cabot Explorer.
My new recommendation goes to the heart of the electric vehicle and tech supply chain to a little-known European company with roots going back to 1805. Starting soon, China will impose stricter controls on the export of two critical tech metals, gallium and germanium.
This new regulation is a reaction to the US’ efforts to cut China off from the supply of modern semiconductor chips. China no doubt will use its significant leverage in the technology supply chain to continue to push back.
What is sometimes misunderstood is that most of what China refines and processes is not mined in China but around the world in mines that China owns, or controls through long-term supply contracts.
Take cobalt, a critical mineral which is a byproduct of copper and nickel mining and vital to America’s economy and military. This element is necessary for lithium-ion batteries in electric vehicles, superalloys in jet engines, and permanent magnets in advanced electronics.
The cobalt market today depends significantly on a single country: The Democratic Republic of the Congo (DRC). The country possesses 46% of global cobalt reserves with only 0.9% in the United States. Chinese-backed companies own or have financial interests in fifteen of nineteen cobalt mines in the DRC, granting China control over about 50% of the DRC’s cobalt mining capacity. Consequently, China wields significant influence over the world’s cobalt ore supply.
China’s real leverage is on the refining/processing side of the commodity equation. China refines 72% of the world’s cobalt, while the United States refines zero percent. While getting cobalt ore is one thing, coming up with ways to refine it more cleanly and recycle is another more pressing concern.
This why companies such as Volkswagen are searching the world, from Canada to Indonesia, for battery supplies for electric vehicles it sells in the US and Europe that are now 100% reliant on China with the goal to reduce that number to below 50% as soon as possible.
To build up its ex-China processing/refining capabilities, VW is teaming up with Umicore SA, a materials technology company based in Brussels, Belgium. The venture is set to begin production in 2025 and is slated to process materials for enough batteries to power 2.2 million fully electric cars a year.
The company has a long history in mining going back to 1805 and has evolved into more of a processing and recycling technology company, changing its name to Umicore SA in 2001.
Umicore’s leading battery materials technology portfolio consists of nickel, manganese, cobalt technologies, manganese-rich lithium and solid-state battery technologies. Just last month, Umicore inaugurated one of the world‘s largest and most advanced solid-state battery material prototyping facilities in Olen, Belgium, which will expand and accelerate its innovation and technology development.
The company, which spends 6.7% of revenue on research & development and delivers a 17% return on equity, is a rather conservative way to play critical metals on the refining rather than mining side. UMICY is also a stock in an uptrend (+8.8% in July), though its share price is down about 17.5% in 2023, giving us an attractive entry point.
Recommended Action: Buy UMICY.