Counter Cycle: Contrarian resources investor Rusty Delroy says ‘quiet critical mineral’ tin speaks the loudest

In our new column Counter Cycle, Nero Resource Fund founder and co-manager Rusty Delroy says tin is one of his key commodity picks.

Contrarian resources investor Rusty Delroy joins us for our new column Counter Cycle. Up first – tin. Pic: Supplied/Stockhead

Welcome to a new column with Nero Resource Fund founder and co-portfolio manager Rusty Delroy, a Cottesloe-based fund manager who has developed a reputation for taking the path less travelled in his investments.

In the first edition of Counter Cycle, Josh Chiat talks to Delroy about his conviction in tin as the pick of the metals to prosper from the rise of the critical minerals narrative.

Ask close to any fund manager, broker or miner and they'll tell you they're bullish on copper as the world grows in new and unusual forms.

Electrification. E-mobility. Urbanisation. Technology. AI. Renewable energy.

There's any number of reasons why both investors and operators are hot for the red metal.

But Delroy thinks the smaller, even more supply constrained tin market could offer better opportunities where value is not being ascribed currently by markets.

Over 50% of demand in the tin market comes from solder, the glue that holds together electronic circuit boards. Rising consumption of consumer technology, the growth of data centres, electric vehicles, solar and more will see a 360,000tpa market today rise to 500,000t by 2030.

By 2040, Sucor Sekuritas analysts say tin demand could hit 800,000t, more than double today's level. Delroy refers to it as the 'quiet critical mineral'.

"The copper market is already an enormous market, so the incremental rate of change is compelling but it's nowhere near as high as you're going to see out of the tin market," he told Stockhead.

"The tin market is a small market and the growth in demand is just far higher.

"You're coupling that demand growth being far higher with a supply side that is far more constrained. There hasn't been decades of exploration and the like, so there's a very sparse asset suite to meet demand.

"Whereas in the copper market there is arguably a fair range of next tier projects at any point in time, it's really just a price function.

"If you lift the copper price 20% you should see a supply response to that. You could double the price of tin and I'd argue you won't get much change in 2-3 years, it's going to take a lot longer to bring on tin supply and that's key to the thematic from our perspective."

Where could prices go?

Tin metal currently trades on the London Metals Exchange for US$29,775/t, well above pre-pandemic levels of ~ US$12,000/t, but below the all-time highs seen after the Russian invasion of Ukraine of almost US$50,000/t in 2022.

At this level most western producers are making decent money, but Delroy said prices had to go far higher to incentivise new sources of production in a market starved of modern discoveries.

"If you look at a producer like Metals X (ASX:MLX) they're making good margin today. They're probably on 30%+ margins, that's a healthy margin in mining," he said of the half-owner of Tasmania's Renison Bell tin mine.

"But that's an old asset with a lot of sunk capital. I would argue that the incentive price required to bring capital to new developments it has to be higher than today and I would argue that because if you look at the market cap of some of the tin developers, they're tiny market caps.

"That means capital hasn't yet been inspired into these assets. Why? Arguably because the current tin price isn't viewed as compelling enough to make the investment."

At the same time, material has been pulled out of the market from Myanmar, where an ethnic insurgency in the Wa State is crippling supplies from alluvial tin and rare earth mines to China and Indonesia where clampdowns on environmental breaches have restricted illegal tin mining and seen quotas placed on producers.

From 69,000t in 2023, Indonesia will let miners produce a little over 46,000t in 2025. Visibility on exports from Myanmar is opaque, but Delroy says estimates are somewhere between 50-90% of supplies over the land border to Chinese smelters have been cut.

"Indonesia wants to clean up the environmental degradation that's occurred," he said. "If you've ever looked online at the dredging, it's almost like something out of Waterworld, the movie with Kevin Costner.

"It's absolutely wild.

"They're very genuinely motivated to lift the standards there, as we've seen them do with nickel. I also don't think we're at risk of Indonesia suddenly producing a heck of a lot more tin."

Jeremy Hartanto, an analyst at Sucor Sekuritas, says the limits on tin extraction in Indonesia will likely support prices in a healthy range of US$28,000-35,000/t.

Where does Nero find tin exposure?

With that in mind, Delroy says Metals X is the best place on the ASX to find exposure to the price of the metal.

Once a diversified miner with operations in gold, copper, tin and nickel, MLX has been simplified over the years and now counts half of the historic Renison Bell underground mine on Tassie's west coast as its sole producing asset.

82% of the other half is owned by Hong Kong's GreenTech and 18% by the world's top tin producer, China's Yunnan Tin, with the mine producing a combined 2899t of tin in concentrate in the September quarter.

"First world, long-standing operations, high grade and really solid margins at spot pricing," Delroy said. "They've got $200m in cash, a $200m EV (enterprise value) ... they're probably doing close to $25 million a quarter in an operating margin. That's $100m per annum and they've got 10 years in reserves.

"$100m per annum on a $200m EV, that's pretty compelling. You've got free optionality with 50% of Rentails (a tailings retreatment project to produce tin from waste at the Renison Bell site), currency's helping them, the Aussie's coming back pretty solidly, the share buyback is supporting the stock and there's potential to consolidate the ownership of the JV and other regional assets in Tasmania.

"I don't think you need to walk past it because it's so compelling, and if you can find first-world assets I think you should hunt there first."

In the developer and explorer space, Delroy says Stellar Resources (ASX:SRZ), where Nero holds a 15% stake, is a standout.

Stellar owns the Heemskirk project, another Tasmanian deposit with a mineral resource estimate of 7.48Mt at 1.04% Sn for 77,870t of contained tin.

SRZ says the project, 18km southwest of Renison and 10km east of the Avebury nickel mine, is the third highest grade that remains undeveloped globally.

"It has a really high quality register – both Paradice and Regal are substantial there, it's strategically located, it's got a high grade reserve (and) we expect that will grow in both size and grade given the exploration success that continues," Delroy said.

Stellar has $10m cash in the bank to take it through a PFS and a $32m market cap.

"There's a high quality management team – Simon Taylor, Andrew Boyd and Mark Connolly, that's the ex-Papillon team – you've got an already healthy scoping study, low capex of $70m doing just under 2000tpa of tin," Delroy said.

"The NPV was $150m at a US$30,000/t tin price, which is spot today, and the real key here is we think come the dropping of the PFS in the back half of the year we could see this project significantly improve."

He thinks the PFS, utilising ore sorting, could double throughput to 3500tpa.

"That would be very meaningful to a player like Metals X, that are doing 6000tpa today. That would up their attributable production by 50%," Delroy noted. "Our view is that's worth $100m plus to someone to take it out."

Also with Metals X as a potential acquirer, Delroy noted London-listed First Tin, which has projects in Germany and Australia and counts MLX as a ~30% holder as a tin explorer to watch.

The views, information, or opinions expressed in the interviews in this article are solely those of the interviewees and do not represent the views of Stockhead.

Stockhead does not provide, endorse or otherwise assume responsibility for any financial product advice contained in this article.

Nero Resource Fund holds positions in Metals X and Stellar Resources.

Originally published as Counter Cycle: Contrarian resources investor Rusty Delroy says ‘quiet critical mineral’ tin speaks the loudest