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Of course the total market for whatever it is matters. That's what drives the supply and demand parts and thus the price. However, in most of the markets that we talk about, we're close to "free" or "pure" market conditions. The addition of one more wheat farmer to the world's supply of wheat farmers might change the wheat price by some fraction but we can safely ignore that in any analysis of the market faced by other wheat farmers.
Well, OK, there's one guy, Steve Keen, who insists that because that's never wholly and exactly true then we never had a free market at all but we can leave that level of pedantry aside in the real world.
On the other hand, there are markets that are small enough that what the other producers are doing - even if there's only some handful of them - becomes entirely make or break for any other producer in that same market.
What follows is not really about any of my three examples. It is, instead, to give three examples from the world I know - mining companies - to provide the lesson in this reality. It might well be that a company has the most delightful, exciting, deliriously fabulous plan but it could well be possible that what other folks are doing at the same time will be the determinant of success.
Lynas Corporation (OTCPK:LYSCF) I'm using as a historical example. This is not to make comments about the current operation or prospects of this company.
The rare earths business has been concentrated in China since the 1990s, when that country overtook the US as the global major supplied. Then in 2010 China decided to limit exports - you could export things made of rare earths, without limit, but not the rare earths themselves without quotas, the argument being likely to create domestic value add - and so global prices soared.
Lynas was able, in this environment, to raise the funding for their separation plant in Malaysia. Which seemed really pretty excellent because that meant they could supply - roughly and around and about - global demand outside China for those raw rare earths. OK, maybe not all Japanese demand but close to global desires.
Ah, but then Molycorp also raised the finance - off the back of the same events and price rises - the funds to reopen Mountain Pass in California. At which point the rare earths market outside China was very definitely oversupplied. Lynas ended up refinancing and massively diluting shareholders, Molycorp actually went bust as a result.
Neither project was bad, or even badly run. The market simply couldn't absorb two new entrants, not each producing tens of thousands of tonnes in a global market of perhaps 150,000 tonnes.
I've written about NioCorp (OTCQX:NIOBF) several times here and this is the point that I keep making about it. They're planning to come to market with many multiples of current world demand and charge higher than current world price for their scandium. This just doesn't happen.
This is also the problem for several other companies trying to enter this market. In order for their plant to be anything like economic, they have to be at scale. But that necessary scale is larger than the global market. The only way that anyone really can successfully enter the market is by adding incremental supply. A couple of tonnes here, 6 there, as byproduct. So, the Rio Tinto couple of tonnes a year in Canada, the Sumitomo 6 tonnes from the Philippines, OK, that can work.
Everyone's on the right side of the point I'm making. Markets can be small enough that the one new entrant can kill the economics for everyone.
Which brings me to Helium One (OTCPK:HLOGF). As I've said elsewhere about Helium One:
It’s entirely possible that Helium One will succeed. The thing investors need to know is that the competition for Helium One is not some other deposit of helium rich gas out there. It’s the entire global LNG industry that is the competition.
The background here is that helium is the only one of the non-radioactive elements we commonly use that is constantly being generated here on Earth. The initial supply of the planet had boiled off into space billions of years ago. The atmosphere has some 3 ppm He in it and we could extract that if we really wanted to - at great expense.
We used to get it from some natural gas wells in Tx and OK which the Federales ran. Well, OK, but there's great concern that weight run out. Except that fear is driven by not understanding that it is being constantly generated.
It's a daughter product - the alpha particle - from the radioactive breakdown of uranium and thorium And there's an awful lot of rock out there with low levels of U and Th in it - 50 ppm, 100 ppm, that sorta level. The helium that is produced tends to accumulate - that which doesn't just disappear into the atmosphere - with natural gas.
Near all natural gas contains some helium, those TX and OK wells were just very rich in it. But, of course, it takes a lot of money to extract that He from the CH3.
Helium One is on the track of high He natural gas in Tanzania. Seems logical, the local rock is high in U and Th so we might well find goodly amounts. So the plan's a good 'un, right?
Note that I am not even going to offer a view on that. Instead, I want to point out this major point of this piece. Whether there's He in that Tanzanian natural gas isn't, really, the point. It's how much is there in all the other natural gas? Further, what is it that we do with that other natural gas?
If we just pipe it to be burnt then a high He gas field is a great fine. Really important, MRI machines continue to work, party balloons float to the ceiling and all that.
Except, well, how do you extract helium from natural gas? The answer being you don't, you distil it. In doing so you extract the gases which liquefy at the higher temperatures first. So, chill your gas and out comes the butane as a liquid, cool some more you get the butane. Keep going and you'll get all the hydrocarbons and be left with an atmosphere of oxygen, nitrogen and helium - plus traces. Keep going and take out the O2 and so on and eventually you end up with the only gas left being the helium. At which point you've done your purification. Not by extracting He, but by taking everything else away.
As you can imagine, if you've only got a small He content in the original gas this is an expensive thing to do. So, folks don't, which makes a He rich gas supply valuable for that He content.
Except, what is it that large parts of the global gas industry are moving to? Liquefied natural gas, LNG. Where the whole point of the exercise is to cool gas down so that the propane and butane and so on come out as liquids. Leaving us with a remnant atmosphere already highly enriched in that He, whatever the original level was.
So, where do we get He from? LNG plants, And yes, Qatar is indeed a new He supplier on the block as it expands its LNG supplies.
Please note again that I am not dissing nor talking up Helium One prospects by pointing this out. It's an example of how the wider world matters, that's all.
The point here is simply to point out that when evaluating a miner then we've got to think about the market size that it's addressing. ~Someone coming to market as a rubidium supplier can be laughed at because the global market is perhaps 3 tonnes a year. But past that it matters who else is doing what as well. And it can be quite a left field as well. Who would have thought that LNG would affect helium mining? But there it is, it does.
As I say this is just a pointing out of a fact about investing. What other folks around our target investment do matters. They could oversupply our intended market, consume the material produced, some technology out there could entirely destroy the thing we're trying to do - a new method of buggy whip making is of no great interest these days.
That is, be careful not just about the addressable market for whatever it is. Think more widely, laterally, about what might affect that market itself as well.
This article was written by
Disclosure: I/we have no stock, option or similar derivative position in any of the companies mentioned, and no plans to initiate any such positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.